Topic: Trade and Immigration

“Leveling the Playing Field Act” Hurts the Broader Economy

The Senate leadership is working hard to find the votes needed to support the trade agenda. Key to progress is passage of trade promotion authority (TPA), also known as “fast track”, which would commit Congress to vote up or down on a trade agreement rather than offering amendments. Opposition to trade liberalization has been a comfortable policy stance for senators beholden to organized labor and to the anti-growth left. Opponents on the right profess concern about the possible loss of national sovereignty and generally are reluctant to give President Obama greater authority of any kind.

Political realities sometimes require offering sweeteners to make a difficult vote more palatable. Trade adjustment assistance (TAA) has been legislated in the past to help workers and firms that are having difficulty dealing with competition from imports. Even though the economic and equity arguments in favor of trade-related unemployment benefits are relatively weak (Why treat people who are unemployed due to international competition differently than those who lose their jobs due to changes in technology, for instance?), the political rationale for TAA at times has been compelling. It’s not surprising that both the House and Senate have been searching for a way to pass both TPA and TAA. The president has expressed his preference to sign them at the same time.

With the outcome of the Senate vote on TPA not yet clear, it’s not surprising that there has been a search for additional sweeteners. The steel industry has pushed to include Sen. Sherrod Brown’s (D-OH) poorly named “Leveling the Playing Field Act” as part of the TAA package.  (My op-ed on the Act is available here.) Given the need to woo as many votes as possible, the Senate leadership has agreed to this request.

It’s not my intention to criticize pro-trade senators who are doing their best to pass TPA. Life can be complex, and political life all the more so. However, it may be worthwhile for free-trade proponents to think carefully about the implications of adding Sen. Brown’s measure as part of this effort to provide the president with negotiating authority.

Here’s the rub: the protectionist provisions of the “Leveling the Playing Field Act” would take effect as soon as the president signs the TAA legislation, but potential trade liberalization (if any ever gets enacted) would not be realized until sometime well in the future. The Trans-Pacific Partnership (TPP) – the first agreement that might be concluded once the president has negotiating authority – would not begin to be implemented until 2017 at the earliest, perhaps much later. Although details of the agreement are not yet public, restrictions on politically sensitive imports are likely to be phased in over perhaps as many as 20 years. Thus, the United States would be making its antidumping/countervailing (AD/CVD) regime more protectionist immediately in exchange for future liberalization that may or may not ever occur.

If possible, Senate leaders should remove the Leveling the Playing Field Act from TAA and let adjustment assistance be considered on its own merits. If that isn’t feasible, the effective date of Sen. Brown’s legislation should be changed so that it does not become operational until the eventual implementing legislation for TPP also becomes effective. That way there will at least be some growth-promoting liberalization to help offset the reduced economic welfare caused by the Leveling the Playing Field Act.

Fear of Chinese Economic Hegemony

In the context of discussing the Trans Pacific Partnership (TPP), and the U.S. role in the Asia-Pacific region, Robert Kagan of Brookings raises the specter of competition with China and says this:

Economically, China would like to turn Asia into a region of Chinese hegemony, where every key trade relationship is with Beijing.

Along the same lines, law professor Noah Feldman says:

China is using its close economic relationship with its neighbors as leverage to build its geopolitical position. Its ultimate goal is to displace the U.S. as the regional hegemon.

I’m puzzled by statements like these.  What do Kagan and Feldman think Chinese economic “hegemony” in Asia would look like?  What exactly do they fear?

I don’t know the answer to what’s going on in their minds, but I have tried to look at what China is actually doing.  One thing it is doing is signing trade agreements with other countries in the region.  So are these trade agreements part of a scheme to dominate its neighbors?  Well, the text of the agreement China signed with Australia was just released, so let’s take a look at some of what it says.  As described by the Australian government, China would liberalize a lot of its trade with Australia, including the following:

  • Health and aged care services: China will permit Australian service suppliers to establish profit-making aged care institutions throughout China, and wholly Australian-owned hospitals in certain provinces. This will greatly expand the Australian private health sector’s offering of medical services through East Asia.

So Australia is touting the agreement as a way to build hospitals in China, and more generally to sell products there. (Australia also notes that 92.9 per cent of China’s imports of resources, energy, and manufactured products from Australia will enter duty free right away, with most remaining tariffs removed within four years.) This makes the whole idea of China’s “economic hegemony” sounds a lot less scary. Rather than setting up a system to compete with the United States, China seems to be participating in the same rules-based, liberalizing trading system that the United States and just about everyone else is in.

I wrote more about this issue in a recent Free Trade Bulletin.

The Mercantilists Are Marching onto War

Senator Lindsey Graham likes to march onto war, and off into economic swamps, as well. Recently, Senator Graham mounted a counter attack on fellow Republicans who opposed the reauthorization of the Export-Import Bank. Indeed, the Senator said “…I’m not going to unilaterally disarm.” Yes, it is clear that the senator has mounted a surge.

The Export-Import Bank (Ex-Im) provides financing and loan guarantees at below-market rates to foreign purchasers looking to buy products from American exporters. For example, if Emirates Air wants to buy planes from Boeing, Ex-Im can provide a loan guarantee, reducing the interest rate Emirates will pay, and thus incentivizing Emirates to buy from Boeing rather than Airbus.

Ex-Im’s supporters claim that these subsidies create jobs and finance domestic economic growth. But, they fail to consider the ensuing downstream effects. As Cato scholar Daniel Ikenson makes clear, every dollar Ex-Im provides to subsidize foreign purchasers of U.S.-produced products discriminates against U.S. consumers of the same products. For example, when Emirates receives a subsidy for planes because it is a foreign company, Emirates gets a leg up on Delta.

An edifying account of how this system works was presented many years ago by the late Prof. Yale Brozen in his foreword to Prof. Leland Yeager’s classic Proposals for Government Credit Allocation (1977):

Whom you know and with whom you have influence becomes more important in obtaining capital than how productively you can use it. Capital is diverted from more productive uses to politically determined applications […]. The national income pie shrinks as an increasing proportion of our capital is allocated by the political process – not only because of its diversion from more productive uses but also because more and more of our resources are devoted to winning political influence, as that becomes the road to access to available capital and subsidies.

For the record, Ex-Im isn’t small potatoes. In FY 2015, Ex-Im’s loans and loan guarantees will total $30.9 billion, or 6.7% of all non-housing federal credit programs. The Ex-Im’s total cumulative loans and guarantees outstanding (read: credit exposure) currently sits at $112 billion. Because the loans are granted at below-market rates, the Ex-Im does not receive fair compensation for the $112 billion of risk it takes on.

Instead of adopting a policy that makes a few U.S. exporters winners at the expense of many losers, there is a way to make all U.S. firms more competitive: just lower the grueling corporate tax rate. Yes, according to the Organization for Economic Co-operation and Development (OECD), the U.S. has the highest corporate tax rate of the 34 OECD member countries.

There is clearly a better way to unburden U.S. corporations and make them more competitive internationally than to sponsor a “bank” in which politicians and bureaucrats, not capital markets, choose winners and losers. It is time to move away from a mercantilist view of trade towards one that puts the market back in control.

Trade Promotion Authority and the TiSA’s Immigration “Smoking Gun”

A widespread criticism of Trade Promotion Authority (TPA), which remains in limbo after a surprising legislative mess last Friday, has come from conservative skeptics who believe that TPA will permit President Obama to change US immigration laws unilaterally.  Originally a fringe argument, it gained momentum earlier this month when WikiLeaks published the confidential draft negotiating texts on the Trade in Services Agreement (TiSA), which is currently under negotiation.  Among those texts was an Annex on “Movement of Natural Persons” – one of the standard “modes” of supply (Mode 4) negotiated in trade agreements that cover services.  The leaked annex, TPA critics claimed, was “smoking gun” proof that President Obama was, in fact, secretly negotiating with foreign governments to liberalize US immigration restrictions without congressional input, and that TPA would grant him the power to lift such restrictions in the very near future.  The facts surrounding TPA, TiSA and global services trade, however, effectively rebut such claims.

BACKGROUND

Before getting to these facts, it’s important to understand just what TiSA is.  The TiSA is a plurilateral free trade agreement on services being negotiated among 27 participants (including the US and EU).  TiSA began in 2012 but only picked up momentum over the last year or so, as the World Trade Organization’s (WTO) Doha Round, which also included services, faded.

If signed and implemented, TiSA would likely represent a major economic win for the United States, given that (i) the vast majority of the US economy is services; (ii) the United States has a large comparative advantage in global services; and (iii) unlike goods, global trade in services remains relatively restricted.  TiSA’s basic goals include that each participant offer to all other parties, at a minimum, the best commitments that it has made in preferential FTAs, and, importantly, the eventual “multilateralization” of the agreement into the WTO such that it is open for accession by all WTO Members.  As such, the architecture and principles of the TiSA reflect those of WTO’s General Agreement on Trade in Services (GATS), which was finalized in 1995 and covers all WTO Members including the United States.  Any final, multilateralized TiSA deal would be a very good thing for those who support free markets and, of course, the US global economies.

Despite these benefits, the leaked TiSA has caused an uproar among skeptical (and in many cases, anti-immigration) conservatives.  (It’s also upset anti-trade liberals who see the deal as “global deregulation,” but that’s a canard for another time.)  As mentioned, however, there are a lot facts that undermine the argument that the TiSA represents an immigration “smoking gun.”

Today’s Trade Vote Is Getting A Partial Do-Over Next Week—Here’s Why

A very unexpected outcome during a series of votes on trade policy in the House of Representatives has managed to confuse pretty much everyone today. 

The most important and controversial bill in the package was Trade Promotion Authority, which narrowly passed the House 219-211 with 28 Democrats in favor and 54 Republicans opposed.  Trade Promotion Authority (TPA) will enable the President to conclude the Trans-Pacific Partnership (and other) trade negotiations and submit a final agreement to Congress for an up-or-down vote. 

But in order for TPA to go to the President’s desk, the House must also pass Trade Adjustment Assistance.  That’s because TAA was included together with TPA in the bill the Senate passed last month. 

Normally, Democrats support TAA, which is an entitlement program for people whose jobs are displaced due to import competition.  Many Republicans oppose TAA as a useless, big-government entitlement program.  House leadership chose to hold two separate votes on TAA and TPA to prevent Republicans from voting no on the package out of opposition to TAA. 

That strategy may have backfired.  Because advancing TPA required passage of TAA, Democrats were able to scuttle the whole thing by voting no on TAA.

But it’s not over yet.  Republican leadership is planning a do-over on the TAA vote in order to salvage TPA.  So there’s likely going to be another vote on TAA early next week.  In the meantime, Republican leadership and President Obama will be madly lobbying their respective party members to muster enough support.

For practical purposes, this result means that Congress has kicked the can down the road for a few more days.  Today’s vote was definitely not a win for the President or GOP leadership, but they haven’t been defeated either.  They can still pull out a victory if they can win enough votes next week to pass TAA—a bill that was defeated today by a solid 126-302.

What Explains the Flow of Unlawful Immigration?

The flow of unauthorized immigrants to the United States has collapsed.  The apprehension of illegal immigrants by Customs and Border Protection (CBP), the best proxy measurement of the flow of such people, along the Southwest Border is way down (see below). 

All Apprehensions on Southwest Border

                       

Source: Customs and Border Protection.

What explains this?  A number of factors are at play.  Economic conditions in the United States, economic or other conditions in other countries, and immigration enforcement all explain part of the decrease in unauthorized immigration over the years.    

Mark Krikorian of the Center for Immigration Studies (CIS) gives most of the credit to beefed up immigration enforcement along the border.  Krikorian seconds a quote by Marc Rosenblum, deputy director of the Migration Policy Institute, who says:

Every month or quarter that the economy continues to improve and unauthorized immigration doesn’t pick up supports the theory that border security is a bigger factor, and it’s less about the economy and we have moved into a new era.

But if immigration enforcement is the main reason why unauthorized immigration collapsed, why are the numbers of unlawful immigrants from countries Other than Mexico (OTMs) increasing?  CBP apprehensions don’t discriminate based on country of origin because they can’t tell where the immigrants are from until they’re apprehended.

Egg Shortage? Let’s Open Up the U.S. Market

An outbreak of bird flu has prompted the untimely demise of 35 million hens, seriously disrupting the supply of eggs in the United States.  Now we get to watch the relationship between supply disruption and price changes play out, which is fun (if you’re into that sort of thing).  There have already been reports of rationing by retailers and of significant price hikes

With eggs costing up to 3 times their normal price, a lot of retailers and restaurants are “rationing” eggs.  The goal of the rationing is most likely to avoid raising prices.  For example, Whataburger chose to stop offering late night breakfast rather than raise prices. And some grocery stores are limiting the number of eggs shoppers can purchase in an effort to keep prices low for regular customers without attracting hordes of commercial users.

High prices are also pushing consumers toward premium egg products.  The Guardian reports:

The higher prices have driven some consumers to buy specialty eggs including cage-free and organic, which typically cost more but haven’t seen a similar increase because specialty-egg chicken houses haven’t been hit as hard, Urner Barry egg industry analyst Brian Moscogiuri said. He noted that specialty-egg prices are closer to regular eggs, leading some consumers to justify the purchase.

With a large portion of America’s egg production capacity suddenly wiped out, the only way to get prices back down quickly is to find new sources of supply.  Thankfully, the U.S. Department of Agriculture has a way to do that.  According to the Associated Press:

The bird flu outbreak has caused the U.S. Department of Agriculture to approve importing egg products from the Netherlands to be used for baking and in processed foods.

The USDA said last week the Netherlands should begin shipping egg products within days.

It’s the first time in more than a decade the U.S. has bought eggs from a European nation.

In recent years, only Canada held certification to sell liquid, dried and frozen egg products to U.S. companies.

Allowing more imports is a great idea.  Local supply shocks like the bird flu outbreak have much less impact on prices and availability when there is a diverse array of sources available.  There are still costs associated with shifting supply chains, but basic commodity prices are much more stable and less prone to shocks in a global market.

It’s good that the USDA has responded rationally to alleviate this problem by permitting egg imports from the Netherlands, but the move raises an important question: Why was it not okay to import eggs from the Netherlands before?  Were Dutch eggs unsafe?  Are they safer now?

The USDA is supposed to allow egg imports from countries with equivalent safety standards.  It seems pretty clear that the way the system is currently being managed results in an overly protected U.S. egg market.  It’s more than a little silly to think that Canada and the United States are the only places with sufficient regulatory oversight to ensure the production of safe egg products.

In 2013, Sallie James and I wrote a paper explaining how regulatory protectionism is often disguised as safety standards.  If U.S. authorities are willing to allow certification to prevent price surges, have they been denying certification based on price control considerations?  That would be an abuse of sanitary and phytosanitary measures for protectionist purposes in violation of international trade rules. 

While it’s great that the USDA is working to find new sources of supply now, the bird flu outbreak wouldn’t have caused as much disruption for consumers if the U.S. market had been more open to begin with.