Dear Congress: Your tax on Pakistani shirts and pants is hurting America

Of all the many foolish, self-defeating, and downright stupid U.S. policies -- from the Cuba embargo to agricultural subsidies to the prohibition on talking to Iranian diplomats -- tariffs on Pakistani textiles probably rank among the dumbest.

That's the conclusion I drew from the Council on Foreign Relations' thoughtful new report on Afghanistan and Pakistan, which was just released this morning.

The 112-page report, whose lead author was the council's Daniel Markey, a former top State Department official for South Asia, offers a mild-mannered, but unmistakable rebuke to the recent optimistic rumblings coming from U.S. military leaders in Afghanistan.

The bipartisan task force behind the report -- headed by former State Department No. 2 Richard Armitage and Clinton-era national security advisor Sandy Berger -- lends "conditional" support to the Obama administration's current strategy in Afghanistan and Pakistan, but recommends the U.S. downgrade its presence in Afghanistan if Obama's upcoming policy review finds that the current approach is failing. (Note: a number of task force members dissented from that conclusion.)

"We are mindful of the real threat we face," the report reads. "But we are also aware of the costs of the present strategy. We cannot accept these costs unless the strategy begins to show real signs of progress." 

The group makes a number of other recommendations -- including a vague call for the U.S. to do something about Lashkar-e-Taiba -- but to me, the textile tariffs stand out.

"The textile sector industry accounts for 38 percent of Pakistan's industrial employment, this agreement could provide employment opportunities for millions of young Pakistanis, discouraging them from paths leading to militancy," the report argues.

Given that additional aid to help Pakistan recover from the horrific floods that devastated the country this summer will probably be a tough sell on Capitol Hill, and the likelihood that China and other low-cost producers, not the remnants of the U.S. textile industry, would probably be hurt by lifting the tariffs, this strikes me as a no-brainer.

Unfortunately, as the Wall Street Journal reported in August that there's little appetite in Washington (or Brussels) to help the struggling Pakistani textile industry, which is getting creamed by Chinese competition.

The link between unemployment and militancy is controversial, but it doesn't get any more direct than in Faisalabad, the hard-scrabble town that was home to one of the Mumbai attackers:

The textile crisis has hit Faisalabad-a grimy city of three million named in the 1970s for the late King Faisal of Saudi Arabia-harder than anywhere in Pakistan. Scores of factories have closed recently here, in the heartland of Punjab province's textile industry.

Umer Apparel Ltd., a Faisalabad company that exports $15 million in goods to the U.S. annually, including brands like American Eagle and Aeropostale, has laid off almost a fifth of its work force of 1,500 and is running at only three-quarters of capacity, says its chief executive, Rana Hassan Sajjad.

Faisalabad officials are concerned about links between unemployment and a wave of Islamic extremism in the city. A number of suicide bombings by the Pakistan Taliban on government and civilian targets in Pakistan this year, including many in Lahore, the capital of Punjab, have been planned from Faisalabad, city police say."There's a valid link between joblessness and militancy," says Tahir Hussain, the chief federal government official in Faisalabad. "Wherever the militants are getting manpower, that's where the joblessness is."

About half a million Pakistani textile workers have lost their jobs, mainly due to Chinese competition, according to the Pakistani government. The United States charges a 17 percent tariff on Pakistani-made cotton shirts and pants -- lifting it entirely would net Pakistan as much as $4 billion a year, the government estimates. (Compare that to the paltry $150 million the U.S. offered after the floods, or the $7.5 billion Kerry-Lugar aid bill, which is spread over five years.)

Getting rid of the tariffs would not be without its complications. India would likely protest the move as unfair preferential treatment toward Pakistan, as would China. That isn't the real problem, though: U.S. textile producers would fiercely lobby Congress against the move, though American garment manufacturers and the U.S. Chamber of Commerce would mildly support it. And with a number of existing trade deals looking dead in the water, it's not clear such legislation would go anywhere.

Last year's experience is instructive: Congress tried to pass a bill establishing special trading zones in Pakistan to get around the tariffs, but Senate Republicans spiked it in a dispute over the law's labor provisions. In any case, as the New York Times noted in an editorial back in August, "The trade legislation that finally emerged from the House last year was so hemmed in with protectionist limits that it was almost worthless."

I hope this new report changes some minds, but betting on Congress to do the smart thing is never a good investment strategy.

AFP/Getty Images


Guest blog: Good outcome for a bad deal

Napoleon always said he liked lucky generals. He would have loved Barack Obama. The president is so lucky that he now has the South Koreans doing the dirty work of saving him from committing political suicide by signing a Free Trade Agreement (FTA) that would likely further increase both the U.S. trade deficit and the U.S. unemployment rate.

Reports from Seoul yesterday said the deal was essentially done and that Obama and South Korean President Lee Myung-bak would meet their self-imposed deadline by inking the deal today (Thursday). But no, the Koreans, who have been relentlessly promoting this deal as essential to both Korea's future economic well-being and its national security, suddenly said they couldn't agree to a small increase in imports of U.S. beef or a slight relaxation of emissions rules for imports of small numbers of foreign auto imports.

Since, like China, South Korea already manipulates its currency and imposes a myriad of subtle bureaucratic regulations and informal agreements that make the Korean market one of the most closed in the world, one might wonder why Seoul couldn't agree to these two U.S. requests which would in no way result in any significant increase in Korean imports from the United States. But Obama should really thank his lucky stars for South Korea's economic paranoia because it may save him from his administration's own worst instincts.

I know we're all supposed to be free traders and that opposition to anything labeled free trade is strictly taboo. But really, does anyone truly believe that we have anything like free trade with South Korea? This is a country that, as a matter of policy encourages the infringement of foreign intellectual property, and whose courts routinely annul the Korean patents of foreign based companies.

Yes, the proposed deal would significantly reduce Korean tariffs and facilitate foreign investment in Korea and contains strong language on the protection of intellectual property. But if the courts won't enforce the language what is the point? And tariffs are not the real barriers to foreign penetration of the Korean market, especially since the Korean government can and does manipulate its currency to offset the effect of any tariff reductions. As for facilitating foreign investment in Korea, why do we especially want to do that when we need investment in the United States? Moreover, the proposed deal on investment as presently constituted actually allows the U.S. branches of Korean companies to take disputes over U.S. regulatory rulings and impacts out of the American legal system by appealing to the World Bank and the International Court.

Isn't that something? The United States has consistently refused to join the International Criminal Court on grounds of protecting national sovereignty, but was just on the verge of signing a trade deal that would enable foreign companies to evade the sovereignty of the U.S. legal system in certain disputes. I wonder if the Republicans who have been promoting the deal understand that.

But sovereignty is not really the main point; that would be jobs. Here, the deal fails utterly. Of course, there are lots of studies by the various think tanks around Washington. Not surprisingly they only prove that while figures don't lie, liars figure.

If you are for the deal, you can easily find a computer model that will confirm your view and vice versa. So let me put it in the words of one of the Korean negotiators whom I know and to whom I posed the question of whether, honestly between friends, he thought the deal would significantly increase U.S. exports to Korea or U.S. employment. His answer was an immediate "no." And no one who knows anything about doing business in Korea believes otherwise.

So let's hope Obama's lucky streak keeps holding, at least until he gets out of South Korea.

Clyde Prestowitz is president of the Economic Strategy Institute and author of The Betrayal of American Prosperity.