Trade

The Boston Consulting Group (BCG) released a report identifying seven industries poised to return manufacturing to the United States from China over the decade. Re-shoring will be driven by increased Chinese labor costs, the volatility of other Chinese costs (e.g., exchange rates, transportation), and an increasingly productive U.S. manufacturing sector. The report suggests 600,000 to 1 million new U.S. manufacturing jobs could be directly created, along with 1.8 to 2.8 million additional indirect jobs. BCG’s report argues that production leaving China is more likely to return to the United States rather than Mexico—which enjoys a cost advantage—partially because the relative strength of the U.S. manufacturing workforce. That relative strength is at risk; CFR’s Ted Alden discusses the shortage of skilled workers in the U.S. manufacturing pipeline. Firms, governments, and unions must work together to build a workforce that will support a manufacturing renaissance. International trade and investment. Read more from leading analysts on the debate over next steps in U.S. trade policy. Innovation FTC Issues Online Privacy Report The Federal Trade Commission (FTC) issued its report on online privacy (Bloomberg). The report calls for Congress to enact new privacy laws while also encouraging the burgeoning online advertising industry to accelerate self-regulation. A signature goal of the FTC is a “do-not-track” feature in web-browsers by year’s end. Consumer privacy will be challenged by new technologies; the FTC raised concerns about face-based marketing (Bloomberg). Innovation. Read more on how the U.S. capacity to innovate could play a chief role in economic growth. Education and Human Capital States Improving Cases for NCLB Waivers Education Week reports that the second round group of states applying for No Child Left Behind (NCLB) waivers made strides with programs targeting special education students and English language learners, but many need to improve accountability systems. With five more states in the third and final round to go, forty-two states will have sought NCLB waivers from the education department. Waivers increase flexibility for the states in exchange for compliance with new department guidelines. Race to the Top Targets Districts and Early Education Secretary of Education Arne Duncan announced that the $550 million for the next Race to the Top contest will go towards district-level reform and early education (Education Week). Concerns remain over the relative small pot of money to be split between the two priorities; the original Race to the Top contest awarded over $4 billion to twelve states for K-12, and the department awarded $500 million last year to nine states for early education. The new report of the CFR Independent Task Force on U.S. Education Reform and National Security asserts that fixing the nation's underperforming K-12 public schools is critical for strengthening the country's security and increasing its economic competitiveness. Education and human capital. Read more from experts discussing ways to improve U.S. education and immigration policies. Corporate Regulation and Taxation Uncertainly Remains Over Dodd-Frank Rules The Hill reports that the Chamber of Commerce has major concerns about the slow implementation of Dodd-Frank. Its scorecard for the new regulations gave “incompletes” to fifteen of seventeen regulatory categories. A spokesman for the chamber pointed out that “We’re almost two years into the regulatory process, and we still don’t know [the rules].” The spokesman also said that while the chamber is concerned about uncertainty, it also prefers undesired regulations to be delayed, creating a position that he said was “admittedly schizophrenic.” Corporate regulation and taxation. Read more from top economists and business experts on solutions for addressing corporate tax reform. Steven J. Markovich holds an MBA from the University of Chicago’s Booth School of Business.

The nonpartisan Congressional Research Service (CRS) reported that income tax credits and deductions cost over $1 trillion annually in foregone revenue. Eliminating these special tax incentives could yield a simpler tax code with smaller rates. However, elimination would be unpopular as over 90 percent of the potential savings is concentrated into 20 programs that benefit millions, such as the mortgage-interest deduction, and the non-taxable status of employer provided health insurance. Both the Washington Post and Wall Street Journal analyzed the report. This CFR Backgrounder outlines the competing policy paths on fiscal reforms and the global consequences for failing to bring down U.S. Debt. Debt and deficits. Read more from experts on the challenges in reducing U.S. debt. Infrastructure Dry Winter Fallows Californian Farmland After an unusually dry winter, California’s Central Valley farmers fallow farmland (WSJ) in response to water allocation cutbacks. California’s water infrastructure is not able to adequately smooth out yearly fluctuations in precipitation, and weak water rights ensure that farmers bear the brunt of droughts. Economic effects will ripple beyond the Central Valley; farm payrolls will be reduced and declining production will raise prices on supermarket shelves. 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. International Trade and Investment Apple’s iPad may be hurt by Chinese Trademark Reforms Proposed reforms to strengthen Chinese intellectual property laws—including higher damages for infringers—are usually cheered by large multinationals; half of American firms in China said IP infringement hurt their businesses. Bloomberg discusses how domestic Chinese firms are better protecting their IP rights. Consider the iPad; disputes over Apple’s contract with the Hong Kong firm that has owned the trademark to IPAD since 2001 has exposed Apple to infringement damages in the largest market for iPads outside of the United States. International trade and investment. Read more from leading analysts on the debate over next steps in U.S. trade policy. Corporate Regulation and Taxation Shareholder Pressure Restrains CEO Pay The Wall Street Journal reports that despite robust revenue and profit growth, total direct compensation growth for CEOs stalled in 2011. As the SEC increases disclosure requirements for executive compensation, shareholders pressure directors to keep pay in line with performance. Many of the 65 firms surveyed missed performance targets—despite median growth rates of 9 percent for revenue and 17 percent for net income—and so CEO pay rose just 1.4 percent. Corporate regulation and taxation. Read more from top economists and business experts on solutions for addressing corporate tax reform. Education and Human Capital Start-Ups Flourish in Education Technology The Chronicle of Higher Education reports that venture capital investment in education technology tripled in the past five years. VCs believe education is poised for a digital revolution, with key enablers in place: widespread wireless and high speed networks, growth of smartphones, and increased comfort with cloud software. While the potential benefits of emerging technologies are large, successful entrepreneurs will need to surmount cultural differences between business and education. Education and human capital. Read more from experts discussing ways to improve U.S. education and immigration policies. Steven J. Markovich holds an MBA from the University of Chicago’s Booth School of Business.

High oil prices, improved extraction technologies and declining demand have reduced U.S. dependence on foreign energy (NYT).  Demand decreased as the recession and higher gasoline prices led Americans to drive less and to buy more fuel efficient vehicles.  Oil is a globally traded commodity, so prices have remained high even as domestic oil production rose from almost 5 million barrels a day in 2008, to nearly 5.7 in 2011 and imports of all liquid fuels fell from 60 percent in 2005, to 45 percent in 2011.  Global trading of natural gas is limited; booming domestic production drove prices down 46 percent in 2011 and gas storage facilities are approaching capacity limits (WSJ). CFR’s Michael A. Levi was quoted in the New York Times article.  He is the David M. Rubenstein Senior Fellow for Energy and the Environment and regularly discusses energy policy and markets on his blog, Energy, Security, and Climate. 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. International Trade and Investment Tourism to United States Rises The International Trade Administration of the Department of Commerce announced the growth of foreign tourists and tourism spending in 2011.  The number of international visitors rose 4 percent in 2011—reaching 62 million—while spending increased 14 percent.  This growth in tourism is estimated to have supported an additional 103,000 jobs.  Efforts to stoke further growth include the Obama administration’s recently created Task Force on Travel and Competitiveness that seeks to reduce the difficulties many foreigners face in scheduling a vacation in the United States. CFR’s Ted Alden discusses the need to accelerate improvements to the speed and safety of the U.S. visa system.  Inefficiencies in the current system reduce U.S. competitiveness by discouraging tourism, foreign investment and international business. International trade and investment. Read more from leading analysts on the debate over next steps in U.S. trade policy. Corporate Regulation and Taxation Deutsche Bank Restructures to Avoid Dodd-Frank Capital Requirements Deutsche Bank restructured its U.S. operations to avoid Dodd-Frank capital requirements (FT).  The Dodd-Frank Act requires foreign banks’ subsidiaries that are structured as bank holding companies to meet capital levels required of U.S. firms.  Large investment banks restructured themselves into bank holding companies during the financial crisis to access aid programs from the Federal Reserve. Deutsche Bank’s restructuring follows a similar move by Barclays in 2010, and has prompted the Fed to review capital requirements placed on foreign banks (FT). Corporate regulation and taxation. Read more from top economists and business experts on solutions for addressing corporate tax reform. Education and Human Capital Student Loan Debt Exceeds $1 Trillion The Consumer Financial Protection Bureau reported that aggregate student loan debt now exceeds $1 trillion (WSJ).  As the pay gap between college and high school educated workers continues to grow, a greater number of students are choosing to enroll in college and take on educational debt.  Debt is also boosted by rising tuition rates and repayment penalties as former student fall behind on payments.  While the growth in college education increases the capability of the U.S. workforce, the increasing level of indebtedness among young Americans may cause many to postpone buying a home or getting married. U.S. Workers are Less Mobile The Harvard Business Review suggests that the difficulty some firms face in filling open positions—despite persistent unemployment—may be partially explained by a decline in workforce mobility.  The Census Bureau reported that the percentage of Americans who changed residences between 2010 and 2011 was 11.6 percent, the lowest since 1948.  While surveys indicate that 44 percent of workers are willing to relocate for a career opportunity, many are stuck in their current homes; 23 percent of homeowners are “underwater” on their mortgages.  This provides an edge to more mobile workers—particularly fresh graduates—and to professions that can be done remotely. The HBR article also acknowledges that the growing gap between workers’ skills and employers’ needs is a primary explanation for the difficulty employers have in filling some openings.  CFR’s Ted 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. Education and human capital. Read more from experts discussing ways to improve U.S. education and immigration policies. Innovation Corporate Venture Funding Rises The Wall Street Journal reported that venture capital investment by corporations rose in 2011, but is still below pre-recession highs.  Corporations are increasing their investment in early stage start-ups, rather than waiting to acquire more mature ventures.  Corporate investments rose 27 percent in 2011, from $2.6 to $3.3 billion.  Budding entrepreneurs who secure corporate cash get funding and a strategic partner with deep industry expertise. Innovation. Read more on how the U.S. capacity to innovate could play a chief role in economic growth. Steven J. Markovich holds an MBA from the University of Chicago’s Booth School of Business.

South Asia is among the least economically integrated regions of the world, in part because partition cleaved apart various natural economic communities. Regions, such as Bengal, which had been well integrated historically, suffered considerable economic ill effects. And post-1947 policies have only exacerbated the problem through tariffs, production restrictions, and various trade controls. Actually, the lack of economic integration in South Asia is endemic. It’s not just a challenge for India and Pakistan but for many other countries in South Asia as well. So it’s interesting that Indian foreign policymakers seem, in various ways, to be reemphasizing the economic dimensions of their country’s strategy. At a conference in New Delhi last week, for example, Shivshankar Menon, India’s savvy national security advisor, urged India and its neighbors to refocus on economic integration. Ironically, Menon argued, economic success has raised the costs of not doing business. To see that, take a look around the region: India, even amid a post-crisis slowdown, continues to grow rapidly. Bangladesh has become attractive to global market participants. Pakistan is, for others, a profitable frontier market, despite gathering investment risks. And the opportunities and challenges are on display in Sri Lanka as well: its economy has grown rapidly as new economic opportunities have opened with the end of the civil war in 2009. But to sustain growth, Sri Lanka needs to shift from public sector to private sector-driven growth—and that will require new investment in key sectors, such as tourism, agriculture, fisheries, business process outsourcing, and infrastructure. China has picked up some of the slack. But India is a more proximate economic partner. And the same is true of various South Asian countries and one another. Cronyism, protectionist tendencies, and political risks remain considerable obstacles across the region, including in Colombo. But growth continues across South Asia. And various studies have demonstrated the potential gains from trade. One recent report from an Indian consumer research group, with support from the Asia Foundation, argues that further integration of trade among South Asian economies could yield as much as $2 billion to consumers. This is why it’s encouraging that Menon and others in India seem to be giving regional trade integration new emphasis. After all, India’s size and rapid growth give it some potential to help lead the way. Here are three areas that bear watching: The Strategic Consequences of Indian Growth First, how will India choose to play the strategic consequences of its economic growth? My friend, Sanjaya Baru, has long argued that India should work not just for India-Pakistan bilateral cooperation or regional cooperation within the South Asian Association for Regional Cooperation (SAARC) but also on a parallel track. Given the slow pace of the former two efforts, Sanjaya has written, “it may be necessary for India to … see if regional economic cooperation can be pursued at a faster pace in a wider South Asian context.” One vehicle, he has argued, might be an expanded “Bay of Bengal Community.” This would build eastward off the platform of an existing effort, “BIMSTEC,” which involves technical cooperation among Bangladesh, Bhutan, India, Nepal, Sri Lanka, and two Southeast Asian countries—Myanmar and Thailand. And if Myanmar’s process of political opening ultimately proves to be real (and is matched by an economic opening), then India would be well positioned to help forge new patterns of integration between South and Southeast Asia. Melding Economics into Indian Strategy Now, flip from the strategic consequences of economic growth to the economic dimensions of Indian strategy. Will India increasingly meld economics into its strategic thinking? That will be especially important if Indian foreign policy continues to so ambitiously “look east” in Asia. Strategically, India has been bottled up in the subcontinent for generations, but it wasn’t always so: Southeast Asia bears the hallmarks of a bygone era in names like “Indonesia” and “Indochina,” and Indian sailors once plied the trade routes from the Indian Ocean to the strait of Malacca. But as it once again “looks East,” India risks being left behind in Asia because of the significant mismatch between its lofty strategic goals and more earthbound economic realities. Trade plays a growing role in the Indian economy and India has signed preferential trade agreements with the Association of Southeast Asian Nations (ASEAN) and Singapore. Yet scale remains a handicap: in 2009, 11.6 percent of ASEAN’s trade was with China but just 2.5 percent with India. Meanwhile, the backbone of East Asian economies remains integrated supply and production chains to which India is still largely irrelevant. More manufacturing in India’s southern states could mean greater integration into East Asian supply and production chains. Likewise with outbound investment from corporate India: it could, perhaps, transform India’s interactions with Southeast Asia; but, here too, scale remains a handicap. Domestic Indian policy choices will matter, in particular. The national manufacturing policy could yield new manufacturing zones with industrial parks, warehousing, and opportunities in special economic zones. And as the Indian government works to increase the share of manufacturing in GDP from around 16 per cent to 25 per cent in a decade, India need not compete only at the bottom of the value chain. It could also aim to compete in machinery, auto parts, and even automobiles, particularly through the adoption of new policies at the state level. But huge obstacles remain, and some in India view this as a backdoor to relaxing labor laws. Such policies could falter, too, on land acquisition. South Asia: Watch this Space Third, various new initiatives in South Asia bear watching, not least among them recent developments between India and Pakistan. Mohsin Khan of the Peterson Institute has argued that Pakistan’s November 2011 decision to grant most favored nation (MFN) status to India could prove especially significant. Of course obstacles remain, but Pakistan has continued to take important and constructive steps—for example, shifting from a "positive" to a “negative list”-based import regime with a February 29 Cabinet decision. India’s trade minister, Anand Sharma, has noted that this step will increase from 17% to about 90% the number of items that India can trade with Pakistan. There has been movement elsewhere as well—with Bangladesh and Sri Lanka, for example. Over at Ajay Shah’s blog on the Indian economy, there is a good debate about whether and how India’s growth may have spillover effects elsewhere in South Asia. The bottom line is this: India’s debate about economics and strategy is intensifying. And to my mind, at least, that is a decidedly good thing. After all, India’s success will increasingly depend on how New Delhi (and India’s states) respond to opportunities generated beyond the country’s borders.  

The Hill reports that President Obama will issue an executive order requiring agencies to conduct faster reviews of infrastructure projects. The Obama administration will also issue another memo to specifically expedite permitting of the portion of the Keystone XL pipeline stretching from Oklahoma to refineries on the Texas Gulf Coast. This executive order may not have much effect on the project schedule; Bloomberg BusinessWeek reports that construction plans for the southern portion of the Keystone XL pipeline will not change from a scheduled June start. The announcement occurred during a four-state energy tour, during which President Obama vowed to continue making large investments in solar energy (TheHill). In January, the Obama administration opted not to issue an approval for the entire Keystone XL pipeline project by a Congressional deadline. CFR’s Michael A. Levi—the David M. Rubenstein Senior Fellow for Energy and the Environment—discussed five myths about the Keystone XL pipeline and gave an interview examining the Obama administration’s decision. 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 Senate to Vote on Start-Up Funding Bill The Senate is expected to vote today on the JOBS bill (NYT) and two proposed amendments. The House bill passed 390-23 on March 8th; if either Senate amendment is passed along with the bill, the House would have to reconsider the amended measure. The JOBS bill would reform the financing of start-ups to increase flexibility and reduce regulatory burdens. It would legalize “crowdfunding” (small equity investments by ordinary investors) of up to $1 million and raise the limit of private shareholders from 500 to 2000. Firms with under $1 billion in revenue would be exempted from certain Sarbanes-Oxley regulations regarding IPOs, executive compensation and audits. Forbes provides greater detail on the specific measures. Supreme Court Unanimously Nullifies Two Medical Testing Patents The Supreme Court unanimously voided two medical testing patents (WSJ) held by Prometheus Laboratories, a Nestle unit. The Supreme Court ruled that Prometheus’ tests were not novel, but rather used several obvious steps to calculate recommended dosage for particular patients based upon natural laws. While the ruling may open the door to the free application and refinement of other therapies, innovation may slow in the formerly burgeoning field of diagnostic medicine. Without the profits patent protection provides, established firms say they would curtail investment in new testing procedures, and start-ups may have difficulty attracting backers. Innovation. Read more on how the U.S. capacity to innovate could play a chief role in economic growth. Education and Human Capital Retailers can Excel by Investing in Workers The New Yorker highlights recent studies that suggest that many retailers—including low-price ones—can improve sales and profits by hiring more workers, and training them better. More, better trained employees usually improve sales enough to compensate for higher labor costs; typically an extra dollar of payroll leads to between four and twenty-eight dollars of additional revenue. While increasing payroll investments eventually yield diminishing returns, the recent focus on cost-cutting in U.S. stores created an opportunity for many retailers to benefit customers, employees, and their own bottom lines by investing in their workforces. Education and human capital. Read more from experts discussing ways to improve U.S. education and immigration policies. International Trade and Investment U.S. Retailers Targeting Foreign Customers U.S. retailers are increasing developing their ability to service international customers. The New York Times describes how Macy’s and other retailers are adapting their websites and marketing strategies to reach overseas customers, often through smartphones. Potential sales are large; after a decade of serving international customers, over a third of all visitors to Abercrombie & Fitch’s website are foreigners. Challenges include expensive shipping, customs requirements, specific import and export restrictions and licensing, and VAT taxes. Still, the lower prices and greater selection of American retailers continue to lure international customers. International trade and investment. Read more from leading analysts on the debate over next steps in U.S. trade policy. Steven J. Markovich holds an MBA from the University of Chicago’s Booth School of Business.

The CFR Independent Task Force on U.S. Education Reform and National Security released its report describing the threats posed to U.S. prosperity, security, and preeminence by a failing K-12 education system. Without an effective education, many future U.S. citizens will be unable to compete in the global economy, understand domestic policies and foreign affairs, or serve the nation’s foreign service and military needs, said the report, which was co-chaired by former Secretary of State Condoleezza Rice and former New York City Schools Chancellor Joel Klein. The Task Force made three central policy recommendations: implementing educational expectations and assessments in subjects vital to protecting national security such as science, technology, and foreign languages; making structural changes to provide parents with more school choices for their children; and launching a “national security readiness audit” to raise public awareness and hold schools and policymakers accountable. U.S. Firms Struggle to find Employees for the Digital Age While the unemployment rate in the United States remains high, companies are struggling to hire employees well versed in digital technologies (Harvard Business Review). As information technology revolutionizes industries from finance to manufacturing and retail, firms need to find talent to meet the innovation challenges of a changing world. While most American firms are investing in employee training to bridge skill gaps, the government has a duty to develop a labor force that meets the needs of 21st century businesses. Education and human capital. Read more from experts discussing ways to improve U.S. education and immigration policies. International Trade and Investment Commerce Department Levies Small Tariffs on Chinese Solar Imports The U.S. Commerce Department imposed modest tariffs on imports of solar panels from China, responding to allegations by U.S. solar panel makers that their Chinese competitors are unfairly subsidized. The duties, which could be imposed retroactively, range from 2.9 to 4.73 percent, but are unlikely to slow the rapid growth of solar installations in the United States. U.S. makers of solar panels, led by SolarWorld, which has a large production facility in Oregon, had been hoping for more punitive duties to reduce their declining market share. A second Commerce Department decision on whether Chinese solar panels are being “dumped” in the U.S. market below cost is due in May. Senate Blocks Reauthorization of Export-Import Bank The Senate yesterday blocked the reauthorization of the U.S. Export Import Bank, leaving the future of the agency uncertain. Republicans united to defeat a Democratic amendment to a popular small business bill that would have renewed the agency for four years and raised its financing cap from $100 billion to $140 billion. The bank has played a key role in the Obama administration’s efforts to double exports over the five-year period to 2014 as part of its National Export Initiative. The bank’s authorization runs out in May, but it could hit the financing cap in the next few weeks. Some Republicans are seeking to rein in the bank’s lending, and prospects for passage of a stand-alone bill are uncertain. CFR’s Edward Alden argues for Congress to reauthorize the Ex-Im Bank and expand its lending authority in this blog post International Trade and Investment. Read more from leading analysts on the debate over next steps in U.S. trade policy. Infrastructure Peter Orszag Advocates Re-pricing of Water In his Bloomberg column, former OMB Director and CFR adjunct senior fellow Peter Orszag says Atlanta’s two decade water conflict with Alabama and Florida foreshadows future water conflicts. As aquifer levels fall and pollution sours other sources, freshwater supplies will not keep up with demand. Orszag advocates adjusting water pricing to reflect usage, to raise awareness of water issues and to fund needed improvements. The American Society of Civil Engineers believes an additional investment of $9.4 billion annually through 2020 is required to fix water and sewage systems(WashPost); the U.S. water system’s 700,000 miles of pipes averaging sixty years of age are estimated to leak 25 percent of drinking water. 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 Californians Prepare for Dueling Tax Reform Ballot Initiatives As debate continues to rage about the federal deficit, many states are struggling to close their own yawning budget holes. The Economist describes a ballot initiative battle between California’s Democratic governor, Jerry Brown, and Molly Munger, civil-rights lawyer and wealthy daughter of Charlie Munger, Warren Buffett’s longtime business partner. Both proposals raise taxes. Brown’s proposal temporarily raises sales taxes and income taxes on the affluent to balance California’s budget over the next five years. Munger’s measure would permanently raise income taxes more broadly, largely to fund education. Brown recently won the support of the California Federation of Teachers, but we will have to wait until the November vote to see which—if any—proposal wins the approval of Californians. Debate continues over the 2013 budget plans announced by the Obama administration and GOP leaders. This CFR Backgrounder outlines the competing policy paths on federal fiscal reform, and the global consequences for failing to bring down U.S. debt. Debt and deficits. Read more from experts on the challenges in reducing U.S. debt. Steven J. Markovich holds an MBA from the University of Chicago’s Booth School of Business.

Today Wisconsin Representative Paul Ryan, chairman of the House Budget Committee, will debut the Republican proposal for the 2013 federal budget. The budget is expected to propose reforms to the corporate tax code by lowering the corporate tax rate to 25 percent and shifting to a territorial tax system in which companies would no longer be taxed on their overseas earnings. Individual income tax would be overhauled as well by ending the alternative minimum tax, and moving to two tax brackets of 10 and 25 percent. Paul Ryan’s op-ed about the Republican budget in yesterday’s Wall Street Journal provides a preview. CFR’s Ted Alden discusses the need to reform corporate taxation to keep the United States competitive. In addition to lowering statutory rates closer to levels of the other OECD countries, the United States should move to a territorial tax system—as most of the world has already done—to remove the disincentive to repatriate profits. Corporate regulation and taxation. Read more from top economists and business experts on solutions for addressing corporate tax reform. Innovation A Cautionary Tale of Stolen Innovation Businessweek reports on the boom in Chinese corporate espionage and the challenge it poses to innovators who partner with Chinese firms, detailing the theft of sophisticated wind turbine control technology by Sinovel from American Superconductor (ASMC). Despite elaborate protections and the lack of technology transfer agreements, ASMC fell victim to intellectual theft from its primary customer. Sinovel accounted for more than two-thirds of ASMC’s revenue--and lost 84 percent of its stock price. ASMC’s experience is a reminder of risks faced by firms whose business depend on strong intellectual property protection competing in China. Innovation. Read more on how the U.S. capacity to innovate could play a chief role in economic growth. International Trade and Investment Economists Challenge Manufacturing Productivity Gains A new report by the Information Technology & Innovation Foundation asserts that manufacturing job losses since 2000 are driven not by productivity gains. The report challenges the productivity statistics calculated by the Bureau of Labor Statistics and argues that productivity gains are inflated; savings from outsourcing parts to lower cost countries show up as productivity gains in U.S. manufacturing, even though it represents a transfer of production to a foreign factory. The report also calls into question reported gains in computer and electronic production; these statistical gains may be driven by increasing the capabilities of products, not an uptick in actual units shipped. CFR’s Renewing America initiative recently released a working paper “After Manufacturing: Lessons for a New Reality from North Carolina,” which discussing lessons learned from North Carolina’s responses to the collapse of its manufacturing employment. International trade and investment. Read more from leading analysts on the debate over next steps in U.S. trade policy. Education and Human Capital Federal School Improvement Grants Education Week discusses two reports issued by the Center on Education Policy (CEP) finding that state officials are “generally optimistic” about the federal school improvement grant program (SIG). SIG funds are distributed to state education agencies which award them to local education agencies who then implement one of four intervention models to rapidly improve troubled schools.  The survey shows general support among state education leaders for the major elements of the program: the intervention models, the funding criteria, the focus on student achievement, the competitive grant process, and the level of funding.  Concerns remain about the difficulty in replacing principals and teachers, the three-year time frame, and continuing funding as the American Recovery and Reinvestment Act’s support ends. Education and human capital. Read more from experts discussing ways to improve U.S. education and immigration policies. Steven J. Markovich holds an MBA from the University of Chicago’s Booth School of Business.

This morning Apple announced the company would pay a dividend to shareholders and buy back up to $10 billion in stock, revealing the plan for its $97.6 billion cash hoard (WSJ). As iPads and iPhones flew off shelves, Apple recorded staggering profits but has not paid a dividend since 1995. While many growing firms retain earnings to fuel expansion, the size of Apple’s earnings and cash are unprecedented; Apple’s cash accounts grew by almost $38 billion in 2011 alone. U.S. tax policy is a partial explanation for why Apple has resisted distributing this cash to shareholders. Roughly two-thirds of the $97.6 billion is held by foreign subsidiaries (NYT), and Apple would likely face tax rates above 30 percent to repatriate those earnings to the United States for distribution as dividends. Corporate regulation and taxation. Read more from top economists and business experts on solutions for addressing corporate tax reform. Innovation Concerns about Outsourcing R&D are Premature The Harvard Business Review reports that concerns about U.S. outsourcing of R&D are premature. The United States remains a research powerhouse and a net exporter of R&D related services. The country also attracts R&D investment from foreign multinationals at a higher rate than U.S. firms outsource R&D. Suggested steps to improve R&D in the United States include increasing both public and private investment, attracting and training skilled researchers, and balancing public research dollars between health sciences and engineering/physical sciences. Innovation. Read more on how the U.S. capacity to innovate could play a chief role in economic growth. Education and Human Capital Most Graduation Rates Improve, but Rates across Southwest Decline From 2001 to 2009, the U.S. high school graduation rate (AP) improved by 3.5 percentage points, reaching 75 percent (AP). Forty states raised graduation rates, with strong gains in New York and the southeast, but declines across the southwest. Successful school districts pursued greater outreach to at-risk students by faculty and intervention specialists. For students who have left, schools created programs to ease reentry and to recover credits, including: e-learning, evening classes, and family centers for teens who are parents or pregnant. These new programs as well as reorganizations decreased estimated “drop-out factories” from more than 2,000 to approximately 1,550. Education and human capital. Read more from experts discussing ways to improve U.S. education and immigration.

For the sixth consecutive month, the percentage of U.S. debt held by foreigners rose (Washington Post). While the United States faces short and long term budgetary challenges, uncertainty in Europe has made U.S. debt a relative safe haven. China is the largest holder of Treasury debt, and bought more for the first time in six months. Both China and Japan hold over a trillion dollars worth in public and private accounts; Britain is the third largest lender, but has less than $150 billion in total. As the United States becomes increasingly dependent upon other nations for funding, the debate over how to reduce the deficit continues. This CFR Backgrounder outlines the competing policy paths on fiscal reforms and the global consequences for failing to bring down U.S. debt. Debt and deficits. Read more from experts on the challenges in reducing U.S. debt. Education and Human Capital New Brookings Study on Immigrant Workers The Brookings Institution and the Partnership for a New American Economy issued a report on immigrant workers in the U.S. labor force. As the U.S. population ages, immigrants disproportionately grow as a share of the labor force, though the recession recently slowed immigration. More immigrants in low-skilled positions lack a high school diploma than native-born Americans (28.9 percent vs 7.4 percent), but educational profiles are similar among high-skilled workers. Immigrants tend to cluster around different occupations within an industry and are over represented  in the fastest growing occupations. Education and human capital. Read more from experts discussing ways to improve U.S. education and immigration policies. International Trade and Investment Showdown Over Ex-Im Bank The Senate is likely to consider legislation to raise the $100 billion lending cap of the Export-Import Bank of the United States (Ex-Im Bank) and reauthorize its charter for four years (Congressional Quarterly). Manufacturers such as Boeing see the Ex-Im Bank as an important lending source for foreign customers who otherwise could not purchase American products, while U.S. firms that buy these same goods--such as the airlines--see the Ex-Im Bank as an unfair advantage for their foreign competitors. In the House, Majority Leader Eric Cantor is drafting a bill to bridge differences among House Republicans. Some support the Ex-Im Bank to spur exports, while dissenters want to match expansion authorization with governance reforms. CFR's Edward Alden discusses the issues facing lawmakers as they consider Ex-Im reauthorization in this blog post. International trade and investment. Read more from leading analysts on the debate over next steps in U.S. trade policy. Corporate Regulation and Taxation CFTC Focusing on High Frequency Traders The Wall Street Journal reported that the Commodity Futures Trading Commission (CFTC) is developing a system to monitor all buy and sell futures orders, rather than just those completed; over 90 percent of orders are cancelled, and high frequency traders are responsible for over half of all offers. May 2010’s “Flash Crash” showed the potential for computerized algorithmic trading to increase instability; the DJIA plunged 600 points over five minutes due to massive sell orders on futures contracts. The CFTC’s tracking burden will increase soon as the Dodd-Frank Act mandates that more derivatives trading occur on exchanges rather than between individual traders. Corporate regulation and taxation. Read more from top economists and business experts on solutions for addressing corporate tax reform.

By a 74-22 vote, the U.S. Senate approved a two year, $109 billion transportation bill (TheHill). With unanimous support among Democrats and half of Republicans voting in favor, the bipartisan bill’s passage will put pressure on House leaders to either pass the Senate bill or vote on a House bill of their own, such as the five year, $260 billion transportation bill favored by House Speaker John Boehner, which has split Republican lawmakers. Current federal transportation spending runs out at the end of March; the House has just over two weeks to address transportation spending to prevent interruption. 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. International Trade and Investment Korea-U.S. Free Trade Agreement Goes Into Force The free trade agreement between the United States and South Korea (Reuters) enters into force today.  The agreement negotiated under President Bush and ratified under President Obama remains controversial in South Korea.  Opposition lawmakers—poised to win control of the National Assembly in April’s elections—have threatened to block objectionable parts of the bill, and over a hundred parliamentarians wrote to President Obama requesting relief.  Key concerns relate to agricultural products, and how bilateral investment disputes are resolved. Obama and Cameron Discuss Tapping Oil Reserves President Obama and British Prime Minister Cameron discussed the potential release of emergency oil reserves (Reuters) in response to tightening supplies. Sanctions against Iran and production cuts in places such as Sudan and Syria have led to rising prices. The largest emergency oil release occurred during last year’s Libyan Civil War (FT), but support for another coordinated release is weak in Europe. International trade and investment. Read more from leading analysts on the debate over next steps in U.S. trade policy. Innovation Solar Power Installation Hits Record Growth in 2011 Last year marked a record for solar power in the United States (WSJ); over 1.8 gigawatts of new capacity was installed, more than double 2010’s total.  Growth was stoked by a federal subsidy that expired at the end of 2011.  Without reauthorization, growth is expected to fall in 2013 as subsidized projects are completed this year. Though 2011 was a record year for solar power installers, manufactures have faced price declines of 35 percent over the past two years, primarily due to competition from China.  The U.S. Department of Commerce is expected to issue a preliminary decision on whether to impose tariffs in response to alleged government subsidies to Chinese firms next week. Innovation. Read more on how the U.S. capacity to innovate could play a chief role in economic growth.

The United States, Europe, and Japan challenged China’s export restrictions of rare earth elements at the WTO (WSJ). The complaint alleges that the restrictions give Chinese manufacturers an unfair advantage, as these elements are essential to the production of electronic and cleantech products, while China counters the restrictions are designed to limit environmental damage. An initial ruling is expected before the end of 2012. Ninety-five percent of rare earths are mined in China. Though new mining projects are underway outside China, the country is expected to dominate production through 2016. Separately, Chinese Premier Wen Jiabao stressed the need to continue economic and political reforms, including control over exchange rates (BBC). He also tamped down expectations by mentioning that derivatives contracts in Hong Kong indicate that the yuan’s value is likely nearing market equilibrium. In a recent blog post, CFR’s Ted Alden discusses the limits of the WTO when trade rules conflict with important strategic objectives of large economies. International trade and investment. Read more from leading analysts on the debate over next steps in U.S. trade policy. Corporate Regulation and Taxation Examining Candidates' Tax Proposals On the Op-Ed pages of the Wall Street Journal, Glenn Hubbard and Kevin Hassett discuss the impact of the tax reform proposals of Obama, Romney, and Santorum, specifically the international mobility of capital and how taxes affect firms’ structures and investing decisions. When taxes discourage capital investment, owners are prevented from making additional profits and workers earn less because capital investment drives the productivity gains that lead to increased wages. The authors prefer Romney’s plan. Debating Dodd-Frank’s Complexity, Effectiveness Almost two years after its passage, the Dodd-Frank financial regulatory act is not fully implemented and the debate about its ultimate effectiveness due to its complex nature continues. The Harvard Business Review discusses the main arguments on both sides and calls for simpler rules that are understandable and enforceable. CFR’s Ted Alden discusses the need to reform corporate taxation to keep the United States competitive. In addition to lowering statutory rates closer to levels of the other OECD countries, the United States should move to a territorial tax system as most of the world has already done. Corporate regulation and taxation. Read more from top economists and business experts on solutions for addressing corporate tax reform. Debt and Deficits Senate Holds a Hearing on Reforming Congress Today a panel of U.S. senators will meet to discuss proposals to reform the rules of the House and Senate (WashPost). Several of the proposals to be discussed would affect the budget process, including moving from annual to two year budgets, and the “no budget, no pay” rule that would withhold congressional pay if a budget is not passed. Debt and Deficits. Read more from experts on the challenges in reducing U.S. debt.

This week marks the winding down of one chapter in the history of international trade conflict, and the ramping up of another. On Monday, the World Trade Organization (WTO) reached its final ruling in a three decade-long dispute between the United States and the European Union over aircraft subsidies by confirming that Boeing, along with its European rival Airbus, was also a recipient of significant illegal government subsidies. And then on Tuesday, President Obama announced the launch of a joint U.S.-European Union-Japanese challenge before the WTO aimed at forcing China to lift its restrictions on exports of rare earth and other minerals, which are key ingredients for a range of products such as smart phones, hybrid batteries, and wind turbines. The export restrictions lower the cost of rare earths for Chinese-based producers and raise costs for overseas competitors. The case is part of a larger push by the Obama administration to step up trade action against China, including the recent creation a new Interagency Trade Enforcement Center. The U.S.-EU conflict over aircraft was a battle for the commanding heights of the industrial economy--control over one of the most sophisticated and lucrative of manufactured goods. Civil aircraft remains the single biggest export from the United States and one of the top EU exports. The conflict with China is over which countries will dominate production of the leading technologies of the future.  If the U.S.-EU dispute is any measure, the best outcome is likely a tense compromise in which each of the large economies must find a way to share. The Airbus-Boeing battle is too complex to summarize easily, and has received serious book-length treatment by former New Yorker writer John Newhouse. But from a trade perspective, there is a reasonably simple conclusion--that global trade rules cannot dissuade powerful countries from pursuing their own economic and security interests. The European nations that make up the Airbus consortium were determined to create a globally competitive aircraft maker, and set about doing so systematically over the course of several decades. Government support was part, but only part, of the story. The United States, in turn, was determined to shore up Boeing as a dominant producer for both commercial and military reasons. Government support was similarly part, but only part, of the story. After nearly a decade of legal wrangling before the WTO, the U.S. and EU are more or less back where they started. With both sides having lost before the WTO, there is little alternative but for the two governments to negotiate some arrangement--as they first did in 1992--that will do a bit more to restrain future subsidies while avoiding costly trade sanctions. China is similarly determined to become a competitor in what it calls “emerging strategic industries,” from clean energy to biotechnology to next-generation information technology. The potential for trade disputes is much greater than it was between the U.S. and the EU because Chinese government support for these industries is broader and deeper.  But there are similarities too. The United States was always hobbled in any full-throated denunciation of subsidies for Airbus because, as the WTO decisions showed, Boeing also received extensive subsidies, even if they were determined to be less than one-third of the support received by Airbus. Similarly, in going after China on an issue like clean energy, the United States must concede that its own industries are also heavily subsidized, even if almost certainly much less than their Chinese competitors. The WTO disputes system can be extremely valuable because the panels serve as a neutral arbiter in assessing violations and calculating harm to the industries. But they cannot impose a solution. In the aircraft case, the two sides now have little choice but to find a negotiated truce, one in which (per the panel decisions) the EU will likely have to agree to reduce subsidies by more than the United States. With the United States now challenging China in the WTO on several fronts, the Obama administration should look for similar negotiating opportunities. China is not going to back away from its determination to succeed in these emerging industries, and is already threatening to push back hard in the dispute. But neither should the United States allow subsidized Chinese competitors to take a major bite out of U.S. sales, either domestically or overseas. WTO rulings could help in clarifying where trade rules are being violated, and by how much, and it is encouraging to see the Obama administration using that tool more aggressively. And in this latest case, the United States also needs to move quickly to develop domestic and other international sources of rare earth materials to help increase leverage over China. But like the U.S. and the EU over aircraft, negotiated compromise with China is the only plausible way forward. Even as trade tensions ratchet up, both side should make sure to leave their doors open.

The Harvard Business Review proposes a 4-part strategy to shape the U.S. government’s role in promoting the cleantech industry. Recommendations include acting as an angel investor by making small investments to prove technical feasibility of novel technologies (following the example of ARPA-E), focusing growth capital investments on proven technologies and business models, evaluating and developing eco-systems, and setting coherent national standards and guidelines. With Solyndra’s failure, and the slowdown in loans from the energy department, perhaps now is the time to reevaluate current U.S. policy (NYT). India Brings Criminal Charges on Facebook, Google While India is a compelling market for internet firms, content regulations create hazards for social media (WSJ). Google, Facebook, and ten other social firms were charged with failing to censor material that could offend religious groups. While all responded to complaints and removed offending material, the criminal complaint filed by an Indian journalist argues the websites have a responsibility to proactively police all user-generated content—a burden the firms argue is unfeasible. While these companies face fines and their executives could receive jail time, a guilty finding could also slow the growth and innovation of social media. Innovation. Read more on how the U.S. capacity to innovate could play a chief role in economic growth. Education and Human Capital Efforts at Education Innovation TED launched TED-Ed, an initiative to curate and develop high quality, original short videos targeted to high school students to supplement classroom instruction (WashPost). TED will use an open submission process to find lesson plans that its visualizers will develop. In related news, Khan Academy—provider of a broad range of free instructional videos—launched a new iPad app this weekend that is currently the top education app (WashPost). Both efforts show the potential to use technology’s scale to deploy high quality educational materials widely at low cost. Education and Human Capital. Read more from experts discussing ways to improve U.S. education and immigration policies. International Trade and Investment Developing Nations and Generic Drug Production The Indian government ruled that Bayer must license Nexar—a treatment for kidney cancer—to an Indian generic manufacturer for royalties of 6 percent of revenue. The generic must sell for 8,800 rupees ($176), only 3 percent of Bayer’s price. Ensuring both access to cutting-edge drugs and affordability is difficult for many developing nations. While most multilateral agreements on patents allow governments to force licensing (NYT), few exercise that power. Some compel licensing of AIDS drugs, but India joins Thailand as the only other nation to apply this power to cancer drugs. International trade and investment. Read more from leading analysts on the debate over next steps in U.S. trade policy. Infrastructure The United States Needs a Modern Water System Lynn Broaddus of the Johnson Foundation argues for thinking beyond repairing the current U.S. water system’s leaky pipes and pumps to designing a modern, flexible water system (TheHill). That U.S. water infrastructure needs considerable investment is clear; the American Society of Civil Engineers gave water systems a D-, while the American Water Works Association estimates $1 trillion of investment will be required for repairs and expansion. To address economic and environmental challenges, Broaddus advocates for new technological approaches, changes to financing and regulatory structures, and an integrated approach to the issues of drinking water, stormwater, and wastewater. 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.