WTO Position Paper: United States

As a member of GATT since January 1948, the United States has shown a long standing commitment to the principles of free trade.  We support many elements of the resolutions being presented today, as they are in line with the concepts of free trade and competition that the United States firmly endorses.  We do wish to raise some concerns about the resolutions with which we are presented today.  While we hope to see the WTO further its free trade policies, we are aware that there various interest groups represented here that will react adversely to moving to enact all of these resolutions.  We hope to enact the following changes: 

We first move to merge Resolutions II and III, simply referring to the combination as Resolution II, as Resolution III is simply an explanation or elaboration of the details of Resolution II.  We would like to propose that the purpose of Resolution II should not be to outlaw all non-tariff barriers in the agriculture, automobile, and finance industries, but to reduce them.  While NTBs are clearly barriers to free trade, their purposes are not always purely economic and they cannot always be corrected by free market mechanisms. As seen in the example mentioned in Resolution III, regarding restrictions on genetically modified organisms in food, the existence of the NTB is not to restrict economic activity, but is instead a distinction made for relevant health concerns.  In the United States, we rely on government organizations, in this case the FDA, to use their specialized knowledge to make certain regulations.  While situations like these may have economic impacts, in some cases, there is no way we can sacrifice the regulation in question, thus making these types of NTBs a necessary evil.  We propose that this resolution seeks to reduce non-tariff barriers, but makes exception to regulations that may have human health or related concerns that cannot be overlooked. 

We also move to alter Resolution IV, specifically in regards to agricultural subsidies.  Due to the nature and importance of the agriculture industry, we believe that subsidies in this field are necessary to maintain high levels of production.  Without the protection of subsidies and federal crop insurance, far less farmers would be willing to take the requisite risk to continue working in agriculture.  By protecting vulnerable farmers from crop failure other industry specific risks, we can help preserve a sector of the economy that has been in major decline.  While the U.S. itself has been seeking new ways to cut federal spending on agricultural subsidies, we hope to amend Resolution IV in a way that preserves these types of industry safeguards while taking a more gradual approach to reducing subsidies. 

Finally, while the United States supports the liberalization of capital flows, we move to edit or remove Resolution V, which states that no member state can place restrictions on capital investment flows into or out of their country.  While resolutions made by the WTO are aimed at cultivating free trade around the world, we have seen many instances where irresponsible actions by member states have warranted economic sanctions to be placed on them by other countries.  We believe that restricting capital flows to a certain state as a means of political disapproval can be particularly effective, and we move to create a resolution that reserves the right of member states to implement these sorts of restrictions at their own discretion.

We offer a willingness to negotiate and discuss all resolutions that we have not mentioned in this statement.  We look forward to working with the other representatives present today to create an effective agreement that furthers the WTO’s goals of promoting free trade worldwide.  

Practical Difficulties of Eliminating Externalities

As Alison Butler does not fail to address in her article, eliminating externalities can be extremely complicated.  Assigning property rights seems logical in simple examples, as we hope that principles of the market will create an equilibrium between private and social costs.  In practice (using the chemical plant upstream from a town example), however, it seems like it would be very difficult to A. quantify environmental damage with a dollar amount (how much should the firm pay the town), and B. gauge the opinion of a community regarding the optimal level of pollution (what level of pollution should the town pay the firm to reach).  As Butler notes, this all becomes increasingly confusing as these problems become international, as the natures of different nations inherently predispose them to accepting different environmental practices and policies, making the formation of international agreements on these issues much more difficult to obtain.  

News: IPE and the Environment

A couple of relevant topics in the news recently as we will be discussing the environment this week:

Last week, the U.S. and China released a "joint announcement" on climate change, with both sides setting long term targets to lower emissions and utilize alternative fuels.

Climate change was also a subject of interest at this weekend's G20 summit in Australia, where additional countries joined in on committing to combating climate change.

Hopefully these types of proclamations from the world's leading economies will encourage more actors in the public and private sectors to follow suit. 

Nudge: Improving Decisions About Health, Wealth, and Happiness

            Nudge: Improving Decisions About Health, Wealth, and Happiness, by Richard Thaler and Cass Sunstein, is about how people make decisions.  Thaler and Sunstein realize that, despite the depiction of homo economicus in economics textbooks, where humans are assumed to always act rationally and make decisions unfailingly well, the idea of the economic man carries little weight, and that human beings often make poor choices.  Poor decision-making can be the result of a several variables, such as bias, “inertia” (otherwise known as laziness), or, most importantly, the circumstances under which decisions are made.  The authors emphasize that the way that choices are presented can have a major impact on the decisions people make.  Inevitably, this means that those in charge of designing the choice structure, known in the book as “choice architects,” can have significant influence over people’s decisions.  One particularly illustrative example of a choice architect is that of someone who designs the way food is arranged in a cafeteria.  If the designer knows that different food arrangements will lead people to consume different foods, then the designer has the ability to alter consumption choices based on cafeteria design.  Thaler and Sunstein propose that if all choices will be influenced by choice architects then better choice architecture can be used to help people make better decisions.  They explain that by adhering to the idea of “libertarian paternalism,” a type of intervention that maintains individual liberties, choice architects can subtly “nudge” people to make certain choices while maintaining the liberty and individuality of the chooser.

            When are nudges appropriate?  Despite criticizing humans' ability to make decisions, Thaler and Sunstein do not believe that humans need help making every decision that they face.  According to the authors, nudges should be reserved for difficult decisions that are infrequent, situations in which people may not have adequate experience or information to make the best choices.  An example of this would be selecting a mortgage, a situation in which people often lack a detailed understanding of the results of their choices.  The authors also endorse nudges when choices and their consequences are separated in time (choosing a time to wake up vs. actually getting out of bed) or when choosers are forced to make choices to which they get little feedback or guidance (understanding fees associated with a cell phone bill).  Under any of these unique sets of circumstances, people could likely use assistance from choice architects.

            In order to preserve the libertarianism proposed by libertarian paternalism, nudges made by choice architects must not force choosers to relinquish their right to choose.  Choosers should also face low opt-out costs, which will allow them to choose autonomously with little difficulty.  Instead, changes in choice architecture are simply meant to make it easier for people to make good choices.  By understanding human tendencies and behavior, choice architects can influence peoples' behavior without having to directly impose outcomes on individuals.  Thaler and Sunstein explain a variety of tools that could be used as nudges, such as improving default options, providing choosers more information and feedback, and reducing barriers to action.  While all of these nudges can have extremely beneficial impacts on peoples' lives, choosers are never forced or compelled to make certain decisions.  Choosers, however, maintain the right to ignore these nudges and continue to choose poorly, thus preserving libertarianism.

            All of this talk about libertarian paternalism sounds simple, as public or private institutions only need to use their insider information and wisdom to help people make good decisions.  But what constitutes a “good” decision?  Thaler and Sunstein ask this question in their introduction to show that there are a variety of ways to interpret this question.  Think about another example from the book: In 2000, Sweden privatized its Social Security system. The government allowed individuals to create their own retirement portfolios, but also provided a default option for people who were either too busy, too lazy, or too absent minded to select their own.  How does a government go about creating a “good” retirement portfolio for the default option, in order to create a choice architecture model that will be beneficial for people that do not create their own?  Should the idea of a “good” portfolio be the one that will provide the best returns?  Or would “good” be a portfolio that most closely resembles the portfolio people would have chosen independently?  Or should there be no default portfolio at all, forcing people to make choices or not have any sort of retirement plan?  You can see that this all becomes very complicated, and that while choice architecture can be very influential, coming up with the definition of a “good” choice can be controversial. 

            Another issue, raised by Thaler and Sunstein in the closing chapter of their book, is the slippery slope posed by these interventionist (yet libertarian) policies.  If choice architects have the capacity to make people’s lives better, why don’t the choice architects turn nudges in to mandates, or “shoves?”  In other words, why even leave people with the ability to make bad choices?  The concept of libertarian paternalism opens the door for “hard” paternalists to stretch these theories to their limits.  While the authors believe that people of all parts of the political spectrum should be able to see the wisdom of libertarian paternalism, strong anti-interventionists and other’s wary of loss of liberty may resent these policies (see the link in my last blog post).  A related problem is that there is not necessarily anyone overseeing choice architects, which could pose a problem if the choice architect was inherently "bad."  If choice architects lose sight of the libertarian aspect of nudges, an escalation in the scale of paternalism could lead to a slippery slope.

            The ideas of libertarian paternalism and social economics are relatively new phenomena.  While the government and other institutions have started to embrace some of these policies (Sunstein has served as an advisor to President Obama), it is quite likely that we will see additional research in these fields have a continued impact on our lives.  A detailed understanding of social economics can help us better understand why people make poor choices (like how financial crises happen) and how interventions can help correct these problems. 

           

Early Thoughts on Nudge

http://mediamatters.org/video/2010/09/22/beck-cass-sunstein-is-the-most-dangerous-man-in/171019

I've posted a link to a video from 2010 in which Glenn Beck presents his (extremely unbiased) opinion on Cass Sunstein, the author of my book, Nudge.  In the video, Beck calls Sunstein "the most dangerous man in America." As talk show hosts seem to "conveniently" gloss over many of the details, here are a few to remember in order to understand how Sunstein would respond:

1. Nudges, according to the principle of Libertarian Paternalism, are suppose to create choice architecture that provides low-cost opt-out rights in order to ensure that people maintain their freedom to choose.  In other words, the right to choose not to be influenced by Nudges must always be maintained. 

2. Nudges are best for influencing decisions that are difficult and rare, where people may be lacking the adequate experience or information to make the best choices.  While Sunstein does acknowledge the Homer Simpson qualities of humans, he believes that people are very capable of making easy decisions that they have experience making, such as choosing which groceries to buy, while they may struggle with difficult decisions, such as selecting retirement plans or mortgages.

More to come on Wednesday. 

The Complication of IPE

"Although the economics of such schemes are straightforward, the politics are anything but."

-today's reading

"Democracy" in the World Economy

Over the last few weeks, I have noticed that we have, on several occasions, questioned the democracy of national and international financial institutions. In the reading for today's class, Stiglitz criticized the IMF's aversion to democratic practices.  Stiglitz claimed that, in the example of post-Soviet Russia, the IMF too often serves powerful interest groups and often disregards what would be most beneficial to the people of the nation's they set out to help.  He was also critical of the organization's lack of transparency, a characteristic that allows for the organization to avert blame for its actions by keeping interested parties in the dark.  The nature of the organization could be defended with what our class is now referring to as a "Wolf-like" argument: where would we be without the IMF?  This raises an age old debate in politics, especially American politics, where the desire for freedom and liberty is pitted against the desire for security.  This organization, while not exactly democratic in nature, provides the United States and the rest of the world with a sense of global economic stability.  In exchange for this stability, people are willing to sacrifice some of their values, especially people in seemingly desperate situations.  This creates an environment where people are willing to sacrifice the liberty they desire for the protection they need.  In the global economy, perceptions of the democratic nature of the IMF are very dependent on the economic circumstances facing different groups of people.  Critics of the IMF say that it is driven by the interests of powerful nations.  As citizens of a powerful nations, I think we have to wonder if the actions of this body reflect the ideals of that our nation claims to hold dear.

On a semi-related note, Stiglitz's description of the IMF made me think of this years FIFA scandal. FIFA is dealing with a major bribery scandal regarding the 2022 World Cup and is being criticized for its lack of transparency.  The recent developments are that FIFA has now completed an internal investigation, but won't tell anyone what they found...

Here are some links for anyone unfamiliar to the story:
                                            
http://www.ibtimes.com/fifa-bribery-scandal-qatar-2022-issues-casting-shadow-over-brazil-2014-1596296

http://www.bbc.com/sport/0/football/29337509

Ebola!

Since we met in class Tuesday, news outlets have confirmed the first case of Ebola in the United States.  Upon hearing this on NPR this morning, I couldn't help but think about how this relates to International Political Economy and Globalization.  In our globalized world, diseases flow as easily between countries as labor and capital.  We live in a world where West Africa can send us its diseases just as easily as we can send aid dollars or mission workers the other way.  This event also relates back to our discussion of volatility in Hong Kong and the effects of uncertainty on the market, as American and European airline companies saw a marked drop in share prices after reports that the infected individual traveled from Liberia to Texas on major commercial airliners.  While their is little chance that anyone on these flights will experience any medical issues (Ebola is only contracted through contact with the infected person's "bodily fluids"), the fear and uncertainty created by the event was enough to discourage investors in the short run.  It is stories like this one that reinforce the idea of how closely intertwined global society is today and how minuscule events across the globe can have a profound influence on the global economy.

Why FDI?

In Chapter 4 of Wolf's book, he discusses the impact that Foreign Direct Investment (FDI) can have in less developed countries.  On page 84, he says, "Many developing countries recognize that foreign direct investment brings benefits that foreign borrowing does not.  The investor is locked in and cannot flee the country when trouble strikes."  FDI is more than an investment, it is a commitment, tying a corporation or business venture to another country's economic and political environment.  In theory, this bond is what will keep foreign investors from taking advantage of the target nation through unfair agreements or other means, as they will actually become a part of its developing economy.  Wolf previously discussed the importance of trust in the market, and this is where FDI proves potentially dangerous for the investor.  There are many reasons not to trust the economic climate in underdeveloped countries, such as unstable political systems and lack of established banking institutions.  As we discussed in class today, you can't just give a machine to a country with no infrastructure to support it.  Investors are also wary of these markets simply because they are different and uncomfortable.  It is natural that someone looking to invest in Sub-Saharan Africa may lack the knowledge of the intricacies of the market in the region, thus dissuading them from getting involved with the region.  These factors do little to create the trusting relationship needed for FDI to occur, making investing in developing countries a risky proposition.

I recently spent Spring Term 2014 business in Galway, Ireland.  During my time there, I was able to see the possibilities provided by FDI in a stable and trustworthy environment.  Ireland and the U.S. have a very close relationship, and American investment in Ireland has seen prosperity strike a nation that, 35 years ago, was among the weakest in Europe.  Since then, Dublin has become one of Europe's biggest tech hubs, while Galway is a center for medical devices manufacturing companies.   It is obviously unfair to compare Ireland, an English speaking country with a low corporate tax rate, to any underdeveloped nation in terms of investment potential, but it does support that the concept of FDI has a very high ceiling when implemented successfully.

A closing thought: Wolf briefly touches on the fear of nationalization.  This is another fearful prospect facing foreign investors.  As seen in Guatemala in 1954, it can get messy.  If I were an American investor, I wouldn't count on the CIA to bail me out again.