Tag: trade policies

A Most Frustrating Press Release

My colleagues and I see many questionable quotes and policy pronouncements from members of Congress, but one crossed my desk recently that really pushes the envelope.

Senator Jeff Sessions (R -AL) – he who caused some important trade policies to expire in December – is attempting to “right” that wrong by introducing new legislation (S. 433) to reinstate the policies. Essentially, he is trying to succeed where others (thankfully) failed, i.e., to carve-out legislatively certain products (sleeping bags) made in his state. In so doing, however, he filled his March 2 press release with a retinue of half-truths, disingenuous mis-interpretations and damaging dog-whistles.  Let’s examine them one at a time, shall we? (All emphases are mine.)

WASHINGTON¬—U.S. Senator Jeff Sessions (R-AL) today introduced a bill that would modernize and reauthorize the Generalized System of Preferences (GSP) through 2012, along with the Andean Trade Preference Act.

By “modernize”, Senator Sessions means “set a damaging precedent of individual members of Congress being allowed to create loopholes from law to favor certain constituents.”

The GSP, originally authorized to avoid domestic job losses,…

From my fairly extensive reading about the GSP, I can find no explicit intention to avoid domestic job losses, even though the exceptions for textiles and steel (and other products) were probably driven by those considerations.

extends duty-free benefits to products in developing countries that do not compete with products made in the United States.

This part is misleading. The program has no provision to say it applies only to goods that do not compete with U.S.-made products (perhaps Senator Sessions is getting the GSP confused with the Miscellaneous Tariff Bill?).

When Congress originally authorized GSP in 1974, it explicitly excluded many sensitive products, such as textiles and steel. However, due to a loophole in the law, foreign sleeping bags are allowed duty-free treatment even though they compete directly with American manufacturers, therefore threatening American jobs.

When Senator Sessions says that sleeping bags can enter the United States duty-free because of a “loophole in the law,” it depends on what he considers the loophole to be. If he means sleeping bags are a textile product and therefore should be exempt from the program, he might have a reasonable case to make on definitional grounds, even if I think it would be poor policy. (Update:: A reader of our blog has pointed out the following: “You don’t need to concede anything on the fact that sleeping bags are textile products… The GSP statute does not exclude textile products from the program, so there are no definitional grounds. The GSP statute excludes products “subject to textile agreements.” As the USITC pointedly noted in its most recent advice to the US Trade Representative…sleeping bags are not and never have been subject to textile agreements.” A publicly released, redacted version of the USITC report is available here, and the note about sleeping bags not being subject to textile agreements is in footnote a to the table on page 2-1.) If, however, he means the “loophole” exists because the sleeping bags compete with U.S. products, then I’ve explained above why no such condition applies in the GSP. No loophole is needed to allow sleeping bags to enjoy the benefits of duty-free status.

In other words, sleeping bags are in a unique situation by being forced to compete with a foreign competitor that pays no taxes under the GSP.

From what I can tell of this case, sleeping bags are not in a unique situation. Many U.S. producers compete with imported products (of course, many also benefit from having access to imports). It is not clear to me why sleeping bag manufacturers deserve special treatment.  Sleeping bags have been through a number of administrative reviews, and each time were found to be subject to the general provisions of the GSP. Not to be dissuaded, however, the sleeping bag manufacturer in question has asked for yet another review.

Senator Sessions’s dog-whistle about a foreign (ooh, scary!) competitor that “pays no taxes” is reprehensible, even if nationalistic rhetoric is commonplace in public debates about trade policy. And in fact, it is the importers of these products (i.e., Americans) who pay no import duties. His statement, however, implies that somehow the Bangladeshi company is avoiding “tax”. Yes, tariffs are taxes – if only more politicians would recognize that! – but his choice of words is confusing at best.

“The current loophole in the GSP is an unfair policy and an injustice to American industries,” Sessions said.

Even if you think having to compete with imports is an injustice – and I surely do not –  I can find only one company and at most one “industry” (and not “industries,” plural) that would suffer it. But “an inconvenience to a company in my constituency” doesn’t sound nearly as good in a press release, does it?

Members on both sides of the aisle have acknowledged this is a threat to American workers.

I’m assuming he’s referring to the Casey-Brown bill (named for two Democratic Senators) that tried last month to carve out sleeping bags from the GSP, but from what I can tell, the Senators included the carve-out because they wanted the larger bill (about the Trade Adjustment Assistance program and, to a lesser extent, the Andean Trade Preference Act) to pass and needed to get around Senator Sessions’s objections that caused the programs to expire in the first place. The main “threat” of which these senators appeared to be afraid was that emanating from Senator Sessions’s office.

The legislation introduced today would not only fix this loophole in the GSP but also reauthorize the program to allow for trade to continue in a fair way….

On the contrary, Senator Sessions is seeking to create a loophole in favor of the Alabama manufacturer.

…The Exxel Outdoors Plant located in Haleyville, Alabama is the largest sleeping bag manufacturer in the United States. Exxel Outdoors nearly shut down this past year because of unfair competition from a Bangladesh company that imported sleeping bags to the United States.  Sessions blocked the trade bill in December because of this unjust loophole.

There was nothing in the administrative reviews to suggest the competition from the Bangladesh manufacturer was “unfair” in the sense it is normally meant in trade policy (i.e., the imports are subsidized or dumped).  Maybe Senator Sessions is seeking to paint the competition as “unfair” in the general sense of the word.

If all that hasn’t left you exhausted, and you still want to know more about the Generalized System of Preferences, including it’s flaws, then my recent study is a good place to start. The Coalition for GSP, an advocacy group, also has an interesting blog.

Was Bill Clinton Also an “Extremist” on Trade?

This has not been a good week for the national Democratic Party. Along with losing the Massachusetts Senate seat, the party took another step toward making hostility to trade liberalization a plank of party orthodoxy.

As my Cato colleague Sallie James flagged earlier today, the Democratic Congressional Campaign Committee issued a press release yesterday criticizing a Republican candidate in upstate New York for contributing to the Cato Institute. And, of course, everyone knows that Cato is “a right wing extremist group that has long been a vocal advocate for extremist, unfair trade policies that would allow companies to ship American jobs overseas.”

Among our sins, in the eyes of the DCCC, is that Cato research has supported tariff-reducing trade agreements, such as the North American Free Trade Agreement (NAFTA). Our work has also advocated unilateral trade liberalization—getting rid of self-damaging U.S. trade barriers regardless of what other countries do—which violates the conventional Washington wisdom that we can’t lower our own barriers without demanding “reciprocity” and “a level playing field” from other nations

There is nothing extreme about our work on trade. It fits comfortably within mainstream economics expounded not only by Adam Smith and Milton Freidman but by such liberals as Paul Samuelson and Larry Summers.

In fact, for decades, the Democratic Party embraced lower barriers to trade:

  • In the 1930s and ’40s, President Franklin Roosevelt and his Nobel-Peace-Prize-winning Secretary of State Cordell Hull lead the United States away from the disastrous protectionism of President Hoover and a Republican Congress.
  • Democratic Presidents Kennedy, Johnson, and Carter all supported successful agreements in the General Agreement on Tariffs and Trade to reduce trade barriers at home and abroad.
  • Bill Clinton, the only Democrat to be re-elected president since FDR, persuaded a Democratic Congress to enact NAFTA in 1993 and the Uruguay Round Agreements Act in 1994, which created the World Trade Organization. Clinton also championed permanent normal trade relations with China in 2000, which ushered that nation into the WTO.
  • In the previous Congress, scores of House Democrats co-sponsored “The Affordable Footwear Act,” which would have unilaterally lowered tariffs on imported shoes popular with low-income Americans. Liberal Democrat Earl Blumenauer of Oregon visited the Cato Institute in July 2008 to speak in favor of the bill. (Will he be the next target of a DCCC press release for cavorting with “extremists”?) In the current Congress, a similar bill in the Senate is currently co-sponsored by such prominent Democrats as Dick Durban (Ill.), Chuck Schumer (N.Y.), and Mary Landrieu (La.).

To learn more about why Democrats (and Republicans) should support free trade, I highly recommend two books: Mad about Trade: Why Main Street America Should Embrace Globalization, by yours truly; and Freedom From Want: Liberalism and the Global Economy, by Edward Gresser, a trade expert with the Democratic Leadership Council.

Trade Delivers Peace and Bargain Prices

Mad about tradeFor a fair and authoritative (and did I mention favorable?) assessment of my new Cato book, Mad about Trade: Why Main Street America Should Embrace Globalization, you can read William H. Peterson’s review in today’s Washington Times.

Dr. Peterson is an adjunct scholar with the Heritage Foundation and the Ludwig von Mises Institute who holds a Ph.D. in economics from New York City University. In his review he writes:

Daniel Griswold’s tour de force explores, reasons and documents how import competition benefits the American consumer, seeing him move ahead toward greater peace incentives, lower real prices, more choices, better quality. Mr. Griswold also tracks how the big-box retailers such as Wal-Mart, Home Depot and Best Buy deliver the world’s goods mostly by sea via millions of big, truckload-size containers. …

So Mr. Griswold would have the United States adopt or maintain trade policies best for most Americans, especially the poor and middle class, no matter what other nations do. Says the author: Let’s drop the remaining barriers separating us from ongoing growth and peace policies enhancing the global marketplace. Bully for him.

Information at the beginning of the review should have given the list price of the book as $21.95, and it is available with a nice discount at Amazon.com.

Information at the beginning of the review should have given the cover price of the book as $21.95. It is available with a nice discount at Amazon.com along with a peek inside at the table of contents and selected pages.

Buy American Hurts Most Americans

Earlier today, Doug Bandow weighed in with some commentary on the problems that Buy American provisions are creating for both Canadian and American businesses. Let me reinforce his view that such rules are anachronistic and self-defeating with some thoughts from a forthcoming paper of mine about the incongruity between modern commercial reality and trade policies that have failed to keep pace.

Even though President Obama implored, “If you are considering buying a car, I hope it will be an American car,” it is nearly impossible to determine objectively what makes an American car. The auto industry provides a famous example, but is really just one of many that transcends national boundaries and renders obsolete the notion of international competition as a contest between “our” producers and “their” producers. The same holds true for industries throughout the manufacturing sector.

Dell is a well known American brand and Nokia a popular Finnish brand, but neither makes its products in the United States or Finland, respectively. Some components of products bearing the logos of these internationally recognized brands might be produced in the “home country.” But with much greater frequency nowadays, component production and assembly operations are performed in different locations across the global factory floor. As IBM’s chief executive officer put it: “State borders define less and less the boundaries of corporate thinking or practice.”

The distinction between what is and what isn’t American or Finnish or Chinese or Indian has been blurred by foreign direct investment, cross-ownership, equity tie-ins, and transnational supply chains. In the United States, foreign and domestic value-added is so entangled in so many different products that even the Buy American provisions in the recently-enacted American Recovery and Reinvestment Act of 2009, struggle to define an American product without conceding the inanity of the objective.

The Buy American Act restricts the purchase of supplies that are not domestic end products.  For manufactured end products, the Buy American Act uses a two-part test to define a domestic end product: (1) The article must be manufactured in the United States; and (2) The cost of domestic components must exceed 50 percent of the cost of all the components. Thus, the operational definition of an American product includes the recognition that “purebred” American products are increasingly rare.

Shake your head and chuckle as you learn that even the “DNA” of the U.S. steel industry, which pushed for adoption of the most restrictive Buy American provisions and which has been the manufacturing sector’s most vocal proponent of trade barriers over the years, is difficult to decipher nowadays. The largest U.S. producer of steel is the majority Indian-owned company Arcelor-Mittal. The largest “German” producer, Thyssen-Krupp, is in the process of completing a $3.7 billion green field investment in a carbon and stainless steel production facility in Alabama, which will create an estimated 2,700 permanent jobs. And most of the carbon steel shipped from U.S. rolling mills—as finished hot-rolled or cold-rolled steel, or as pipe and tube—is produced in places like Canada, Brazil and Russia, and as such is disqualified from use in U.S. government procurement projects for failure to meet the statutory definition of American-made steel.

Whereas a generation ago the cost of a product bearing the logo of an American company may have comprised exclusively U.S. labor, materials, and overhead, today that is much less likely to be the case. Today, that product is more likely to reflect foreign value-added, regardless of whether the product was “completed” in the United States or abroad. Accordingly, Buy American rules and trade barriers of any kind (as appealing to politicians as they may be) hurt most American businesses, workers, and consumers.

It’s time to wake up and scrap these stupid rules.

About That Vision Thing…

Does the world need a “shared vision on food and agricultural trade policy”? So says World Trade Organization Director General Pascal Lamy:

Let me start by saying that food and agricultural trade policy does not operate in a vacuum. In other words, no matter how sophisticated our trade policies may be, if domestic policies do not themselves incentivize agriculture, and internalize negative social and environmental externalities, then we will always have a problem.

Here I question what exactly Lamy means by “incentivize”.  Does he mean “make sure we get incentives right”, or does he mean “provide positive incentives to agriculture”? The former probably is harmless if it means simply allowing market forces to work, the latter a potential opening for the types of subsidies and price supports that have done so much damage to agricultural trade policy. Ditto with his wish to “internalize negative social and environmental externalities”: on the face of it, this is a fairly inoffensive goal, and a positively noble one if he is referring to, say, the effects on poor farmers abroad stemming from rich country farm subsidies. But I can see all sorts of nefarious social policies flowing from that prescription if it gets into the wrong hands.

Lamy goes on to make sensible points about the effects of tax policy on agriculture, and makes this statement about the importance of free trade for food security:

To my mind, global integration allows us to think of efficiency beyond national boundaries. It allows us to score efficiency gains on a global scale by shifting agricultural production to where it can best take place. As I often say, if a country such as Egypt were to aim for self-sufficiency in agriculture, it would soon need more than one River Nile. Which basically means that global integration must also allow food, feed, and fibre to travel from countries where they are efficiently produced to countries where there is demand.

All necessary, if not sufficient, conditions for global food security, to be sure. But Lamy then turns to exactly what a global vision for agriculture might involve:

I believe that we could all agree on what the basic objectives are that we seek from our agricultural systems. We all want sufficient food, feed, fibre and some even want fuel. We want nutritious food and feed. We want safe food and feed. We want a decent and rising living standard for our farmers. We want food to be available and affordable for the consumer. We want agricultural production systems that are in tune with local culture and customs, and that respect the environment throughout a product’s entire life-cycle.

Hmm. I’m not sure about all that. For one thing, some of those goals seem potentially in conflict. United States sugar policy, for example, has shown us the results when consumers’ desire for “affordable” food conflicts with sugar farmers’ desire for a “decent and rising living standard” (hint: it’s not the consumers who make out like bandits). Similarly, it is at least conceivable that food grown “in tune with local culture and customs” might be more expensive, or make food less abundant, or even less safe. And if those goals can be in conflict within a country’s borders, I shudder to think what such an overburdened agenda could do to the already-struggling global trading system. At the extreme, a call for a “global vision” of agricultural trade policy could see the return of international commodity agreements and other supranational management nightmares of the mid-late 20th century.

On balance, the WTO has been a force for good in freeing agricultural trade. For sure, commodity markets are still very distorted, and the whole mercantilist basis of the WTO must be questioned. But by trying to harness the desire of exporters for more customers to counteract the pressure on governments to protect domestic industries, the WTO has done much good in the world. Pascal Lamy is right to encourage countries to stay on course with the Doha round of trade negotiations. I just hope that encouraging a “global vision” for agriculture, and pointing to vague notions of “social externalities,” doesn’t run against his stated purpose of freeing farm trade.

More on Cato’s work on agricultural trade policy here.