I’m going to file this one under “interesting wonky idea that would NEVER, EVER happen”. The Chinese government flipped when the United States imposed a tariff on tires; imagine the reaction to the United States creating a new exchange rate. I’m highlighting Baker’s op-ed not because I think it’s a good idea, but proof that the problem of the yuan peg is not an easy one to solve and will require some creative thinking. Even if some thoughts won’t work.

Republicans have called Democrats “socialist” for wanting to raise the top marginal tax rate. Imagine the epithet they would hurl if a new tax code threatened professional sports.

The Spanish government has proposed reforming the “Beckham law”, named after the British star, that taxes foreign soccer players at a lower rate than domestic athletes. La Liga and its players claim a repeal of the law would cause foreign stars to leave the Spanish league. The players have even threatened to strike. The English Premier league also flipped a lip when the UK government proposed a new tax plan earlier this year. Ironically, English fans feared the tax rate would drive Christiano Ronaldo from Manchester United to Real Madrid. Ronaldo is now on Real Madrid and may see his tax rate increase anyway.

Now this tax problem could be easily solved if all European governments decided to cooperate a set a standard tax rate for soccer players across countries and leagues. But of course, this situation is an example of the prisoner’s dilemma. There is no supra-national organization that can force European countries to set a standard tax rate. So instead we are left with a world in which tax policy can affect the outcome of the Champions League

This can have beneficial aspects in any country that is trying to grow fast, but it can also be profoundly destabilizing. Mr. Obama should talk gently about the experience of Japan in the 1980s, the United States this decade, and almost all emerging markets pretty much every decade.

For all the bluster about the Chinese exchange rate problem, I’ve never heard a convincing proposal for how to convince the Chinese government to let the yuan appreciate but I think Johnston has stumbled upon something here. Definitely something for the President, Tim Geithner, Hillary to think about on the flight to Singapore.

*Ok, maybe not everyone’s. But really do check out the Wikipedia section on the photo-ops. Medvedev in a poncho! High comedy.

I belong to the third camp—the one that believes that the Bubblers and the Extrapolators can both be right. My camp looks at China and sees the parallels with America’s rise to global economic greatness during the late 19th and early 20th centuries. From an outsider’s vantage point, America looked like a machine that could take immigrants and raw materials and spit out manufactured goods at will. By 1890, the U.S. economy was the largest and most productive in the world. As any student of American history knows, however, these were hardly tranquil times for the United States. Immigration begat ethnic tensions in urban areas. The shift from an agrarian to an industrial economy led to fierce and occasionally violent battles between laborers, farmers, and owners of capital. With an immature financial sector, recession and depressions racked the American economy for decades.

I have to agree with Professor Drezner on this one. For all the talk about China’s emergence as a global power, you’d expect the country to be a perfect “harmonious” society. In reality, China is pretty tumultuous, full of ethnic tension, uneven economic growth and shifting societal norms. One of the many reasons I’m glad China’s economic growth is still so high is I’m terrified to see what would happen without improving economic conditions.

*In a way I’m doing this too. I’m the first comment. I really do recommend China: Fragile Superpower. Check it out

Or at least it’s very likely. The Financial Times has a poll projecting a landslide for Japan’s opposition Democratic Party. The DPJ is expected to win 321 of the Diet’s 480 seats. So a party that has never been in power is close to having an overwhelming majority. So what exactly does this the prospect of a new ruling party mean for foreign policy?

Before we continue, I have to add this necessary caveat: these prognostications are really staps in the dark since the DPJ has never been in power and we really don’t know what they will do. Remember the AK was going to turn Turkey into Iran and the BJP was going to start a nuclear war with Pakistan. Power tempers ideology and dampens idealism.

The biggest takeaway is the DPJ is more interested in Asian regionalism than the US-Japan relationship. Yukio Hatoyama, the man most likely to become Prime Minister, has predicted the end of American unilateralism and presented the European Union as a positive role model for regionalism. However, the Japanese-American relationship is so strong that America will continue to be a major player in Japanese foreign policy. At the same time Japan may become a key ally on climate change since the DPJ is much stronger on environmental issues.

Picture courtesy of the Economist

Last Friday, he wondered about the international implications of the messy healthcare debate going on in the U.S. this August.  Walt wrote, “When I see some of these folks in action, even a realist like me begins to question the validity of the ‘rational actor’ assumption.”  Whenever a realist talks that way, it grabs my attention.   And he’s right, but then of course, that’s why I’m not a committed realist and why I am a fan of behavioral economics and any discipline embracing advances in psychology. 

But then Tuesday,  Walt really stirred up a debate by questioning the “safe haven” argument for the U.S. commitment in Afghanistan.  He made a number of points, but one in particular relied on the assumption that the Taliban, if it were to regain control of the country or a significant portion of it, would act rationally.  Essentially, Taliban leaders would be unlikely to provide extensive refuge to al-Qaeda because they would be assured of military defeat, just like after 9/11. 

On FP’s new AfPak channel, two scholars– Peter Berg and Paul Cruickshank– quickly pounced on Walt’s post.  It’s remarkable how similar their rebuttals of Walt’s six major points are, and I think it’s fair to say that they demolished his argument.   Both emphasized, however, that neither history nor current trends give credence to the notion that the Taliban should be considered a rational actor in any future scenario. 

I think another of Walt’s points demonstrates not merely a problem with realism but with the exercise of analyzing current events through a single theoretical prism.  Simplifying for the sake of modeling is not what I’m attacking.  It’s necessary in economics, IR, and other fields.  But when applying a model to a given topic, an analyst has to be careful not to force departures from the model to fit.  Walt was not with his first point, that the Taliban was not, is not, and will not likely be an ideologically unified force.  Both responses to Walt emphasized that the current trend among the Taliban fighters is unification, exactly the opposite.  Walt ignored this. 

Challenging widely accepted notions of strategy is a valuable exercise to force policymakers to rethink and defend foundational assumptions.  I made an effort, though admittedly not one from an expert, to do that with respect to the administration’s Russia/Ukraine/Georgia strategies. But it becomes something entirely different when a scholar overplays his hand.  It becomes advocacy. 

My final question, though, is this.  Do realists live up to the rational actor assumption if uninformed, screaming Americans receive more skeptical treatment than the Taliban? This week, at least, Stephen Walt didn’t make a great case in the affirmative.

Photo from CNN.

But according to a report from NYU Law School, that’s not really the case.  In fact, EPA could use is authority under the Clean Air Act (CAA) to establish a well functioning cap-and-trade system.  There a few problems in cases in which the CAA would force EPA to issue separate regulations outside of cap-and-trade (like automobile emissions, for instance.) Overall, though, a fine system could be worked out. 

What’s more, EPA doesn’t really have much choice in the matter.  The Supreme Court, in 2007′s Massachusetts vs. EPA, the Supreme Court narrowly ruled that GHG emissions are air pollutants that EPA must regulate.  The Bush administration (surprise, surprise) chose to ignore the ruling.  (The NYU report has all the dirt: Bush’s EPA was ready to issue its ruling in accordance with the court’s finding when Bush advisers literally forced the EPA head to retract the emails sent to the White House.  Bush advisers had been meeting with oil-industry officials, who convinced them to stall on complying with the court ruling.)  This April, two years after the court ruled and ten years (!!!!) after the case was first filed, the Obama EPA complied and began the path toward regulating GHGs.

Clearly, it would be outstanding if Congress could deliver an effective bill. The CAA wasn’t precisely designed for something as ambitious as confronting climate change in the world’s largest emitting country, and such ambiguity in EPA interpretations of policy will lead to a legal headache when the regulations are inevitably challenged in court.

But here’s the upside: the Obama administration can achieve more by bypassing Congress.  A bold claim?

First of all, the EPA won’t be subject to protectionist pressures in Congress. So we won’t get any carbon tariffs with the potential to start trade wars and to erk the Chinese so much that any chance of getting China on board at Copenhagan disappears. 

Second, EPA won’t be subject to farm-state interests that bloated the Waxman-Markey House bill with insanely generous and environmentally dubious offset programs attached with lax regulations under the auspices of the Dep’t of Agriculture.  But I didn’t really need to explain: why don’t we just start deciding, for time’s sake, that any time the farm states get really worked up, it means bad news for trade and/or the environment. 

Third, EPA can auction 100% of permits under its cap-and-trade.  (For anyone interested in how this doesn’t violate Congress’s sole power in raising taxes, check out the NYU report.)

So EPA can let Obama step up to the plate at Copenhagan, but he’ll have much more to show than a worst-case, last-ditch effort.  He can pressure more countries to do more, and better.  I’m not suggesting Congress should just give up– it will probably look better internationally to show that at least the House made an effort (however feeble.) I have to say, though, after reading dire reports on the ineffectiveness of Waxman-Markey and the depths to which the bill would fall in a Senate version (if one could even pass), that hearing of the EPA’s broad authority was truly excellent news.

Photo of Lisa Jackson, EPA Administrator, from US News.

Most of the time, references to the post-WWII reconstruction of Western Europe simply mean somebody wants the rich world to take out its checkbook. 

But I was intrigued reading a recent proposal by Glenn Hubbard in Foreign Policy.  He focused on the actual mechanics of the Marshall Plan: it provided loans to businesses which then repaid the loans to their home governments which then spent the funds on infrastructure improvements. 

He makes a number of good points.  Microfinance is enough to bring about dramatic transformations in individual lives, but it is not sufficient to jumpstart an economy.  His infrastructure-following-business proposal is also astute: one of the reasons aid-financed infrastructure improvements have been neglected and ineffective is the lack of communication with the people who they are intended to aid. 

And I have to admit, his overall idea, which he provided a little more detail on when he argued for this plan a year ago, is worth a good think. Set up a committee to dispurse aid; make potential recipients adopt business-friendly policies; disperse aid to businesses, upstarts, or “business infrastructure” like training centers; have the direct recipients repay their governments, which will in turn spend it on vital infrastructure, planning projects closely with business leaders.

But there are a couple problems.  The first is that his blistering critique of aid comes a little late.  Yes, for decades aid from the West to the Rest has been ineffective.   Now, though, things have begun to change.  Aid dispersal has undergone reform in many major donor countries, including, to some extent, the U.S.  The MCC already forces recipients to demonstrate progress on five or so indicators directly related to a pro-business environment (trade reform, ease of starting a business, land rights, trade policy, others here.)   Basically, Hubbard makes the same mistake lots of conservative-minded aid critics make (and which I’ve written on this blog about before): he lumps all aid together and fails to admit the possibility of reform. 

The other major problem is the optimistic and naive assumption that governments will change policies when offered funds that will completely bypass their control.  The European recipient governments of Marshall Plan funds –as Hubbard admits– understood the importance of ground-up, business-led growth.  But the poorest countries in Africa don’t necessarily have that valuable experience.  Plus, they have become used to directing massive aid funds.  It’s hard enough, as an outsider with a legacy of poor conditionality associated with aid, to inspire reform in recipient governments.  Forcing them to make politically difficult changes while betting on an untested business community to pay them back is quite a big risk.

But like I said, his argument is not one to be tossed out.  My initial take is that something like the MCC, which offers big aid packages to governments, should be combined with a business-investment program.  That way, a country will still have a strong carrot: immediate, direct budget support aid.  But the potential for wholescale economic change that Hubbard forsees has a fighting chance.

The ruling addressed a number of contentious trade issues.  For example, are intellectual goods to be treated as manufactured goods under trade law? Also at stake is the use of “cultural protection” as an excuse for trade restrictions. 

I’m going to focus on the second one for now. 

The WTO has struggled since its inception with “trade and…” issues because trade comes into conflict with other values that certain countries may prioritize.  Environmental goals, food and health regulations, and labor standards are the most commonly discussed.  And there is nothing ostensibly perverse about these pursuits.  However, they often mask protectionism.

So that’s where WTO law comes in.  Members agree to uphold the principles of non discrimination and national treatment, basically not discriminating in favor of domestic producers or certain countries at the disadvantage of others.  

I am not in agreement with (and maybe not in the majority of) other free traders, but I believe that a country is not a threat to the free trading system if it democratically decides to elevate another of these goals ahead of trade so long as it respects the two major planks of WTO law (see the seal trapping case between Canada and the EU.)

But you’ll notice a couple of problems with China’s case.  First of all, the “trade and…” issue is culture.  Culture is different from the other goals I mentioned because by definition it violates the principle of national treatment.  A country is saying that a certain tradable good produced domestically is so integral to a national culture that it desevers protection.  China used the excuse for its entertainment and media restrictions, including one that limits the number of annual Hollywood movie releases to 20 and creates incentives for pirating. 

China is only the most recent to jump on the culture bandwagon.  France has been at this for years, defending French film, among other goods.

But here’s the key point: culture changes.  It is what a people want to be.  If French or Chinese people want to pay to see Batman– like it or not–that is a part of French or Chinese contemporary culture.  If Chinese films are good and reflect the culture the government is supposedly trying to protect, then people will go see them. 

Of course, this case wasn’t as simple as a French restriction put in place by a democratic government.  And that brings me to the second problem: “trade and…” restrictions in general are okay by me if democratically decided.  China doesn’t have that ability.  What is the WTO to do with unfair trading rules decided by an authoritative government?

The answer is to give a partial victory to the plaintiff.  The entertainment and media controls are not really about culture.  They’re about censorship.  And the U.S. complaint went for the kill, arguing that censorship laws were non-tariff barriers to trade.   The WTO declined to respond to that argument and, instead, addressed more minor restrictions through the lens of a culturally-based trade regulation. 

To call censorship laws a threat to a liberal trading regime is to call non-democratic government a threat to a liberal trading regime.  And that flies in the face of the whole idea of the WTO in the first place.  It was never intended as a democracies-only club.

 The WTO panel found a way to dismiss “trade and culture” complaints, throw a bone to anti-China interests in the U.S., and preserve its institutional integrity.  Not a bad day.

Photo of a work by Wang Guangyi from Michael Berger Gallery, Pittsburgh, PA.

As an incoming college freshman, I read MOUNTAINS BEYOND MOUNTAINS, an excellent work of nonfiction on Paul Farmer’s unprecedented HIV/AIDS work in Haiti.  Along with Jeffrey Sach’s END OF POVERTY, this page turner sparked my interest in studying development.

So my first point is that if you haven’t read it yet, check out this book.  It’s inspiring, though admittedly less so with the knowledge that such a noble and experienced individual cannot receive a stamp of approval to run a major government office.

I didn’t know Farmer was on the top of the list for USAID director, but I’ll be honest: if someone asked me to name my top pick for the post, his name would have come first. 

So, despite my general support for President Obama, I have to be frank.

Some foreign policy hands have noted that for Farmer’s visionary and inspiring career, the MacArthur genius, medical doctor and anthropologist wasn’t necessarily an easy fit for running a large government bureaucracy.

Hmm, a policy wonk without experience to command executive authority? That sounds a lot like the McCain/Palin attack on the president.

Remember: during the campaign, Obama promised to doublethe U.S. provision of foreign aid.  With the recession, such lofty plans rapidly flew out the window.   But now, not to even name a USAID director and to the extent that it causes a public rift with the Secretary of State, is simply absurd.

Last February, I sat in a Cape Town classroom and listened as several African students criticized the U.S. in response to a question about how U.S. foreign-aid policy would respond to the financial crisis.  Several railed against U.S. shortsightedness and suggested that China would take advantage of the opening left by an impotent and increasingly isolationist U.S.   And I, being an American on the post-Obama election high, said, “Not so fast.”  Just because the U.S. stalls a doubling of aid does not imply abandonment of the impoverished world.

And it doesn’t.  But Obama’s giving in to Chuck Grassley on tariffs on Brazilian ethanol and the complete failure to appoint a USAID director does indicate that the developing world isn’t a high priority. 

So to President Obama: just because you went through the ridiculous two-year marathon of an American presidential election does not mean that you should subject unprecedentedly worthy appointees to the same bizarre dance.

Photo from Amazon.