Russia, Cuba and U.S. Jobs

In 1972, at the height of the Cold War, the U.S. Congress unanimously passed the so-called Jackson-Vanik amendment. Its purpose was to deny most-favored-nation trade status to any country with a non-market economy that prevents free emigration. (Most-favored-nation status ensures that countries enjoy favorable trade terms, such as low tariffs and high import quotas.)

Although it was not explicitly stated, the amendment was intended to punish the then-Soviet Union for not allowing Russian Jews to emigrate freely. However, since the collapse of the Soviet Union in 1991, Russia has had totally free emigration and has developed a semi-market economy. Even so, the Jackson-Vanik amendment is still part of U.S. law.

This past December, after 18 years of negotiations, Russia was finally formally invited to join the World Trade Organization (WTO). Russia now has until June 15, 2012, to ratify the accession agreement. According to WTO rules, all WTO members automatically enjoy most-favored-nation status. This means that, unless the U.S. Congress amends or retracts the Jackson-Vanik amendment before Russia’s accession, the United States will be in violation of its own WTO treaty obligations.

Until the amendment is changed, the United States, for its part, will not have most-favored-nation status with Russia. U.S. companies — whether they are Caterpillar, GE or Procter & Gamble — will not be able to benefit from Russia’s reduction of tariffs. Instead, business and job growth that should be coming to the United States will go to Europe and Japan.

Those who do not want to repeal Jackson-Vanik argue that it remains an effective instrument to hold Russia accountable, to force it to be more democratic and to punish it for any perceived violations of human rights.

Those are all laudable goals. But the fundamental question the United States needs to ask is whether it really believes in free markets or not. With WTO accession, Russia will be an integral part of the global market, and the net effect of the “principled” American stance will translate into job losses.

To see how this works, consider this example: Let’s say an earth-moving machine manufactured by Caterpillar costs $100,000. If the United States does not have most-favored-nation status with Russia, the machine could be charged a duty of 10%, meaning its cost in Russia would be $110,000.

Yet an equivalent piece of equipment made in Japan, a country that will have most-favored-nation status with Russia, will probably enter Russia with a minimum duty charged, making it $10,000 cheaper than the U.S.-made machine. Clearly, U.S. companies will lose sales under this scenario.

Cuba’s oil

Like the Jackson-Vanik amendment, U.S. restrictions on trade with Cuba are remnants of Cold War nightmares. Over the years, they have become part of the folklore that pervades U.S. presidential elections. Candidates of both of the major political parties are fearful that, if they advocate a change in these restrictions, they will alienate Florida’s Cuban émigré community — and thus possibly risk losing Florida’s indispensable electoral votes.

But Cuba is changing — and the United States should be encouraging that change. Much of the country’s farm sector is now being privatized, and Cubans can now buy and sell private homes and cars, to give just a few examples.

But more importantly, unemployment is a far bigger present danger to the United States than Cuba’s policies. U.S. presidential politics should therefore be guided by what advances job creation, even if that entails relaxing trade restrictions on Cuba.

Here is a perfect example of the self-defeating absurdities the present policy regime brings about: Cuba is now drilling for oil within its offshore boundaries in the Florida Straits, about 50 miles off the Florida coast. Yet because of U.S. trade restrictions, the deepwater rig that is drilling the wells was made in, and transported from, China — literally half a world away.

The main piece of U.S.-made equipment on the rig — the blowout preventer, manufactured by National Oilwell Varco in Houston, Texas — cannot be serviced by that company, or any U.S. company, under current law. One would think — especially after the BP spill in the Gulf of Mexico demonstrated how vital the blowout preventer is — that Americans would have a keen interest in having its experts provide that service.

One has to realize the fact that the U.S. restrictions represent, in essence, an economic reversal of the Monroe Doctrine. Rather than keeping other big nations out of its “sphere,” the United States is instead letting China move in. It is giving China the opportunity to become more proficient in a key U.S. industry — and to do so in what could easily be a natural and lucrative market for U.S. firms.

U.S. trade policy needs to be based on what is good for the U.S. economy and job growth. The United States needs to recognize that, in an ever more integrated world, using trade to fight ideological battles of a bygone era in order to curry favor with small domestic constituencies is an economic dead end.