Trade talks aren't about trade talks

Following on yesterday’s trade data, I want to draw your attention to a piece from CQ Today earlier this week on the Trans-Pacific Partnership (TPP) that argues “With Pacific Rim Talks, Trade Enters New Era”:

Because previous rounds of global trade negotiations wiped away many tariffs and quotas, companies are now focused more on domestic laws. And accelerating globalization has more tightly integrated trade laws and financial regulations, government procurement policies and a host of related matters.

They are completely right that trade is in a “new era.” But they got the dates wrong. Trade entered a new era in 1994 with the inclusion of TRIMS (Trade Related Investment Measures), TRIPS (Agreement on Trade-Related Aspects of Intellectual Property Rights) and GATS (General Agreement on Trade in Services) in the Uruguay Round. These moved trade negotiations past tariffs and at-the-border issue to internal economic and regulatory policies. Essentially, trade negotiations are actually economic integration and harmonization negotiations. [For example, on copyright laws — see National Journal’s Tech Daily for more.]
The problem with the shift to economic harmonization is that the old dynamics of negotiations don’t work. During my Senate staff career, I was involved in the beginning and the end of the Uruguay Round. When we finally passed the implementing legislation, I mused out loud that I thought this would be the last global round of trade negotiations. None of my colleagues agreed – and some of the old hands seemed taken aback at such heresy. They argued that you can only get an agreement by linking everything in a big package. (In diplomacy – this is known as “linkage.”)
Almost two decades later, I still think I am right. Linkage doesn’t work the way it used to. In previous negotiations, the focus was on tariff reduction. I’ll reduce my tariffs on steel if you reduce your tariffs on autos. This allowed for a win-win (from economists point of view) situation that pushed for lower and lower tariffs. Everyone agreed that the end point was lower tariffs. The question was how to get there.
In the new talks, it is unclear how the trade-offs work, and in what direction the dynamics points. I’ll lower my tariffs on steel if you increase your copyright protection to 100 years? I’ll allow you to subsidize your aircraft industry if you don’t ban my genetically-modified beef? I’ll decrease my agricultural subsidies if you reduce regulations on investment banking?
We don’t have any agreement on what the end point should be. We have a general idea – “open economies” – but we differ dramatically on what that means and on the specifics.
Thus my unease with large multi-issue, multilateral negotiations such at the TPP. I’m not sure we understand the trade-offs any more. And I’m not sure what we really want to accomplish in any one specific area [less regulation on the financial sector or more regulation?]. Rather, as I’ve argued before, we may have to approach each of these economic regulatory issues separately – possibly in separate forums, such as the OECD and the G20. Yes, this being a negotiation, there will be linkage. But the complex web of links will not become so great as to bring the entire structure down. And it will allow all parties to clearly focus on a specific issue not the trade-offs — leading, one would hope to a better outcome.

May trade in intangibles

Some good economic news this morning as the trade data released this morning by BEA shows the U.S. trade deficit dropped by $1.9 billion to $48.7 billion in May. Exports were up by $0.4 billion and imports were down by $1.6 billion. The decline was in line with economists’ expectations, according the Wall Street Journal.
The not-so-good news was that the improvement in the deficit was due to a sharp decline in oil imports (down by over $3.2 billion) which was the result of lower oil prices. Imports of non-petroleum goods increased and overall exports were basically unchanged. While decreasing oil imports is an important step to lowering the trade deficit, getting the non-petroleum goods deficit down is also key. Lower oil prices help, but solving our trade problem will take more than lower oil prices. And in the regard, the overall trend over the past year and a half has not been good – with the non-petroleum goods deficit generally increasing while the petroleum goods deficit generally holding steady.
The somewhat-good news is that our trade surplus in intangibles improved in May after declining in April. The intangibles surplus was up ever so slightly (by $99 million) to just over $13 billion. Royalty payments increased slightly, with both exports (payments received) and imports (payments paid out) up. Business services also saw an increase in exports of $227 million and in imports of $144 million.
The bad news concerns the deficit in Advanced Technology Products, which surged by over $2 billion in May to $8.7 billion. The overall decline was lead by an increase in information and communications technology (ICT) imports, reversing April’s big import drop. But almost every other category saw a deterioration of this trade position as well (flexible manufacturing, electronics and weapons being the exceptions). The last monthly surplus in Advanced Technology Products was in June 2002 and the last sustained series of monthly surpluses were in the first half of 2001.
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Note: we define trade in intangibles as the sum of “royalties and license fees” and “other private services”. The BEA/Census Bureau definitions of those categories are as follows:


Royalties and License Fees – Transactions with foreign residents involving intangible assets and proprietary rights, such as the use of patents, techniques, processes, formulas, designs, know-how, trademarks, copyrights, franchises, and manufacturing rights. The term “royalties” generally refers to payments for the utilization of copyrights or trademarks, and the term “license fees” generally refers to payments for the use of patents or industrial processes.


Other Private Services – Transactions with affiliated foreigners, for which no identification by type is available, and of transactions with unaffiliated foreigners. (The term “affiliated” refers to a direct investment relationship, which exists when a U.S. person has ownership or control, directly or indirectly, of 10 percent or more of a foreign business enterprise’s voting securities or the equivalent, or when a foreign person has a similar interest in a U.S. enterprise.) Transactions with unaffiliated foreigners consist of education services; financial services (includes commissions and other transactions fees associated with the purchase and sale of securities and noninterest income of banks, and excludes investment income); insurance services; telecommunications services (includes transmission services and value-added services); and business, professional, and technical services. Included in the last group are advertising services; computer and data processing services; database and other information services; research, development, and testing services; management, consulting, and public relations services; legal services; construction, engineering, architectural, and mining services; industrial engineering services; installation, maintenance, and repair of equipment; and other services, including medical services and film and tape rentals.

Equipment depreciation is a limited economic tool to spur the knowledge economy

Later this afternoon, the Senate will vote whether or not to proceed to consider a piece of legislation to help small businesses. Part of that legislation extends the existing bonus depreciation for purchase of equipment — creating a tax break for that spending.
Last year, the on-line journal The Economists’ Voice published an article on “Should the Government Invest, or Try to Spur Private Investment?”:

The U.S. economy clearly needs stimulation, but the Obama administration’s plan for accelerated depreciation is an ‘old economy’ approach to stimulating aggregate investment and unlikely to ease the Great Recession, according to Michael Cragg of Brattle Group and Joseph Stiglitz of Columbia University. The authors suggest alternative policies consisting of carefully designed carrots and sticks.

As I noted in my comment in the article (also published in The Economists’ Voice), Drs. Cragg and Stigliz are exactly correct when they point out that accelerated depreciation is a limited tool — as they put it “an ‘old economy’ approach to stimulating investment.” However, they only touch upon the reason. Accelerated depreciation applies to tangible plant and equipment. Yet, as numerous studies have shown, the composition of investment and capital formation has shifted from tangible plant and equipment to intangibles. Since investments intangibles are generally expensed rather than depreciated, any accelerated depreciation schedule completely misses the mark.
Investment tax credits are the more appropriate tool. But our policy toward tax credits for intangibles is weak at best. The Research and Experimentation Tax Credit (commonly referred to as the R&D tax credit) fights off near-death experiences on a route basis. It is also more limited in scope and scale than what is available in other developed nations. Investment incentives for other intangibles, most notably worker training, are completely absent. If we are to move beyond “old economy,” we need to focus on policy ways to provide incentives for investment in intangibles.
As I have argued too many times to recount, one policy change would be to turn the R&D tax credit into a broader knowledge tax credit. A knowledge tax credit would apply to company expenditures on worker training and education — just like the R&D tax credit applies to expenditures on research activities. In only make sense that boosting worker skill levels is a necessary compliment to any activities to raise innovation and productivity. After all, innovation doesn’t come solely from the lab any more.
It also makes sense to pair the knowledge tax credit with any efforts to incentivize increased investment in plant and equipment. If we give companies incentives to conduct research or invest in new equipment we should also give companies incentives to invest in their most valuable asset: their workers.
Likewise, the knowledge tax credit could be paired with any job sharing programs that compensate workers for lost wages due to working fewer hours. Rather than reduce their hours, a tax credit could be given for workers spending those hours for training, either on-the-job training or in the classroom. This would have a dual effect. It would increase our human capital — a major input to productivity and economic growth. And it would immediately increase consumer demand as companies would use the funds to pay workers to take classes (thereby creating more employments slots for others to fill the working hours of those in the classes).
Thus, I would argue that regardless of what the Senate does today, use of accelerated depreciation as a tool of economic stimulus is increasingly less effective “old economy” policy. We need to think more creatively about what tax policy would work in this new situation. Key to that effort is focusing on incentives for increased investment in intangible assets.

Select tweets 6/18/12 – 7/8/12

Select tweets and re-tweets from the past two weeks:

June employment

The June employment numbers are out from BLS and the data is not good. Only 80,000 jobs were created and the unemployment rate remained at 8.2%. Economists had expected an increased of around 100,000 jobs. Cuts in government jobs continue to drag down the jobs numbers but only slightly in June. A surge in local government hiring of 18,000 meant the total decrease in government jobs was only 4,000. Employment was up in manufacturing and professional & business services. Other areas showed minimal change, with information industries actually losing jobs.
Once again the number of involuntary underemployed increased — for the fourth straight month. The number of workers who could only find part time work rose by 93,000. Much of the jump was due to an increase in the number of individuals working part time because of slack work. This indicates an ongoing slowdown of economic activity.
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New presentations on Athena website

Two new short presentations have been added to the Athena Alliance website:

June 19, 2012
“Intangible Capital: An Overview”
Presented at Strategic Report Roundtable of the Washington Economic Development Commission (WEDC). WEDC is charged with the development of an economic and innovation strategy for the State of Washington. The presentation gave an brief overview of the concept of intangible capital as a lead-in to an expert discussion on state-level economic development programs and their evaluation. This expert roundtable was held in conjunction with the development of the State of Washington’s report Building a World Class Innovation Ecosystem

May 8, 2012
“From IP to IC: Putting intellectual property in context”
Presented at Manufacturing Innovation 2012, sponsored by the Manufacturing Extension Partnership (MEP) of the U.S. Department of Commerce. This presentation places traditional intellectual property (IP – patent, copyright and trademarks) in the context of the broader concept of intangible capital (IC) and describes a proto-tool that can be used to assess whether an organization’s IC is capable of fully utilizing its IP.

Measuring global innovation

Earlier today, INSEAD and the World Intellectual Property Organization (WIPO) released the 2012 Global Innovation Index. The report shows Switzerland as the most innovative country, followed by Sweden, Singapore, Finland, the UK, the Netherlands, Denmark, Hong Kong and Ireland. The U.S. was 10th, tied with Luxembourg.
While the rankings make good news headlines, the value of the report is in the details. The rankings are based on an innovation input sub-index and innovation output sub-index. The inputs include institutions (both public and private), human capital and research, infrastructure, market sophistication, and business sophistication. Outputs are divided into knowledge and technological outputs and creative outputs. Each of these areas is broken down into subcategories and then into specific metrics. For example, creative outputs include creative intangibles, which contains four metrics – one being the level of trademark registrations. Creative outputs also contains the subcategory of creative goods and services with five metrics including the level of recreation and culture consumption. One the input side, the subcategories and metrics attempt to go beyond the standard R&D and higher education measures to included broader business metrics such as ease of starting a business and the availability of credit.
Having said that, however, the index is still a technology based formulation of innovation. Even the creative outputs metrics have a technological bent, such as the use of information and communications technologies (ICT) and the creation of on-line content, and a narrow definition of entertainment and cultural products. And knowledge outputs are patent and high-tech oriented — although it was good to see metrics on new business formation and quality certifications (ISO 9001) included. Thus, the index misses the broader measures of innovation, such as level of creation of new products (both goods and services) as an output and importance of non-technological intangibles as inputs.
And of course, no metrics are without their anomalies. One of the most interesting is the fact that Guyana and Paraguay rank 1st and 2nd respectively in receipts of royalty and license fees as a portion of GDP. Guyana is also ranking 1st (tied with 3 other nations) in royalty and license fee payments as a portion of GDP.
Looking specifically at the U.S., the report highlights some of the strengths and weaknesses. Understandably, the report mentions weaknesses in human capital and research, including lower levels of graduates in science and engineering and the increasing difficulty of students coming to the U.S. to study. In this category, however, the U.S. is penalized for its low level of students who study abroad. The U.S. is also penalized by its relatively low levels of imports and exports relative to GDP (i.e. for having a large domestic market) and for its relatively low levels of inward foreign direct investment. Also interesting is the relatively low ranking for political stability (52nd) and for press freedom (41st). One the other side, the U.S. ranks 3rd (only slightly behind Switzerland and the UK) in university/industry collaboration.
From a policy perspective, there are a couple of indicators where the U.S. does poorly that could use attention. First is the category of ecological sustainability. The report explicitly recognizes the importance of “green growth” and innovation. In this area, the U.S. is 48th in environmental performance, 71st in energy efficiency and 93rd in ISO 14001 environmental certificates. Policy policies could make a difference in each of these areas. The second is under infrastructure. The U.S. ranks only middling in ICT access (22nd) and ICT use (17th) — while ranking 1st in government on-line service. However, the U.S. ranks 129th in gross capital formation. Finally, the U.S. ranks 96th in ISO 9001 quality certifications. This falloff of interesting in quality mirrors the lower business interest in the Baldrige Award. Quality is the entry point for global competitiveness and innovation. If American businesses lose sight of that fact, winning the innovation race will become that much more difficult.