Topic: Trade and Immigration

University of Denver Panel Recommends You Have a National ID

If you have a job, a panel convened by the University of Denver thinks you should have a national ID card.

DU’s “Report of the Strategic Issues Panel on Immigration” says:

The idea of a national card for identifying citizens and non-citizens has become the third rail of immigration politics. But in truth, without a means of positive identification, it makes very little difference what immigration policies are adopted because they can’t be effectively enforced. A means of positive identification is essential to prevent the employment of illegal immigrants.

Only the panel’s narrow framing leads to this conclusion.

Restrictive immigration policies may require a national ID and federal background check system because such policies are so at odds with employers’ and workers’ interests. The federal government will have to continually investigate workers and employers to maintain them.

But policies that align immigration rates with our country’s demand for new workers would foster the rule of law naturally—without a national ID, worker surveillance, and an overweening federal government.

Much hand-waving animates the report. It imagines a card system that is “extremely difficult or impossible to counterfeit.” But that’s a product of how much value your card system controls—the more value, the more effort goes into forging it—and access to employment in the U.S. is worth a lot. The report says nothing about fraud in the card issuance process.

Nor does it calculate the expense to our nation’s seven million employers—many of them small businesses, families, and individuals—for getting card readers. Their proposal to hold employers harmless is an embossed invitation to fraud on the system—unless those inexpensive card readers are also fingerprint or iris scanners. If the system is going to work, someone legally responsible has to verify that the card belongs to the person presenting it. And if you’re going to use biometric scanners, there is a lot of work yet to be done to control error rates.

Of privacy concerns, the panel says it listened to “experts and advocates on all sides.” But the advisors listed in the report do not include any privacy expert or civil liberties advocate. They do include an advocate for restrictionist immigration policies, a police chief, a former U.S. attorney, a federal Immigration and Customs Enforcement official, a Colorado state homeland security official, a federal Department of Homeland Security official, a sheriff, the Colorado Attorney General, and a CIA officer. It is unlikely that the one “immigrant rights” advocate addressed the privacy issues for U.S. citizens, much less the technical and data security problems.

It’s not new for people focusing on one issue to think that a national ID is their solution. In fact, it’s typical for people to think that sprinkling technology over economic and social problems can solve them.

A Trade Proposal Unworthy of an Economist

Just when you have a pretty good sense of who is dishing protectionist nonsense and from where, along comes Robert Aliber, who – according to the byline of his commentary in yesterday’s Financial Times – is professor emeritus of international economics and finance at the University of Chicago.  Et tu, Chicago?

Aliber considers the US-China trade imbalance unsustainable and, because the Chinese government continues to prevent the value of its currency from rising sufficiently, proposes that the United States impose an across-the-board duty of 10 percent on all Chinese imports, which (after 6 months) would ratchet up 1 percentage point per month every month until the Chinese trade surplus with the United States declines to $5 billion per month. 

We’ve heard this tune before – but from politicians who are presumably far less adept at economics than a University of Chicago economics professor ought to be.  Yet, even Chuck Schumer ultimately acknowledged the banality of his (and Lindsey Graham’s) thrice-introduced legislation to impose a 27.5 percent tariff on Chinese imports as a proxy and incentive for renminbi appreciation.

If Aliber limited his argument to the assertions that the bilateral imbalance is unsustainable and that the Chinese government should allow the value of the renminbi to be determined by supply and demand, I’d have much less to quibble with.  I’d still be plenty skeptical that bilateral trade accounting tells us anything meaningful in this age of cross-border investment and transnational production and supply chains.  I’d still break from the implication that balanced trade should be an objective of policy or that it is more important than economic growth. And I’d still remain unconvinced that an increase in the value of the renminbi alone would have much of an impact on bilateral trade flows.  But I’d agree that a market-determined exchange rate would increase the likelihood that investment, consumption, and production decisions would better reflect underlying conditions in labor, financial, and goods markets, and in that regard would be a more useful guidepost for informed decisionmaking.

But Aliber’s proposal – and the numerous fallacies upon which it is predicated – goes well beyond that point, and appears to be the product of something like acute tunnel vision.  He is so fixated on the bilateral trade account that nothing else – including the impact of his proposal on the economy broadly – commands his attention. 

Aliber utters all of the classic fallacies about the insidious impact of China’s currency on U.S. manufacturing; the leverage and sway China allegedly holds over U.S. policymakers, as our banker of last resort; and, how China caused our trade deficit by purchasing U.S. securities.  I disagree with all of those assertions, vehemently, and have explained why in various places, but I want to focus presently on his proposal, which is one of the worst ideas in circulation.

Consider this passage, which Aliber apparently considers evidence of the cleverness of his plan (but really exposes its inanity):

Because many Chinese exports contain large amouts of embedded imports, the 10 per cent import tariff in effect is a tax of more than 30 per cent on Chinese value added. With electronics and other high-tech exports, where the import content may be 70 or 80 percent of their value, the  10 per cent tariff might be equivalent to a tax of 60 or 80 per cent on Chinese content.

Neat.  But isn’t the fact that Chinese exports contain so much import content enough to soundly reject Aliber’s plan in the first place?  Has he forgotten that we don’t import dangling Chinese value added?  What we import are products, some of which comprise 20 percent Chinese value added, some 80 percent, and according to the most recent research, an average of about 50 percent Chinese value added.  And what does that mean?

It means that on average 50 percent of the value of components, raw materials, and labor embedded in the typical cargo container from China unloaded in Long Beach, California is other countries’ value added.  It means that slapping a duty on imports from China is the same as restricting imports from countries indiscriminately (I know, non-discrimination is what the GATT/WTO rules are all about, but you get my point). It means restricting our own exports to China, which are embedded in the “high-tech” products that we import from China. (High tech is in quotes because the category consists mostly of computers and electronics, like cell phones and iPods, but protectionists like to exaggerate the security angle of our alleged trade follies by pointing to a bilateral deficit in “high tech,” even though Chinese value-added in those goods is well below average, and our imports of them support high-paying U.S. jobs). 

Having obviously not read my new paper, Aliber still sees global commerce as a competition between “Us” and “Them.”  He writes: “It should not take long for the Chinese to learn that they are much more dependent on access to the US market than Americans are dependent on Chinese goods,” and goes on to say that Americans can make those product here or buy them elsewhere.  Of course we could get them elsewhere, but the fact that we prefer to get them from China means that there would be costs associated with switching sources. 

Aliber is a fixed-pie-kinda-guy who fails to recognize the enormous wealth that has been generated by the elimination of political, trade, communications, and transportation barriers, and the highly stratified division of labor this barrier erosion unleashed.  He fails to recognize that Chinese labor and American labor are more often complementary than competing, and that the factory floor has broken through its walls and now spans oceans and borders. 

Imposing 10 percent duties on products invented and designed in the United States, consisting of components produced in Japan, Singapore, Thailand, and the United States,  consuming Australian minerals in the production process and Chinese labor in the assembly process is akin to taking a sledge hammer to a random station along a traditional production-assembly line.  It impedes the production process and raises the cost of bringing products to consumers, inflicting damage that is felt at all nodes in the design/production/assembly/supply chain, including those in the United States.

It means making it more difficult to support higher value-added U.S. manufacturing and service activities because with uncertain or compromised access to lower cost component production and assembly operations in China, it will be more difficult for ideas hatched in American labs to come to fruition in the form of the next gadget or convenience or life-saving device.

China’s position as the final point of assembly in so many different supply chains, as evidenced by the fact that 50 percent of the value of its exports to the United States consists of Chinese material, labor, and overhead, means that the impact of currency appreciation on the bilateral trade account is uncertain.  A stronger renminbi vis-a-vis the dollar means that Americans should pay more for imports from China, but a stronger renminbi also means that Chinese-based producers/assemblers will pay less for imported raw materials and components, lowering their cost of production/assembly.  That cost savings should enable Chinese exporters to lower their prices to American consumers, possibly compensating entirely for the higher renminbi-dollar exchange rate.

Of course, there are plenty of other reasons to eschew Aliber’s proposal, not the least of which is the fact that it certainly would be found WTO-illegal and would invite discrimination against U.S. exporters.  Considering that increased U.S. exports – and not just reduced imports – can help reduce the bilateral deficit, it is curious that Aliber would propose a remedy that would likely curtail U.S. exports.  It would also raise costs throughout the supply chain directly, and by introducing enormous uncertainty into the trading system.

Now that he’s seen the light, maybe Chuck Schumer should give Aliber a call.

Schumer Fouls Out

Chuck Schumer is perhaps my favorite U.S. Senator because of his endless capacity to make me laugh.  He often reminds me of Inspector Clouseau, the earnest but bumbling detective from the Pink Panther movies.

Through an excellent post by Scott Lincome today, I learned not only that official NBA jerseys (those worn by the players) are made for Adidas in upstate New York, but that Senator Schumer is attempting to thwart the company’s decision to move production to Thailand. 

I share Scott’s assessment of the absurdity of Schumer’s efforts, but more importantly, I wanted to share this humorous footage of Schumer’s awkward nativist appeal that basketball is an American-centric game….conducted in front of German-born NBA Star Dirk Nowitski’s jersey. 

Classic!

Is Trade Policy Obsolete?

That is one of the conclusions in my new paper, “Made on Earth: How Global Economic Integration Renders Trade Policy Obsolete.”

For hundreds of years, trade policy has been premised on the assumptions that exports are good, imports are bad, and the interests of domestic producers are tantamount to the “national interest.” Though that mercantilist worldview has never been accurate, its persistence as a pillar of trade policy into the 21st century is especially confounding given the emergence and proliferation of disaggregated production processes, transnational supply chains, and cross-border investment. Those trends have blurred any meaningful distinctions between “our” producers and “their” producers and speak to a long chain of interdependent economic interests between product conception and consumption.

Still, trade policy places the interests of domestic producers above all else even though the definition of a domestic producer is elusive and even though actions on behalf of producers often harm interests along the product continuum, which include engineers, designers, financiers, processors, assemblers, marketers, shippers, retailers, consumers, and others.

In 2008, foreign nameplate automobile producers, employing American workers, paying American taxes, and supporting American businesses, communities, and charities, accounted for almost half of all U.S. light vehicle production. The largest “U.S.” steel producer, Arcelor-Mittal, is a majority-Indian-owned company with headquarters in Luxembourg and Hong Kong. The largest “German” producer, Thyssen-Krupp, is completing a $3.7 billion green-field investment in steel production facilities in Alabama, which will create an estimated 2,700 jobs in that state.

So, who are “we”? And who are “they”?

Are these foreign-named or –headquartered companies not “our” producers because some of the profits they earn are repatriated or invested in operations outside the United States? If so, then shouldn’t we consider U.S. Steel Corporation, which earned 25 percent of its revenue last year on steel produced in Slovakia and Serbia, and General Motors, which has had success producing and selling cars in China, to be “their” producers? Why should U.S. Steel, General Motors, and the unions that organize workers at those companies dictate the parameters of U.S. trade policy, while Toyota, Thyssen and their non-union workers have no input? Why should trade policy reflect a bias in favor of producers—or worse, particular producers—at all? That bias hurts other interests—both foreign-based and domestic—in the supply chain.

Global commerce isn’t a competition between “us” and “them.” It is instead a competition between entities that defy national identification because of cross-border investment or because the final good or service comprises value added from many different countries. This reality demands openness in both directions, which flies in the face of conventional trade policy wisdom, which seeks to maximize access for domestic producers abroad while minimizing access for foreign producers at home.

It is only for simplicity’s sake that a container full of iPods shipped from China and unloaded in Seattle registers as imports from China. But the fact is that only a few dollars of the $150 cost to produce an iPod is Chinese value-added. The rest is mostly value attributable to Japanese, Korean, Singaporean, Taiwanese, and American components and labor. Then iPods retail for about $300 and most of the mark-up accrues to Apple, which uses the profits to support innovation and higher paying jobs in the United States.

From a trade policy perspective, each iPod imported from China adds $150 to our bilateral deficit in “high tech” goods. It is regarded as a problem to solve. The temptation is to restrict.

But from a commercial perspective, each imported iPod supports U.S. economic activity up the value chain. Without access to lower-cost labor abroad—if rudimentary component manufacturing and assembly operations were required to take place in the United States—ideas hatched in American labs would be far less likely to make it beyond the white board. Much higher costs would make it far more difficult to create these ubiquitous devices that have, in turn, spawned new ideas and industries.

Essentially, the factory floor has broken through its walls and today spans borders and oceans, making Chinese and American labor complementary in this and many other industries. Yet, despite all of this integration, despite the reliance of producers in the United States and abroad on imported raw materials, components, and capital equipment, trade policy still pretends that access to the domestic market is a favor to grant or a privilege to revoke. Trade policy is officially ignorant of commercial reality.

Openness to trade in both directions is an imperative in the 21st century. Policies that do not try to channel incentives for the benefit of specific groups but rather provide the greatest opportunities for citizens to participate most effectively in our increasingly integrated global economy are the ones that will maximize economic growth and national welfare. People in other countries should be thought of more as customers, suppliers, and potential collaborators instead of competitive threats.

In the 21st century, instead of serving the exclusive interests of domestic producers, trade policy should be about welcoming investment and attracting and cultivating the human capital necessary to make the United States the location of choice for the world’s highest value economic activities.

Slavery and the Tariff: Exceptions to the American Spirit

We have much to be thankful for as Americans. We live in a country founded on the principles of liberty and limited government, and the freedom and prosperity we still enjoy today flow from those foundational principles.

I was reminded of our great heritage recently as I was re-reading Frederic Bastiat’s classic pamphlet, “The Law.” He wrote his impassioned defense of individual freedom and limited government in 1850, at a time when socialist ideas were on the march in his native France. Bastiat observed that, as government grew more powerful on the Continent, the struggle for political power became more bitter, stoking hatred, discord and social disorder.

In contrast, Bastiat beckoned his readers to

Look at the United States. There is no country in the world where the law confines itself more rigorously to its proper role, which is to guarantee everyone’s liberty and property. Accordingly, there is no country in which the social order seems to rest on a more stable foundation.

Being a lover of liberty, Bastiat also saw two great exceptions to “the general spirit” of our republic:

Nevertheless, even in the United States there are two questions, and only two, which, since it was founded, have several times put the political order in danger. And what are these two questions? The question of slavery and that of tariffs, that is, precisely the only two questions concerning which, contrary to the general spirit of this republic, the law has assumed a spoliative [despoiling or plundering] character. Slavery is a violation, sanctioned by law, of the rights of the person. Protective tariffs are a violation, perpetuated by the law, of the right to property …

Bastiat went on to warn, prophetically, that these two “scourges” posed a grave threat to the social order:

certainly it is remarkable that in the midst of so many other disputes this twofold legal scourge, a sad heritage of the Old World, should be the only one that can and perhaps will lead to the dissolution of the Union.

And then he wondered how much greater the coming conflict would be in Europe, where the law had become far more perverted. (He truly could not have imagined what was to come a few decades later.):

It is in fact impossible to imagine a graver situation in a society than one in which the law becomes on instrument of injustice. And if this fact gives rise to such dreadful consequences in the United Sates, where it is only exceptional, what must be its consequences in Europe, where it is a principle and a system?

Among today’s advocates of higher trade barriers, Pat Buchanan is especially fond of hearkening back to our “heritage” of high tariffs throughout the 19th century. Implied in his argument is that true patriots who celebrate the founding principles of our country should embrace higher duties on Chinese tires and Mexican tomatoes. But Frederic Bastiat, the Frenchman, understood far more accurately the real spirit of our Republic.

Chile Shows the Way on Trade

The longest and least uplifting chapter in my new Cato book Mad about Trade is Chapter 9, where I describe all the remaining duties and restrictions our government imposes on our freedom to trade with people in other countries. We are certainly not “the most open market in the world,” as a member of President Obama’s Cabinet asserted in China last week. In fact, by one measure we rank a lowly 28th.

After mentioning this fact in speeches lately, I’ve been asked more than once to name the markets that ARE the most open in the world. Here, according to the latest 2009 Economic Freedom of the World Report, are the top ten most open economies:

1. Hong Kong
2. Singapore
3. Chile
4. Ireland
5. Panama
6. Netherlands
7. United Arab Emirates
8. Slovak Republic
9. Hungary
10. Luxembourg

(The list is a bit different from the one I cite in the book, which was based on the 2008 EFW report.)

One of the most remarkable members on the list is Chile. Decades ago, it was one of the most closed, protectionist economies in Latin America. Today it is the most open. In fact, when you consider that Hong Kong is a special administrative region of China, and Singapore is a tiny city state, Chile is the most open full-sized country in the world. (I hope our free-trade friends in Singapore won’t take offense at that!)

It is no coincidence that Chile has become the economic star of Latin America.

Will our own president and Congress learn from Chile’s example?

Higher Immigration, Lower Crime

Yes, you read that right. The story is more complicated than a short headline can covey, but that is the gist of an article of mine in the just-out December issue of Commentary magazine. [Subscription needed.]

The past 15 years have witnessed two undeniable trends: dramatically rising levels of immigration, both low-skilled and high-skilled, and an equally dramatic plunge in crime rates nationally. I don’t argue that increased immigration in the past 15 years is the primary cause of falling crime rates, but I do argue that the evidence punches a gaping hole in the Lou-Dobbs contention that immigrants have clogged our prisons and unleashed a new wave of crime.

In the Commentary article, and in an earlier Cato Free Trade Bulletin, I cite Census data that show that incarceration rates for immigrants are significantly lower than for native-born Americans. The contrast is especially sharp between immigrants without a high-school diploma and their native-born counterparts. Along with their lower propensity to commit crimes, immigrants are also more likely to be employed than similarly educated Americans.

Or as the subhead of the magazine article nicely puts it, “Today’s ‘underclass’ of newcomers seeks a day’s work, not a drug deal.”