Tag: trade

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.

America’s Economic Problem Is Regulation, not Trade

Even when Donald Trump seems to get something right, he’s mostly wrong. At least when it comes to economics.

Many Americans are suffering financially. Yet the problem is not trade: Americans have grown wealthy as a trading nation. In contrast, regulation has done much to harm U.S. competitiveness.

The Obama administration is busy writing new rules to turn America into its vision of a good society, irrespective of the impact on liberty or prosperity. Last year Uncle Sam spent $62 billion to run the rest of our lives.

Observed Patrick McLaughlin and Oliver Sherouse of the Mercatus Center: “Over the last 20 years the regulatory budget has more than doubled in real terms while the number of total restrictions has grown by about 220,000—a 25 percent increase.”

The problem is not only the expense of enforcement. Far greater is the cost of the impact on the economy.

Last year Clyde Wayne Crews of the Competitive Enterprise Institute assessed the impact of regulation in his working paper entitled “Tip of the Costberg.” He figured the total price of regulation to be $1.88 trillion.

However, these figures almost certainly are too low. Crews argued: “Too often, regulatory impacts don’t get measured. But further, the disruption of market processes and the derailment of wealth, safety and health creating processes themselves are for the most part wholly neglected.”

Regulatory costs play out in many ways. One aspect is what an individual or company spends to comply with government dictates. Far harder to measure is what does not occur as a result of arbitrary and expensive rules. What products are not launched, what enterprises are not started, what jobs are not created?

Of course, regulations theoretically are promulgated because they yield net benefits after costs. However, agencies have an incentive to inflate the value of what they are doing. That means exaggerating problems and “social costs,” overstating alleged benefits, and discounting compliance costs.

Overall how much have we lost from excessive, unnecessary regulation? A lot, according to economists John W. Dawson and John J. Seater.

They considered the cumulative impact of losing a couple percent of economic growth year in and year out from 1949 through 2005: “That reduction in the growth rate has led to an accumulated reduction in GDP of about $38.8 trillion as of the end of 2011. That is, GDP at the end of 2011 would have been $53.9 trillion instead of $15.1 trillion if regulation had remained at its 1949 level.”

Increased regulation also contributes to increased inequality. In January McLaughlin and Laura Stanley of Mercatus concluded that such rules “skew income toward politically connected producers and away from individual who lack the resources necessary to navigate the legal and regulatory framework.” 

Finally, there is the issue of lost liberty. Crews released a second study last year entitled “Mapping Washington’s Lawlessness 2016.” It reviewed what he termed “regulatory dark matter.”

The regulatory process is essentially lawless, beyond the normal accountability of a democratic system. As Crews explained: “Congress passes and the president signs a few dozen laws every year. Meanwhile, federal departments and agencies issue well over 3,000 rules and regulations of varying significance. A weekday never passes without new regulation. Beyond those rules, however, we lack a clear grasp on the amount and cost of the thousands of executive branch and federal agency proclamations and issuances, including memos, guidance documents, bulletins, circulars, and announcements with practical regulatory effect.”

Americans are suffering. But closing off the economy is no answer to them.

As I pointed out in American Spectator online: “Policymakers should address federal, state, and local governments which are doing so much to prevent American companies from out-competing foreign operations and rewarding Americans accordingly. These are the bad policies to blame for creating today’s economic problems and imposing widespread financial hardship, thereby fueling the populist Trump bandwagon.”

The Continuing Anti-Trade Adventures of Ted Cruz

Ted Cruz’s campaign has produced a new ad targeting Wisconsin voters in the lead up to that state’s primary election tomorrow. As images switch back and forth between farms and factories, Cruz lists off a number of generic demographics and blue collar occupations that his campaign “is for.” He also complains about international trade.


Here’s the substantive part of the ad:

We will repeal Obamacare, peel back the EPA and all the burdensome regulations that are killing small businesses and manufacturing. 

I’m going to stand up for fair trade and bring our jobs back from China. 

We will see wages going up. 

We’ll see opportunity again.

Senator Cruz doesn’t tell us what he means by “fair trade” or promote a specific trade policy. The term “fair trade” is usually used by politicians as a euphemism for “protectionism.” In the past, Cruz has noted that the value-added tax (VAT) he has proposed is “like a tariff” because it imposes a greater burden on imports. Perhaps this is what he means by “fair trade.”

In any event, some simple facts about trade might be helpful to explain the problems with Cruz’s approach. For example, nearly 60% of imports are materials and capital goods used by American companies. So, Cruz’s “fair trade” is a tax on the very same “small businesses and manufacturing” whose burdens he wants to lift. Oh, and reduced employment in America’s thriving manufacturing sector is not due primarily to trade with China.

The biggest difference between Donald Trump and Ted Cruz on trade is that Trump has been more specific. Trump has singled out specific trade deals he opposes and has promised to tax specific companies specific amounts. Also, Trump’s disdain for trade has been apparent from the beginning of his campaign, while Cruz’s rhetoric and positions have been getting gradually worse in response.

While Trump has been getting lots of attention for his anti-trade rhetoric, it’s worth remembering that other candidates are not offering better policy proposals. They are simply less sensational in how they present the same flawed message.

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Can Competition ‘Make America Great Again’?

Many worry about international trade and the increased competition to which it leads, while overlooking trade’s incredible benefits. In a refreshing Wall Street Journal article, the founder and CEO of FedEx, Fred Smith, reflects on how trade and deregulation have improved American living standards over the course of his lifetime. He recalls how many luxuries enjoyed by few during his youth plummeted in price and became accessible to more people than ever before. 

“Foreign travel was exotic, expensive and rare among the population as a whole” during the 1960s, Smith reminds us. Industry deregulation and international Open Skies agreements changed that. “Long-distance telephone calls were expensive, international calls prohibitively so,” and cell phones did not even exist yet. “From furniture to TVs and appliances, and especially automobiles, American brands dominated consumer spending” across the United States, and were often out of reach to the less affluent. Then trade worked its magic: 

[Trade] has rewarded Western consumers with low-cost products that have substantially improved standards of living. [Today] Americans and Europeans don’t need to be affluent to afford cell phones, digital TVs, furniture and appliances.

The moral of Smith’s story is clear: competition, which trade and deregulation facilitate, has an extraordinary tendency to enhance efficiency and bring down prices.

Don’t Get Fooled by Trump

Watching Pete Townshend wailing on his Fender Stratocaster last night at the Verizon Center reminded of what I’d read about Fender’s history. Part of the Fender story regards how the firm got hammered by Japanese competition in the 1970s, but then bounced back by refocusing on quality. So while I was listening to “Won’t Get Fooled Again,” I’m embarrassed to say I was pondering Donald Trump’s misguided statements favoring protectionism.

As president, Trump suggests he’d block imports from China, Mexico, and even Japan. But what Trump does not seem to realize is that import competition makes American companies stronger. To make America great again, we need both import competition and domestic policy reforms, including slashing the corporate tax rate to 15 percent, as Trump is advocating.

Let’s look at a bit of history. American firms Fender and Gibson have long been the dominant electric guitar makers. But both firms were in decline in the 1970s, as quality fell and import competition increased. Leo Fender had sold his guitar company to conglomerate CBS in 1965, and within a few years musicians began noticing substantial drops in product quality. A similar decline happened at Gibson in the 1970s, which was also controlled at the time by an ineffective corporate parent.

Japanese guitar firm Ibanez saw an opportunity. It had expanded into electric guitars in the 1960s with the idea of making cheaper copies of American products. But by the 1970s, the firm realized that it could make higher-quality products than the Americans, but at lower cost. And like Honda and Toyota in automobiles, Ibanez focused on product innovation, while the American firms rested on their laurels. Ibanez’s strategy succeeded, and today it is one of the top guitar firms.

By the 1980s, Gibson was “floundering” and “might well have gone under,” noted an article in Guitar World. And Fender was “all but dead,” according to the company’s official history. But America’s capital markets came to the rescue. Fender was bought out in 1985, and Gibson in 1986, by teams of investors determined to revive the firms’ traditions of quality. Today, Fender and Gibson are back on top of this competitive industry.

By the way, the weakness of Fender and Gibson also prompted American entrepreneurs to enter the fray. Randall Smith started guitar amplifier company Mesa Boogie in his California workshop in the late 1960s. Smith told Guitar World that he saw the decline of Fender and Gibson in the 1970s, and he was determined to “avoid that fate and remain dedicated to the instruments and the musicians that play them.” Smith’s company went on to invent an array of new features for guitar amps that have become standard in the industry.

Hartley Peavey has a similar story. As a teenager in Meridian, Mississippi, Peavey began building guitars and amps for his friends, which led to his founding Peavey Electronics in 1965. He wanted to offer consumers better value for money than the gear on the market at the time. Peavey used innovative manufacturing techniques to keep his costs down and to challenge Fender and Gibson with quality guitars at lower prices. Today, Peavey is one of the largest names in amps and guitars, and it ships many of its products worldwide from factories in Mississippi.

In sum, Trump is singing the right song on corporate taxes, but don’t be fooled by his rhetoric on trade.

For more on guitars, see here.

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