Last year, the United States lost three cases at the WTO in which domestic regulations were challenged by our trading partners as disguised protectionism.  In each of the three cases—a ban on clove cigarettes, dolphin-safe labels for tuna, and country-of-origin labels for meat—the WTO found that the challenged regulation impacted the competitiveness of foreign goods significantly more than domestic like products and that this discrimination did not further the goals of the regulation.  The United States must amend each of these regulations in the next few months or the complaining governments will be able to pursue WTO-authorized trade sanctions against us. 

The offending regulations don’t have to be repealed to be made WTO-compliant, but the United States must do at least one of three things for each of them:

1. Diminish the negative impact on foreign products,
2. Increase the negative impact on domestic products, or
3. Better validate the different treatment.

In  the first attempt at reform, the Administration chose Option 3.  Existing regulations require that meat sold in grocery stores carry country-of-origin labels that differ based on the national origin of the animal before it was slaughtered in the United States.  Last year, the WTO determined that tracking and recording requirements in the law made it more costly for U.S. slaughterhouses to purchase foreign-raised cattle, and that the burden was not proportional to the amount of origin-related information ultimately passed on to consumers.  The Department of Agriculture proposed in early March to “comply” with the WTO ruling by increasing the amount of information the labels would carry.  The reforms would require labels on meat sold in grocery stores to say specifically where the animal was born, where it was raised, and where it was slaughtered.

It’s vitally important to recognize that this new regulation will do absolutely nothing to improve market access for foreign cattle or to reduce the discriminatory nature of the regulation.  What it will do is make the discrimination somewhat less obviously protectionist.  It will not reduce that protectionism, settle the dispute, or in any way liberalize trade.  On the contrary, the Administration took the opportunity to further privilege the special interests behind the original law.

For the second and most recent attempt at reform—this time for the dolphin-safe label requirements—the administration chose Option 2 (Increase the negative impact on domestic products).  Packaged tuna sold in the United States can only be labeled dolphin-safe if it is caught according to specific guidelines mandated by law.  These guidelines are different depending on where the tuna is caught and are particularly onerous for fisheries operating off the coast of Mexico.  The WTO found that the U.S. regulation’s lax standards for tuna caught in the rest of ocean did not further the goal of protecting dolphins but rather demonstrated the law’s protectionist nature.

The new regulation continues to single out the Eastern Tropical Pacific for special treatment but also makes it slightly more difficult for fisheries operating elsewhere to earn a dolphin-safe label.  The Mexican government has yet to respond to the reform proposal.  The Mexican tuna industry, however, has unsurprisingly voiced its continued opposition.  The reform is definitely not as robust as it could have been—and quite likely not enough to make the regulation sufficiently even-handed—but at least it does something to diminish the discrimination.

The third restriction the United States must reform is the ban on clove cigarettes.  In 2009 Congress passed a new tobacco control law, which gave the FDA the power to regulate tobacco products and banned flavored cigarettes—except for menthols.  There are basically two kinds of flavored cigarettes.  One is clove cigarettes made almost exclusively in Indonesia and smoked by less than 1% of American smokers.  The other is menthol cigarettes made almost exclusively in the United States and smoked by around 25% of American smokers.  The ostensible purpose of the ban was to discourage youth smoking by removing flavored cigarettes from the market, but the judges at the WTO couldn’t figure out how that goal was furthered by exempting the most popular kind of flavored cigarette from the ban.

In the cigarette case, none of the compliance options seems likely.  Option 1 would see the U.S. ending the ban on clove cigarettes while Option 2 would see the U.S. banning menthols.  Perhaps Option 3 could be pursued if the FDA can conjure up a study showing that kids who would have taken up smoking because they liked cloves will now turn away from tobacco altogether instead of just smoking menthols or regular cigarettes.  Options 1 and 2 face significant political hurdles.  Option 3 faces significant reality hurdles.

In each of these regulations, the protectionist aspect frustrates the goals of the activists initialing supporting them.  How did these laws come to be passed in the first place if they do such a bad job meeting their own goals? Sallie James and I try to answer that question in a brand new Cato Policy Analysis on regulatory protectionism.  We also propose a number of legal and political tools that can help prevent progressive causes from unwittingly generating unnecessary trade barriers.  You can come hear about these and other unfortunate examples and, if you are so inclined, critique our proposals at a forum we’re hosting at Cato this Thursday.

Just in time for today’s release of my and Bill Watson’s new PA, “Regulatory Protectionism: A Hidden Threat to Free Trade” comes a feature article [$] in the specialist trade (in both senses of the word) publication, Inside U.S. Trade on the likely obstacles to a U.S-EU preferential trade agreement (a recent Cato event also hosted a discussion on this topic). And, in an inadvertent PR coup for us, it focusses almost entirely on how regulations and other non-tariff barriers (NTBs) in each economy might inhibit a successful result to negotiations:  

The shifting nature of domestic policies and agricultural trade between the United States and the European Union over the last several decades means that while some traditional trade irritants are no longer present, others have been introduced that will likely prove difficult to unravel in the context of trans-Atlantic bilateral negotiations. Whereas bilateral trade irritants previously centered on export subsidies and competition in third markets for commodities like wheat, now the disagreements primarily relate to non-tariff barriers (NTBs), including divergent scientific standards, food safety regulations and other issues that are hindrances to bilateral trade… But the difficulty in negotiating these issues is that, because they ostensibly relate to consumer health and safety, governments cannot easily make “trade-offs,” as they can with tariffs. Observers believe that this is the chief reason that the talks over agriculture promise to be so difficult.

Indeed. As we discuss in our paper, tariffs and other conventional trade barriers have fallen over the years, so the barriers that remain are more regulatory in nature, and more sensitive to negotiate. What we’re essentially left with is the difficult issues. They get to the heart of national sovereignty and, on a practical level, require the participation of regulatory administrators who may have very little or no trade negotiation knowledge or experience. They also have little incentive to concede their power. Whereas trade negotiators are paid to, well, negotiate, regulators are paid to inhibit commerce. They face asymmetric rewards: a huge fuss if something goes wrong, not many kudos if they remove the reins and let commerce thrive. Under those conditions, it should be no surprise that they are risk-averse. So this trade agreement will not be easy to complete. In the meantime, though, there is much the United States can do to limit the ability of regulators to shackle the economy with burdensome—and potentially illegal—requirements that limit choice and expose American businesses to retaliatory sanctions. For example, ensure WTO obligations are taken seriously and adhered to. From our paper:  

Prior to implementing a new regulation, federal agencies should be required to evaluate the possibility that less trade-restrictive alternatives could meet regulatory goals as effectively as their preferred proposal. Also, the U.S. government should not dilute or bypass the multilateral rules of the WTO through bilateral or regional negotiations that accept managed protectionism. This paper uses a number of recent examples of protectionist regulations to show that the enemies of regulatory protectionism are transparency and vigilance. Policymakers should be skeptical of regulatory proposals backed by the target domestic industry and of proposals that lack a plausible theory of market failure.

Read the whole thing here. And if you are in D.C. or near a computer next Thursday, watch our event to launch the paper.

There are indications that The Heritage Foundation may soon release an updated version of its 2007 report, “The Fiscal Cost of Low-Skill Immigrants to the U.S. Taxpayer,” by Robert Rector. That 2007 report’s flawed methodology produced a grossly exaggerated cost to federal taxpayers of legalizing unauthorized immigrants while undercounting or discounting their positive tax and economic contributions – greatly affecting the 2007 immigration reform debate.

Before releasing its updated report, I urge the Heritage Foundation to avoid the same serious errors that so undermined Mr. Rector’s 2007 study. Here is a list of some of its major errors:

1. Count individuals, not households.[1]  Heritage counts household use of government benefits, not individual immigrant use. Many unauthorized immigrants are married to U.S. citizens and have U.S. citizen children who live in the same households. Counting the fiscal costs of those native-born U.S. citizens massively overstates the fiscal costs of immigration. 
2. Employ dynamic scoring rather than static scoring. [2] Heritage’s report relies on static scoring rather than dynamic scoring, making the same mistake in evaluating the impact of increased immigration on welfare costs that the Joint Committee on Taxation makes when scoring the impact of tax cuts. Instead, Heritage should use dynamic scoring techniques to evaluate the fiscal effects of immigration reform. For example, Heritage should assume that wages and gross domestic product are altered considerably because of immigration policy reforms. In contrast to that economic reality, immigrant wages, gross domestic product, and government welfare programs are unrealistically static in Mr. Rector’s study. His study largely ignores the wage increases experienced by immigrants and their descendants over the course of their working lives, how those wages would alter after legalization, and the huge gains in education amongst the second and third generation of Hispanics.[3] Heritage is devoted to dynamic scoring in other policy areas – it should be so devoted to it here too.[4]
3. Factor in known indirect fiscal effects.[5]  The consensus among economists is that the economic gains from immigration vastly outweigh the costs.[6] In 2007, Mr. Rector incorrectly noted that, “there is little evidence to suggest that low-skill immigrants increase the incomes of non-immigrants.” Immigrants boost the supply and demand sides of the American economy, increasing productivity through labor and capital market complementarities with a net positive impact on American wages.[7] Heritage should adjust its estimates to take account of the positive spill-overs of low-skilled immigration.
4. Assume that wages for legalized immigrants would increase – dramatically.[8]  Heritage did not assume large wage gains for unauthorized immigrants after legalization.  In the wake of the 1986 Reagan amnesty, wages for legalized immigrants increased – sometimes by as much as 15 percent – because legal workers are more productive and can command higher wages than illegal workers.  Heritage should adopt similar wage increases to estimate the economic effects of immigration reform if it were to happen today.[9] 
5. Assume realistic levels of welfare use.[10]  Vast numbers of immigrants will return to their home countries before collecting entitlements,[11] the “chilling effect” whereby immigrants are afraid of using welfare reduces their usage of it, and immigrants use less welfare across the board.[12]  100 native-born adults eligible for Medicaid will cost the taxpayers about $98,000 a year.  A comparable number of poor non-citizen immigrants cost approximately $57,000 a year – a 42 percent lower bill than for natives.  For children, citizens cost $67,000 and non-citizens cost $22,700 a year – a whopping 66 percent lower cost.  Heritage should adjust its estimates of future immigrant welfare use downward. [13] 
6. Use latest legislation as benchmark.[14]  The current immigration plan, if rumors are to be believed, would stretch a path to citizenship out for 13 years.[15]  Most welfare benefits will be inaccessible until then, so Heritage’s report must take that timeline into account.
7. Remittances do not decrease long term consumption.[16]  Remittances sent home by immigrants will eventually return to the U.S. economy in the form of increased exports or capital account surpluses.  Heritage should recognize this aspect of economic reality rather than assuming remittances are merely a short-term economic cost.  
8. Factor in immigration enforcement costs.[17]  Heritage did not compare costs of legalization and guest workers to the costs of the policy status quo or increases in enforcement.  The government spends nearly $18,000 per illegal immigrant apprehension while the economic distortions caused by forcing millions of consumers, renters, and workers out of the U.S. would adversely affect income and profitability.[18]
9. Use transparent methodology.[19]  Heritage’s methodology should replicate that of the National Research Council’s authoritative and highly praised – even by immigration restrictionists – study entitled The New Americans.[20]  That study is the benchmark against which all efforts at generational fiscal accounting – including Heritage’s 2007 report – are measured.  If Heritage deviates from their methods, it should explain its methodology in a clear and accessible way that states why they altered practice.[21]
10. Don’t count citizen spouses.[22]  Heritage counted U.S.-born spouses of unauthorized immigrants as fiscal costs.  Counting the net immigrant fiscal impact means counting immigrants and perhaps their children at most,[23] not native-born spouses who would be on the entitlement roles regardless of whether they married an immigrant or a native-born American.
11. Suggest changes to the welfare state.  Heritage has elsewhere called low-skill migrant workers “a net positive and a leading cause of economic growth”[24] and accurately reported that “[t]he consensus of the vast majority of economists is that the broad economic gains from openness to trade and immigration far outweigh the isolated cases of economic loss.”[25]  Instead of arguing against low-skill immigration, Mr. Rector should instead suggest reforms that would, in the words of Cato’s late Chairman Bill Niskanen, “build a wall around the welfare state, not around the country.”[26]

It is imperative that the economic costs and benefits of increased immigration be studied using proper methods and the most recent data.  A previous report by the Heritage Foundation in 2006 entitled, “The Real Problem with Immigration … and the Real Solution,” by Tim Kane and Kirk Johnson roundly rejected the negative economic assessments of Mr. Rector’s 2007 study.[27]  Not only does Mr. Rector not speak for the broad conservative movement; it appears that economists who have worked for the Heritage Foundation also disagree with Mr. Rector’s conclusions. 

For decades, the Heritage Foundation has been an influential intellectual force in conservative circles.  Its economic analyses have been predicated on consideration of the dynamic effects of policy changes as opposed to static effects.  Unfortunately, Mr. Rector’s past work has not been consistent in this regard, employing the same static scoring conservatives have traditionally distrusted in other policy areas. 

Many conservatives rely on the Heritage Foundation for accurate research about immigration’s impact on the economy.  Before releasing another study assessing the net fiscal impacts of immigration reform, Heritage should correct the errors outlined above to guarantee the most accurate information on this important topic is available.

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