Topic: International Economics and Development

Globalization and Food Safety

The Washington Post has an interesting story today about E. coli on lettuce. A batch of lettuce produced in California last month passed through numerous screenings and was sent to U.S. grocery stores. Some of it was also sent to Canada, and the government there found E. coli, which led to a major recall across both countries.

Here are some speculations:

  • Globalization increases the safety of American-produced goods because those goods must often pass muster in foreign markets where consumers and governments have different standards and safety procedures.
     
  • I don’t know whether American or Canadian food safety procedures are better, but a diversity of systems generates greater information, which allows producers and governments everywhere to improve quality.
     
  • Globalization doesn’t lead to a “race to the bottom” on environmental standards as critics often claim. Some countries, such as Japan, apparently have very high standards on food, and that tends to push up standards elsewhere. When Japanese importers demand strict standards from Chinese food producers, Americans consuming Chinese products also benefit.

Hong Kong’s Flat Tax Rate Dropping to 15 Percent

Unlike American politicians, Hong Kong lawmakers understand that lower tax rates are a key to staying ahead in a competitive global economy. The Chinese Territory’s chief executive has just announced that the flat tax will drop by one percentage point, from 16 percent to 15 percent. As BBC news reports, the corporate rate also will drop, with further reductions likely:

Hong Kong has said it will cut taxes, in a move to promote further growth and lure foreign investment. Leader Donald Tsang said taxes would be cut by 1 percentage point, to 16.5% for firms and 15% for individuals, in the first policy speech of his new term. …In announcing the tax cuts, Mr Tsang said: “We will consider further profits tax relief if our economy remains robust and our public finances stay sound.”

Paul Craig Roberts Misses the Mark

In an opinion piece published this week, Paul Craig Roberts takes exception to a conclusion in my recent Cato paper about the state of U.S. manufacturing.  I usually welcome disagreement as an opportunity to elaborate or persuade.  But it’s quite evident that Roberts is not interested in elaboration and is beyond persuasion.  The purpose of his dissent was to construct a straw man against which he could present his skeptical, and empirically refutable, views about trade.  

In my paper, Roberts identifies what he believes is an “extraordinary mistake [which] results in an incorrect conclusion.”  He argues that my failure to distinguish imports produced by U.S. companies abroad (offshored production) from imports produced by foreign firms abroad (import competition) leads me to the erroneous conclusion that “the health of U.S. manufacturing [is attributable] to import competition.”  

First of all, nowhere in my paper do I attribute the health of U.S. manufacturing to import competition.  The only passage from which such an interpretation might be drawn (by a careless reader, I would add) is this one: “Revenues, profits, output, value added, and even compensation rose the most for industries most exposed to import competition, and they rose the least for those industries experiencing the smallest increases in imports.”  That is just a statement of fact, as gleaned from the data.  It assigns no causation to import competition.   

I also write: “Exposure to trade, as evidenced by the relationship between imports and exports and operating performance, has been an important component of the success of U.S. manufacturing industries.”  This statement at least implies some degree of causation, which is supported by the fact that profit growth (operating performance) is a function of revenue growth (expanding exports) and cost reduction (increasing imports of production inputs). 

Second, my failure to distinguish between sources of imports in no way undermines the central points of my paper.  The purpose of my paper (“Thriving in a Global Economy: The Truth about U.S. Manufacturing and Trade”) was simply to evaluate the health of the U.S. manufacturing sector.  The conventional wisdom holds that U.S. manufacturing is eroding, the country is de-industrializing, and that import competition is the driving force behind this trend.  We hear this all the time.  Politicians tell us.  Op-ed page writers remind us.  Lou Dobbs warns us.  And members of Congress have proposed all sorts of punitive trade legislation under the banner of arresting and reversing manufacturing decline. 

I set out simply to assess the credibility of the premise.  My approach was straightforward, honest, and devoid of ideology.  There was no shell game or sleight of hand.  I found the most relevant, comprehensible, comprehensive, objective statistics that speak to the health of the sector, presented those data, and offered conclusions that are easily verifiable (i.e., not confused by economic modeling or econometrics or the debatable assumptions upon which such approaches often rely). 

What the data show very clearly is that U.S. manufacturing is far from declining; it is, in fact, thriving.  Output, revenue, profits, profit rates, return on investment, and exports have all been trending upward since the nadir of the manufacturing recession in 2002 and all reached record highs in 2006.  If that doesn’t constitute “thriving,” I’d be interested to learn what does. 

Since data and trends pertaining to the sector as a whole might mask different conditions in particular industries, I drilled down to explore the health of individual U.S. manufacturing industries (broadly defined at the 3-digit NAICS level).  Out of 18 broadly-defined industries, I found that 12 are doing very well and that 6 are struggling, according to the same metrics used to assess the sector as a whole.  With the exception of the auto industry, those industries that are faring poorly are generally low-technology, low-wage, and labor-intensive. 

With the manufacturing sector and the majority of its component industries found to be doing very well, the purpose of the paper was fulfilled.  The conventional wisdom was refuted.  If manufacturing is thriving – and not declining – then it is moot to demonstrate that trade has not been an important cause of manufacturing decline.  But since trade is so demonized, and the data so exonerating, it was pertinent to describe the relationship observed between trade and the various performance metrics. 

Here are some of my observations:  

  • “the rising level of U.S. imports and exports has been associated with positive developments in key manufacturing performance indicia”;
  • “As manufactured imports declined in 2001 and 2002, manufacturing output, exports, and revenues declined as well.  When imports began to pick up again as the manufacturing recession was ending, all of those real variables tracked upwards, adding more data points to the line that confirms a strong positive correlation”;
  • “As manufacturing imports have achieved new heights, manufacturing output, revenues, exports, and profits have all set records, too.”
  • “The premise that U.S. manufacturing is under duress from imports is not supported by the data”;

It is noted in the paper that industries that experienced higher levels of import growth fared better than industries that experienced lower levels of import growth.  I suggest that access to imported raw materials, components, and capital equipment helps keep the lid on costs of production for U.S. producers.  I mention that 55 percent of all 2006 import value was of intermediate products – precisely those products consumed by industry in its own production processes.  I mention that manufacturing export growth has been strong in recent years and that foreign markets are likely to be even more important to U.S. manufacturers in the year’s ahead since that’s where the dynamic growth is.  All of those conclusions (implications, if you prefer) counsel in favor of treading lightly on the trade protection front. 

The fact that some proportion of U.S. imports might have been offshored U.S. production making its way back to the United States in no way undermines any of the key points in my paper.  Even if all imports were of U.S. offshored production, the fact remains that trade has been an important part of that success story.  To the extent that the import figures reflect offshored U.S. production, rising profitability affirms the wisdom of that decision.  But the proportion of imports attributable to offshored production is likely quite small, and not “substantial,” as Roberts suggests. 

Third, my failure to distinguish between offshored U.S. production and foreign production in the import data is insignificant because other data presented affirm the limited importance of offshored production.  Roberts asserts that offshoring simply substitutes imports for domestic production.  If that were the case and if offshoring constitutes more than an insignificant portion of U.S. imports, then we should see that in the data.  But we don’t.   

Instead, we see that U.S. factory output and U.S. value added increased the most for industries that also experienced the largest increases in imports.  In other words, if those imports are offshored U.S. production, they aren’t having a discernible substitution effect, as U.S. output, value added, and profits are rising too.  We also see that U.S. factories accounted for 21.1 percent of the world’s manufacturing output in 2005 (2.5 times greater than Chinese factories), which is virtually unchanged from the 1993 figure of 21.4 percent.  In absolute terms U.S. manufacturing output and value added have been rising virtually year-after-year, as has world manufacturing output.  Yet, the United States has somehow managed to preserve its share of world manufacturing output for at least 13 years.  If Roberts’ concerns about my data presentation had any merit, we would not observe the correlation between imports and output, nor would we see U.S. share of world output that has been remarkably stable. 

I usually don’t mind disagreement with my point of view.  It happens frequently.  But I find it offensive when someone disparages and dismisses my work without a coherent basis for doing so.

Debating the Law of the Sea Treaty

The Law of the Sea Treaty (dubbed LOST by opponents, and LOS by supporters), represents the culmination of a decades-long project to clarify the rules governing the oceans, from the seabed to the waves. The treaty, first rejected by President Reagan in 1982, has been revised over the years; now prominent Republicans, including Indiana Senator Richard Lugar, are urging passage. The Bush Administration has quietly endorsed the process.

Doug Bandow, who wrote a paper for Cato on the subject two years ago, makes a strong case for why the Senate should reject the treaty and continue with the status quo. He squares off this week against Raj Purohit of Citizens for Global Solutions in an online debate at the Partnership for a Secure America.

If you haven’t followed the issue closely, Doug and Raj do a good job of spelling out the relevant arguments for and against.

CAFTA Survives U.S. Meddling

Costa Rica’s voting public wants to join CAFTA. This comes despite last-minute efforts by leading U.S. Democrats to dissuade Costa Ricans from voting to support the national referendum.

Worse, these particular lawmakers showed an alarming cynicism in attempting to convince Costa Ricans to reject CAFTA.

For example, Sen. Bernie Sanders and Rep. Michael Michaud recently traveled to Costa Rica for press conference with Ottón Solís, a former presidential candidate who opposes CAFTA. Their message was that Costa Ricans had nothing to fear by rejecting CAFTA, since, according to them, the country would continue to enjoy duty-free access to the American market under the Caribbean Basin Initiative (CBI).  However, as a congressman in 2000, Sanders voted against CBTPA, an extension of the CBI that allows duty-free access to Costa Rican textiles and tuna . This program expires next year.

More recently, Nancy Pelosi and Harry Reid sent a letter to Costa Rica’s ambassador in Washington reaffirming Sanders’ message: Costa Ricans can safely reject CAFTA and continue to enjoy trade preferences to the U.S market. Guess what? Reid also voted against the CBTPA in 2000.

Reid and Sanders were later joined by Sen. Sherrod Brown, who gave a highly-publicized speech in the Senate floor in solidarity with Costa Rican naysayers. Brown himself was a naysayer to the CBTPA when he was in the House of Representatives in 2000.

This is the cynicism of protectionism at its best: Profess concern for Costa Rican workers after consistently opposing previous efforts to ease trade restrictions with the country. A majority of Costa Ricans voters didn’t buy the story and supported CAFTA.

Still, with these kinds of friends, who needs enemies?

Taxes, Trade and the “Level Playing Field”

Almost every nation has a value-added tax (VAT), which is a type of national sales tax that is imposed at each stage of the production process. Indeed, the United States is the only developed nation without a VAT. But this is a good thing. It is no coincidence that the burden of government in America is smaller than it is in almost every other industrialized country. Simply stated, VATs are “money machines” for big government.

Not surprisingly, this is why many politicians in Washington would love a VAT. But what is surprising is that some otherwise sensible people are sympathetic to a VAT because they think it will help exports. They point out, quite correctly, that the World Trade Organization allows governments to provide rebates for value-added taxes on exports (a practice known as border adjustability). But they are wrong when they argue that this boosts exports and creates a trade advantage.

Regarding the first point, it is downright silly to argue that imposing a VAT - and then creating an export exemption - will boost exports. At the risk of stating the obvious, the export exemption cancels the tax, so the price of American products sold outside US borders would not change.

It is also misguided to claim that a border-adjustable VAT gives other nations some sort of trade advantage. Under current law, all goods sold in America, whether made in America or made in Europe, are sold without a VAT. Likewise, all goods sold in Europe, whether made in America or made in Europe, are sold with a VAT. How much more level can the playing field get? This is not just a debate for navel-gazing academics and lint-covered policy wonks. As reported by the Wall Street Journal, some Republican presidential candidates (or at least their advisers) are focused on “border adjustability.”

Mr. Thompson’s aides outline a change to the tax code that would move away from taxing income or profits and shift toward a system that would reduce taxes on exports when they cross the border and impose them on imports when they enter the country. Under international rules, the European value-added tax, a kind of sales tax, is waived for exports, but those rules block the U.S. from reducing corporate-profit taxes for exporters. “The best thing to do would be to have the [World Trade Organization] change its rules to level the playing field, and that should be the first step. If that fails then we should play by the same game that everyone else plays,” said Lawrence Lindsey, Mr. Thompson’s economic adviser and former director of the National Economic Council for President Bush.

The key question, of course, is whether focusing on the unimportant issue of border adjustability leads to good policy or bad policy. Senator Thompson has made some positive noises about a wholesale replacement of our current anti-growth tax system with a consumption-base tax system like a flat tax or national sales tax. That would be great news, and it would be great news even if border adjustability led the candidate to choose a sales tax over the flat tax. What matters is not border adjustability, but that we would be getting rid of the many warts in the current tax system. But if a myopic fixation on border adjustability led a candidate to propose a VAT or other form of national sales tax without fully (and permanently) eliminating the income tax, then politicians would have an additional source of money to waste and America would be at grave risk of becoming an uncompetitive, European-style welfare state.

Regulatory Competition Leads to Better Policy in France

The Financial Times reports that France is deregulating and cutting taxes in hopes of competing with London in the financial services market. The article also notes that Switzerland and Germany also are trying to attract business by reducing the burden of government. Needless to say, these positive reforms would not happen if the bureaucrats in Brussels had the authority to create a continent-wide regulatory regime. Another threat to deregulation and better policy is IOSCO (the International Organization of Securities Commissions), which wants to impose one-size-fits-all regulation on all jurisdictions - particularly ones with a more laissez-faire approach:

The French government yesterday unveiled its plans to boost Paris as a financial centre, proposing a more lightly regulated market for companies and funds on the Euronext exchange. Several of the measures are closely modelled on UK structures, as the French capital seeks to make up ground lost to London. The new market segment would operate according to European Union minimum standards in terms of listing and disclosure. …Switzerland’s leading financial services companies launched their own campaign last month for tax cuts, a relaxation of immigration rules and other measures to turn their country into the world’s third largest financial centre after London and New York. Frankfurt launched its own more lightly regulated market segment two years ago… Ms Lagarde said the government had already shown serious commitment to financial services by cutting taxes, particularly for higher earners. France’s high taxation is one reason why so many young French bankers flock to London.