Tag: trade

Trump’s New Trade Proposals Borrowed from Democrats

Donald Trump’s campaign has undoubtedly given protectionist rhetoric a new energy in American politics.  China, he says, is “killing us on trade” and the Trans-Pacific Partnership is “a rape of our country.”  Early on, he got attention for calling for a 45% tariff on all goods from China and for saying we should impose tariffs of 35% on imports from companies that invest overseas. 

On Tuesday, he delivered a highly publicized trade policy speech where he doubled down on his belligerent, mercantilist rhetoric.  He also offered some more detailed and thought-out policy proposals.  Here are the seven proposals he laid out:

  1. “Withdraw the United States from the Trans-Pacific Partnership.”
  2. “Appoint the toughest and smartest trade negotiators.”
  3. “Identify every violation of trade agreements a foreign country is currently using to harm our workers … [and] use every tool under American and international law to end these abuses.
  4. Renegotiate or withdraw from NAFTA
  5. “Label China a currency manipulator.”
  6. “Bring trade cases against China, both in this country and at the WTO.”
  7. “Use every lawful presidential power to remedy trade disputes, including the application of tariffs consistent with Section 201 and 301 of the Trade Act of 1974 and Section 232 of the Trade Expansion Act of 1962.”

Despite the outlandish nature of Trump’s rhetoric, there’s actually nothing new or radical about these proposals.  They are, in fact, just what trade-skeptic Democrats have been demanding consistently for over a decade.

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Cato Trade Scholars Endorse the Trans-Pacific Partnership

On June 30, U.S. Trade Representative Michael Froman, former U.S. Trade Representative Clayton Yeutter, and other trade policy experts joined Cato’s trade scholars in the Hayek Auditorium for an event titled: ”Should Free Traders Support the Trans-Pacific Partnership?” The main purpose of the event was to reveal the findings of a forthcoming paper by my trade center colleagues and me, in which we provide a chapter-by-chapter assessment of the 30-chapter, 5,500-page trade deal and reach the conclusion that, yes, free traders should support the TPP.

In our assessment, we make the distinction between free trade and free trade agreements:

For free traders, the ideal is free trade: No border barriers; no domestic regulations or policies that have protectionist intent or effects or that otherwise bestow relative privileges on domestic companies or their products; no superfluous rules that are merely tangentially related to trade, but violations of which can be invoked to erect new impediments to trade. Measured against those standards, the TPP – with its 5,500 pages of explicit rules and exemptions – would not pass the free trade test. The TPP is not free trade. Like all other U.S. trade agreements, the TPP is a managed trade agreement, with provisions that both liberalize and restrict trade and investment. Some free traders would reject the TPP out of hand for its failure to eliminate all restrictions.

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Playing the China Card Wisely Is Obama’s Last Best Chance to Sell the Trans-Pacific Partnership

The Trans-Pacific Partnership is the economic centerpiece of the Obama administration’s much ballyhooed “strategic pivot” to Asia, which – in 2009 – heralded U.S. intentions to extricate itself from the messes in Iraq and Afghanistan and to reassert its interests in the world’s fastest-growing region. After six years of negotiations, the comprehensive trade deal was completed last year and signed by its 12 charter members earlier this year. But the TPP must be ratified before it can take effect – and prospects for that happening in 2016 grow dimmer with each passing day.

One would assume TPP ratification a policy priority of President Obama. After all, he took office promising to restore some of the U.S. foreign policy credibility that had been notoriously squandered by his predecessor. If Congress fails to ratify the agreement before Christmas, Obama will leave office with American commercial and strategic positions weakened in the Asia-Pacific, and U.S. credibility further diminished globally.  The specter of that outcome would keep most presidents awake at night.

In Newsweek today, I put most of the blame for this precarious situation on a president who, throughout his tenure, has remained unwilling to challenge the guardians of his party’s anti-trade orthodoxy by making the case for trade liberalization generally, or the TPP specifically:

Superficially, one could blame election-year politics and a metastasizing popular antipathy toward trade agreements for the situation, but the original sin is the president’s lackluster effort to sell the TPP to his trade-skeptical party and the American public. In the administration’s division of labor, those tasked with negotiating the TPP kept their noses to the grindstone and brought back an agreement that reduces taxes and other protectionist impediments to trade…

What to Make of the International Trade Commission’s TPP Analysis?

The 2016 election season has put international trade in the spotlight – or, actually, under the heat lamp – like never before.  But just as some of us in the trade policy community started getting big heads over the increasing prominence of our pet issues, the U.S. International Trade Commission released this report yesterday, which concludes that the Trans-Pacific Partnership Agreement, if implemented, would boost real annual GDP by 0.15 percent by the year 2032. In other words, the economic growth from TPP could be wiped out by a single new major EPA regulation.  So much for the importance of trade, I guess.

Of course, some will downplay the magnitude of the issue and turn these modest gains into positive talking points to encourage TPP ratification. In addition to GDP, small gains are estimated for real income, employment, and trade, as well.

Others will suggest that the estimates overstate the benefits, as the ITC studies are wont to do.  But as Dan Pearson explained a few months ago in this paper, the ITC’s assessments are not intended to be interpreted as projections into the future. They are static comparisons. The TPP study compares today’s economy without TPP to today’s economy with TPP.  The results are just estimates of what the various outcome metrics would be ceteris paribus.  Accordingly, the utility of the estimates is limited and the validity of the model cannot be tested by comparing real future outcomes to these estimates because in the real world there is no ceteris paribus. Things change.

For example, the model doesn’t take into account things like: supply shocks (such as another fracking-type boom) or demand shocks (such as mass adoption of hand-held devices); transitions from human labor to robots; changes in institutions; the policy reactions of other countries to the TPP; accessions to the agreement by other countries; the impact on the multilateral trading system, and so on.  All of these factors matter at least as much as the terms of the TPP itself. 

So the question is: Why even bother performing these studies?  The real outcomes are determined primarily by information that is unknown and difficult to estimate with reasonable accuracy when the models are run. The results are politicized and misused by advocates and proponents of trade agreements alike.

As it stands now, the ITC is required under the terms of the Bipartisan Congressional Trade Priorities and Accountability Act of 2015 (the Trade Promotion Authority Bill) to conduct an economic impact assessment of a trade agreement within 105 days of the president entering into such an agreement. While there is some useful information to obtain from these assessments, it seems that their greatest utility is to provide political cover to members of Congress.

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Miscellaneous Tariff Bill Shows Why Washington Needs a Refresher in Business Accounting

Nearly two and a half centuries after Adam Smith vanquished the mercantilists, mercantilism is the beacon of U.S. trade policy.  In descending order of priority, U.S. trade policy is oriented toward three objectives: (1) Accelerating export growth; (2) Limiting import growth; (3) Effectuating a trade enforcement regime that maximally supports the first two objectives. The coexistence of the “exports good, imports bad” philosophy with 41 straight years of trade deficits explains why trade is so often maligned and demagogued (i.e., “We’re getting crushed in trade!”), and why trade liberalization is such a tough slog politically. 

Anyone who reads the press releases from the U.S. Trade Representative’s office, the House Ways and Means Committee, the Senate Finance Committee, or the big business trade associations is familiar with the statistic that 95 percent of the world’s consumers live outside the United States.  That mantra is deployed to promote the importance of exports – to suggest that removing foreign trade barriers is essential to U.S. export growth, which is essential to U.S. economic growth.  But rarely does anyone in official Washington make the valid point that if 95 percent of the world’s potential customers live abroad, so do 95 percent of the world’s suppliers, 95 percent of the world’s supply chain partners, 95 percent of the world’s workers, and 95 percent of the world’s investors.

The fact that the United States accounts for only 5 percent of the world’s population means there are numerous channels through which engagement with the world increases U.S. wealth and living standards, and that U.S. barriers to imports, investment, and immigration are at least as important to surmount as are foreign barriers to U.S. exports. But official Washington considers dismantling foreign market barriers, while fortifying U.S. import barriers, to be its remit.

A brief refresher on business accounting is in order.

Lesson 1:

Profits equal revenues minus costs.

In simple arithmetic terms: P = R – C.

Lesson 2:

With reference to the simple equation above, a business can realize higher profits by increasing R or decreasing C.  To be more precise, higher profits require revenues to increase faster than costs increase or for costs to decrease faster than revenues decrease.

Lesson 3:

For any given firm, revenues equal the value of its domestic sales plus the value of its export sales, and costs equal the materials, labor, and overhead used in production, as well as transportation expenses, selling expenses, taxes, and other expenses incurred in the process of delivering the good or service to the customer.

Lesson 4:

By increasing overall supply and reducing the average price of manufacturing inputs and final end-user products, imports help reduce the cost of production for businesses and the cost of living for American households. For businesses, those lower costs generate greater profits to reinvest or distribute to shareholders or they enable lower prices to help them compete.  For households, those lower costs mean lower prices and more resources to save or spend elsewhere in the economy.

Lesson 5:

The goal of trade policy should not be to maximize business revenues.  The goal of trade policy should be to maximize profits (or put in economic terms: to maximize value-added, i.e. GDP). The equation in Lesson 1, above, shows that reducing costs contributes to profit growth just like increasing revenues contributes to profit growth.

Congress demonstrates occasional, attenuated appreciation of these lessons.  Every few years (8 times since 1982), Congress has passed a Miscellaneous Tariff Bill, which temporarily suspend duties on certain, “noncontroversial” products—usually intermediate goods, such as chemicals, electronic components, and mechanical parts—that are not manufactured domestically but are needed by U.S. producers to generate their own output. Although limited in impact by its temporary nature, by the “no domestic production” requirement, and by the caveat that the suspended duty must not reduce tariff revenues by more than $500,000, the MTB does provide some cost savings to U.S. producers. The last MTB provided an estimated $748 million of import tax relief.

As described in this new paper – released ahead of a House vote tomorrow on legislation to resuscitate the MTB process – Congress should recognize that tariffs are always costs that reduce GDP and act with greater resolve to eliminate all import tariffs permanently.

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Congress Fist Bumps Itself Over Tariff “Reform” Bill That Keeps 97% of Import Taxes in Place

This week congressional trade leaders introduced The American Manufacturing Competitiveness Act of 2016 (AMCA), a bill to reform and reinvigorate the stalled Miscellaneous Tariff Bill (MTB) process.  MTBs are legislative vehicles through which Congress temporarily suspends import duties on certain qualified products typically used as inputs in U.S. manufacturing operations. Soon followed the self-congratulatory triumphalism.

House Ways and Means Committee Chairman Kevin Brady (R-TX) said: “This bipartisan bill will empower American manufacturers to compete around the world, create new jobs at home, and grow our economy.”

Ranking Member Sander Levin (D-MI) added: “The MTB is a critical tool that supports American manufacturers and workers, and I’m pleased that we’re finally moving forward with this legislation.”

Senate Finance Committee Chairman Orrin Hatch (R-UT) boasted: “With this legislation, we offer a smart bicameral and bipartisan approach for MTBs — one that improves transparency and allows domestic firms to receive appropriate tariff relief on products that can only be found abroad so that those firms can produce American-made goods here at home.”

Ranking Member Ron Wyden (D-OR) moralized: “We need to do everything we can to make U.S. manufacturers more competitive — that includes passing a miscellaneous tariff bill that reduces costs of components we don’t make here in the U.S.”

Let’s unpack this. 

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Poll: Americans Would Rather Pay Lower Prices than Purchase Items Made in the U.S.

“We don’t win anymore!” Republican presidential candidate Donald Trump tells us. One of the main reasons, according to Trump, is due to free trade agreements. At a rally in North Carolina he declared: “All this free trade, you know what, it is free trade for them, not for us. We’re losing our shirts.” Trump has proposed imposing various taxes on foreign imports to the US because he believes this will help facilitate bringing back jobs to the US (my colleague Daniel Ikenson has written about this here and here).

Trump’s talk of unfair trade and his proposals to punish importers has resonated with many Americans. In fact, a recent CBS/New York Times survey finds that 61% of Americans agree that “trade restrictions are necessary to protect domestic industries” whereas 29% say free trade should be allowed even if domestic industries are hurt by competition abroad. 

Yet, Americans may not be willing to foot the bill of goods’ higher prices that will result from Trump’s proposed trade restrictions. A recent AP/GfK poll finds that 67% of Americans would rather buy cheaper products made in another country rather than pay more for the same product made in the United States. Thirty percent (30%) say they’d rather pay more to buy American made products. That being said, 71% report that they’d like to buy American made items, but that they are often too costly or difficult to find. Furthermore, only 9% say they hold firm to only buying American made goods even if they cost more.

These poll results give some insight into Americans’ revealed preferences, or their actual consumer behavior. While in theory Americans like the idea of buying items made closer to home by their fellow citizens, ultimately their pocketbook may prove more relevant to their behavior.

When it comes to free trade agreements impact on American jobs and wages, Americans are divided but tend not to be concerned. Fifty-four percent (54%) do not believe that free trade agreements decrease wages for American workers while 43% think these agreements do harm wages. Similarly 51% do not think that free trade agreements cost American jobs, while 46% think they do.

Overall, Americans are quite divided over the general benefits of free trade with a third who believe free trade agreements are good for the economy, 37% who say they don’t make a difference, and about a quarter who think these agreements harm the economy.

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