Topic: Trade and Immigration

Rules of Origin for Autos in the TPP

As the Trans-Pacific Partnership negotiations enter their final stage, one issue remaining to be resolved concerns rules of origin for automobiles.  Rules of origin determine how much of a product needs to be made within the free trade area in order for it to receive duty-free treatment.  This is a tricky issue for automobiles because automakers rely heavily on global value chains where different parts are made in different countries.

Japan wants very liberal rules of origin because its industry’s supply chains include non-TPP countries like Thailand. Canada and Mexico want very strict rules of origin, because their industries benefit from preferential access to the U.S. market through the North American Free Trade Agreement. 

Canada and Mexico’s position in the TPP talks is protectionist. It’s also a consequence of negotiating trade liberalization through regional agreements. In the same way that industries who benefit from protectionism oppose the reduction of trade barriers, industries that benefit from preferential access through trade agreements oppose the reduction of other trade barriers.

Auto manufacturing investment in Canada and Mexico is driven in part by the fact that Canadian and Mexican content make it easier to import into the United States duty free under NAFTA.  If the United States drops trade barriers with other countries, Canada and Mexico become relatively less attractive places to invest.  Tight rules of origin in the TPP would reinforce Canada and Mexico’s advantage.

If negotiations at the World Trade Organization continue to flounder and regional agreements like the TPP proliferate, rules of origin will become a larger and larger problem for global trade.

Wisconsin’s Unfair Sales Act and the Folly of Antidumping Laws

A Michigan-based supermarket trying to expand into Wisconsin has come up against an absurd law against selling products at “unfairly low” prices.  As reported by MLive, the Meijer grocery store chain is facing complaints that its grand opening sales violated Wisconsin law for offering products at prices below cost. Why is that bad?

The official rationale behind Wisconsin’s Unfair Sales Act of 1939 is revealing:

The practice of selling certain items of merchandise below cost in order to attract patronage is generally a form of deceptive advertising and an unfair method of competition in commerce. Such practice causes commercial dislocations, misleads the consumer, works back against the farmer, directly burdens and obstructs commerce, and diverts business from dealers who maintain a fair price policy. Bankruptcies among merchants who fail because of the competition of those who use such methods result in unemployment, disruption of leases, and nonpayment of taxes and loans, and contribute to an inevitable train of undesirable consequences, including economic depression.

Some of these are simply a consequence of any market competition, a process that inevitably results in some companies failing.  But the idea that there is something uniquely harmful called “unfair competition” that occurs once a product is sold below cost is just false.  There are many reasons companies sell certain products at certain times for less than the cost of production.  For example, grand opening sales and seasonal sales are ordinary forms of competition.  It’s common in many retail sectors to use a low-priced “loss leader” product to draw customers into your store hoping they will buy other high-priced items as well.  

In short, the existence of regular below-cost sales is in fact a sign of a healthy, competitive market that serves consumers and suppliers. 

Trump, Ford, and Trade Policy

I don’t think anyone likes the idea of responding to all of the various statements that Donald Trump makes, but when he says something vaguely – emphasis on vaguely – substantive on an issue, a short response might be of value. In a recent interview with Chris Cuomo, Trump talked about trade policy, and had this to say (starting around the 7:00 mark) about Ford doing some of its manufacturing in Mexico:

Trump: … Ford is building a $2.5 billion … manufacturing plant for cars, trucks, and parts in Mexico.

Cuomo: How do you keep them?

Trump: Uh you keep them by…

Cuomo: … ‘cause the labor’s cheap that’s why they go.

Trump: For one thing, you keep them by talking to them. But I would say you keep them … if they go there, you know… they’ll make cars, and they’ll sell them to the United States no tax, no nothing. Just come right across the border. …

Cuomo: …and they say the labor’s cheaper over there.

Trump: And you know what, then we’ll say that’s fine. If the labor’s cheaper over there that’s good, but you know what, you’re gonna have to pay a tax to get those cars back in. You’re gonna have to pay a penalty. And if you put a… a penalty on, a tariff or whatever you call it … 

My sense is that Trump’s conception of Ford as a company is rooted in the 1950s, or maybe even the 1920s. In his mind, Ford is owned by Americans, produces in America, and sells to Americans. In reality, though, Ford has long been a global company. Here’s something I wrote about Ford a while back in the context of a paper on international investment:

Is Birthright Citizenship Constitutionally Required?

Lord help me if I have to write about anything else Donald Trump says, but I do have a few thoughts on the birthright citizenship debate he’s launched. I’ll set aside the policy aspects, which have been covered in previous years in the Cato Journal, at a Cato Hill briefing, on this blog, by my colleague Alex Nowrasteh in a pithy oped, and I’m sure many other places on our website. (Alex also posted this week an extended analysis of Trump’s new position paper on immigration.) My main take-away on the policy side is that we don’t want to create a permanent state-less underclass like what exists in many countries.

Now, on the law – on the question of whether you would need a constitutional amendment to end birthright citizenship or could just do it by amending the relevant immigration statutes – the picture is actually less clear. The first thing that the Fourteenth Amendment says, before we get to privileges or immunities, due process, and equal protection, is the following: “All persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States and of the State wherein they reside.” It’s that italicized “subject to the jurisdiction thereof” that’s at the heart of the debate.

Here’s the basic history: The common law at the time of the Founding gave birthright citizenship to all except slaves and Indians. The Supreme Court’s infamous ruling in Dred Scott (1857) confirmed the denial of citizenship to slaves, even if they were freed. The Fourteenth Amendment overturned Dred Scott with respect to blacks (and other non-white races), though Indians were still denied citizenship because they owed allegiance to their tribes, not to the United States. (Native Americans were granted citizenship by statute in 1924, though that allegiance/dual-loyalty paradox still clouds much of Indian law.) 

The proponents of the Fourteenth Amendment added “subject to the jurisdiction” to the Fourteenth Amendment in order to exclude from citizenship two groups beside Indians: the children of (1) foreign diplomats and (2) enemy forces engaged in hostile occupation. That understanding was affirmed by the Supreme Court in United States v. Wong Kim Ark (1898), when it recognized the U.S. citizenship of a man who was born in San Francisco to Chinese parents. Wong’s parents weren’t citizens, although they were legal residents. 

But what about illegal immigrants? Illegal aliens and their children are subject to our laws and can be prosecuted and convicted of violations – unlike diplomats, who enjoy certain immunities, and unlike foreign invaders, who are generally subject to the laws of war rather than domestic civil law. The illegal immigrants’ countries of origin can hardly make a “jurisidictional” claim on kids born in America (at least while they’re here). Thus, a natural reading of “subject to the jurisdiction” suggests that the children of illegals are citizens if born here.

On the other hand, the Fourteenth Amendment’s enactors probably didn’t intend birthright citizenship for illegal immigrants. At ratification in 1868, there were no illegal immigrants and no law had ever restricted immigration. “Subject to the jurisdiction” probably meant primary allegiance to the United States as a sovereign.

My sense of the constitutional question – again setting aside my policy view that more liberal immigration laws (accompanied by vigorous border control to prevent crime, terrorism, and public-health issues) would resolve much of the illegal-alien problem – is as follows.  

When the original public meaning of a legal text is unambiguous, you have to adopt that meaning unless it leads to absurd consequences. Here, the consequences may well be irrational and self-defeating: We prohibit unauthorized entry while offering an inducement, giving citizenship to the children of those who violate the law. So if Congress were to deny citizenship to children of illegal aliens, the Supreme Court might not declare that law unconstitutional. It’s a close call (read the strong arguments pro and con constitutional birthright citizenship by my friends Jim Ho and John Eastman, respectively).

Would the Court consider the consequences of a textual meaning that gives birthright citizenship to the children of illegal immigrants to be absurd?  If so, the intent or purpose of the Fourteenth Amendment’s enactors might trump the text. On the other hand, and being realistic, if Chief Justice John Roberts can find that a mandate is a tax and that a federal exchange was established by a state, there’s no way that the current Supreme Court would eliminate birthright citizenship for anyone.

So really, let’s debate some serious policy issues. It’s just not classy or luxurious to keep pressing this birthright-citizenship stuff.

Donald Trump on Immigration: Same Anti-Immigration Ideas, New Salesman

Donald Trump’s newly released position paper on immigration is the precise mix of fantasy and ignorance that one has come to expect from the recently self-described Republican.  Specifically, his position paper reads like an outline of this April op-ed by Senator Jeff Sessions (R-AL).  Trump is still a candidate in the GOP primary supported mainly by older white men who are not particularly conservative.  Although the electorate has never been more supportive of expanding legal immigration, Trump has never been more opposed.

Trump’s position paper attempts to lay the foundation for his immigration policy as president. Below, I review how his ideas measure up. Quotes from his paper are in quotes, my responses follow.

Here are the three core principles of real immigration reform:

  1. A nation without borders is not a nation. There must be a wall across the southern border.
  2. A nation without laws is not a nation. Laws passed in accordance with our Constitutional system of government must be enforced.
  3. A nation that does not serve its own citizens is not a nation. Any immigration plan must improve jobs, wages and security for all Americans.

The first sentence is true by definition, but assumes that for a border to be real, it must have a wall around it. Whether a wall is warranted should depend on the circumstances at the border, which are vastly more safe than Trump claims. 

The last two principles are vague enough that they could support any immigration policy from a total ban on immigration to open borders. The rest of his position paper narrows their focus.

U.S. taxpayers have been asked to pick up hundreds of billions in healthcare costs, housing costs, education costs, welfare costs, etc. Indeed, the annual cost of free tax credits alone paid to illegal immigrants quadrupled to $4.2 billion in 2011.

This analysis factors in only fiscal costs, which will always lead to negative fiscal outcomes. It ignores the fiscal benefits that come from a larger economy.  The fact remains that poor immigrants use less welfare than poor Americans.  They contribute mightily to Social Security, Medicare, and other portions of the U.S budget.  Over time, immigration’s impact on the U.S. taxpayer is about a net-zero.  In other words, immigrants and their descendants pay for themselves. 

Immigration can turn fiscally positive by further restricting welfare access.  Right now illegal immigrants do not have access to means tested welfare programs, but their American born children do.  However, their benefit levels are adjusted downwards to account for the non-eligible members of their households.  Short of lowering welfare benefit levels for everybody, which would be a positive move, the government cannot deny citizens access based on who their parents are.  However, Congress can deny all non-citizens access to welfare.  Cato has published the only guide of how to do that. Removing the Earned Income Tax Credit for unauthorized or other categories of non-citizens would also be easy.

The position paper doesn’t factor in the estimated $400 to $600 billion government cost of removing all unauthorized immigrants as well as the lost tax revenue from the subsequently smaller economy.  Doing so reveals how fiscally damaging this immigration plan would be if it ever became law. 

The effects on jobseekers have also been disastrous …

The influx of foreign workers holds down salaries, keeps unemployment high, and makes it difficult for poor and working class Americans – including immigrants themselves and their children – to earn a middle class wage.

There is a lot of research on whether immigrants displace Americans in the job market – and the general finding is that immigrants displace very few American workers. 

Sugar and the TPP

How much Australian sugar should be allowed to enter the U.S. market?  That’s a key question the U.S. government must answer prior to concluding the Trans-Pacific Partnership (TPP) negotiations.  The United States is the largest sugar market in the TPP, consuming about 11 million metric tons (MMT) per year.  It also is the largest producer (7-8 MMT) and importer (3 MMT) in the group.  Australia generally is believed to be the most cost-competitive sugar producer among the12 TPP nations.  It also is the largest exporter, annually shipping 3-4 MMT to other countries. 

To complicate matters further, sugar liberalization was explicitly excluded from the 2004 Australia-United States Free Trade Agreement (AUSFTA) due to U.S. political sensitivities.  Australian sugar producers understandably want to redress that omission.  Failure to obtain commercially meaningful access to the U.S. sugar market could lead to rejection of the pact by the Australian parliament.

The U.S. sugar program includes a price-support level for raw cane sugar of 22.25 cents per pound ($490/MT), with refined sugar supported at 26 cents.  Those levels effectively have been raised more than 10 percent to around 24.7 cents ($545/MT) and 30-32 cents, respectively, under the trade-restricting terms of the recent settlement agreement in the antidumping/countervailing-duty (AD/CVD) dispute involving imports from Mexico. (For more on U.S.-Mexico sugar issues, see here and here.)  Mexico is the largest supplier of U.S. sugar imports, generally providing between 1.0-1.5 MMT per year.  Suffice it to say that the agreement between the U.S. and Mexican governments will limit the amount of sugar Mexican producers can export to the United States, and also force that sugar to be sold at higher prices. 

With global raw sugar prices currently at relatively low levels of around 12 cents, Australian cane growers find the possibility of selling more sugar to the United States at high prices to be quite intriguing.  However, those sales currently are limited to the amount allocated to Australia under the U.S. tariff-rate quota (TRQ) regime – a modest quantity of only 87,000 MT.  Australia is asking that the TRQ be boosted by 750,000 MT, an increase of more than nine times.  The United States apparently has offered an additional 65,000 MT (official figure not disclosed), which would not even double Australia’s current access. 

Free Trade Within Canada

I blogged last year about efforts to promote free trade within Canada, through an improved “Agreement on Internal Trade.” Some Canadians are now attempting a new approach to addressing this problem: Invoking the Canadian Constitution.

Here’s what happened to trigger the constitutional litigation, via the Canadian Constitution Foundation:

On October 6, 2012, New Brunswick resident Gerard Comeau decided to go to Quebec on a booze run. As a result of his trip, Mr. Comeau was surprised to find himself charged with violating New Brunswick’s Liquor Control Act.

Here is the strange part: Mr. Comeau’s purchase of beer and liquor in Quebec was entirely legal. His alleged crime was bringing it home to New Brunswick.

Mr. Comeau was stopped in Campbellton, New Brunswick just after crossing the bridge spanning the Quebec-New Brunswick border. He had been followed by the RCMP while he made two stops to buy liquor in Quebec. He was charged with violating the ban on bringing in more than 12 pints of beer or liquor from an out-of-province source (per s. 43 of the Act). As a New Brunswick resident, you can legally buy larger amounts only from a New Brunswick Liquor Corporation store. This crown corporation holds a legally enforced monopoly on liquor sales in the province, and it effectively protects its monopoly across provincial borders through the Liquor Control Act’s prohibitions on importation.

So what does the Canadian Constitution say about all this?  Section 121 of the Constitution Act, 1867 states that: “121. All Articles of the Growth, Produce, or Manufacture of any one of the Provinces shall, from and after the Union, be admitted free into each of the other Provinces.”  You might think that would be enough to ensure free trade, but apparently there is a 1921 Supreme Court decision narrowly interpreting the provision so that it only prohibits customs duties imposed at the border.

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