Let’s Make a Deal (or not)

The U.S. and South Korea have failed to reach an agreement in a trade deal that would have boosted U.S. agriculture exports.  The deal would’ve included concessions to South Korea on automobiles and that was not going over well with domestic automakers like FORD and their related labor unions.  As with all trade arrangements, there are usually winners and losers.  Ranchers and U.S. consumers would’ve been on the winning side of the deal.  The U.S. auto industry and related interests were the potential losers.

Arrangements probably failed due to the tough stance the U.S. is taking on the dollar and foreign exchange pegs these days. No one is happy with QE2 around the world.  We’ll get to that in a minute.  I’m going to quote from the WSJ on this so you need to realize that what’s written here is very pro-free trade.  What was being negotiated at the moment was removal of some trade barriers on both sides.  Political consensus here was that Obama is trying to look more “pro-business”.  Part of South Korea’s problems, oddly enough, is that they are ‘too green’ for America’s stuff. Can you imagine a Democratic president trying to get a country to be less environmental friendly?

One stumbling block was Korea’s refusal to change a provision in the 2007 pact that provided an immediate end to a 2.5% tariff the U.S. levies on imports of Korean cars, said House Ways and Means Committee Chairman Sander Levin (D., Mich.). The U.S. wanted the tariff reduced gradually, while Korea eliminates safety and environmental rules that U.S. auto makers, led by Ford, said help keep Korea the world’s most closed car market. The effect of reducing the U.S. tariff more slowly likely wouldn’t be large because South Korea’s Hyundai Motor Co. already gets around it on more than half of the cars it sells in the U.S., by making them in Alabama and Georgia.

Compounding the stalemate, Mr. Levin said, were U.S. concerns that Korea’s proposed system for settling disputes wasn’t likely to work.

The U.S. also wants Korea gradually to drop its ban on imports of U.S. beef from older cattle, which began after the U.S. had a case of mad-cow disease seven years ago. Previously thought the easier of the two issues, it is a hot button politically for Korea and prompted a walkout by Korean negotiators.

In the end, the parties ran out of time. U.S. Trade Representative Ron Kirk said, “We won’t be driven by artificial deadlines,” though it was Mr. Obama who set the G-20 deadline.

The president alluded to the political pressures. “If we rush something that then can’t garner popular support, that’s going to be a problem,” said Mr. Obama, who had criticized the moribund 2007 Korea pact when he was a candidate. “We think we can make the case, but we want to make sure that that case is airtight.”

So, if you want the White House explanation, here’s Austan Goolsbee in a white house white board moment. I’m not sure what it says when the head of the President’s economic advice team has to give us all lectures, but any way, here’s the deal via Austan.

So, the G20 thing seems to be an exercise in every one going their own way.  No one likes the hot money issue or the weakening dollar.  So much for cooperation.  Guess the only thing we’re exporting  these days are financial bubbles.

The U.S. Federal Reserve decision last week to pump $600 billion into world’s biggest economy has stolen the spotlight away from China’s currency. Brazilian Finance Minister Guido Mantega said today that the Fed’s move may inflate commodities prices and proposed the world move away from using the dollar as the main reserve currency. Former Chinese central bank governor Dai Xianglong this week faulted the U.S. for adopting policies without regard for the dollar’s global role.

The policy fissures and concern countries may react with currency devaluations and capital controls underscore how the G-20 unity displayed during the financial crisis has given way to national divisions as members chart their own recovery path.

“The last thing a developing economy wants is for that liquidity to distort their asset markets and create a destabilizing bubble,” Stephen Roach, Morgan Stanley’s nonexecutive Asia chairman, told Bloomberg Television in an interview yesterday. “The process is not going to work if they don’t come up with a multilateral solution.”

If you want to read how the QE2 could possibly work and if it will be scaled up, I suggest going over to Tim Duy’s FedWatch for a wonky and some what long analysis. Oh, and there are plenty of those nifty graphs that I always love in the piece about the recovery.  He’s going with the blowing bubbles is good narrative.  Interesting.  Duy says the FED has no choice because the Federal Government is so out of it on Fiscal Policy.  Even more interesting and sadly true.

Flooding the market with money is dangerous business.  It risks distorting prices and capital allocations.  We simply don’t know where the money will wash up.  I know that is in vogue to believe there is a nice, obvious story that links an increase in the money supply to an increase in nominal GDP, but that only works on paper.  In the real world, the paths between money and output and prices are complicated.  The ultimate composition of aggregate demand matters.  It matters a lot – distortions have consequences.  Warsh’s risks amount to a laundry list of the possible distortions that might occur as the result of ongoing quantitative easing.  And he clearly takes those risks seriously.

It makes me think that I haven’t been taking those risks seriously enough.  But when monetary policy is the only game in town, what choice do you have?  You do what you can up to a point…but then you throw it back to Congress and say “you take responsibility for the mess you created by abdicating your role in crafting long run, stabilizing macroeconomic policies.”  Warsh has set the stage for doing exactly that.

Of course, seriously, if we really have to throw this back to Congress, we are absolutely done for.  Cooked.  Toast.  Somebody remember to tell the last guy to turn off the lights on his way out.  Better to take our chances with the next bubble.

Aiyee … I’m about reading to move my money into alligator belly futures.  At least that makes a good gumbo if you fail to get out in time.