Topic: Trade and Immigration

High Noon for U.S. Trade Policy

This morning, the U.S. International Trade Commission issued an affirmative determination in a so-called “Section 421” or “China-Specific Safeguard” case that imports of consumer tires from China are causing market disruption in the United States. That may sound like just another day in Washington, but the decision could very well be the catalyst for the most consequential event in trade policy since the Bush steel tariffs of 2002. It will certainly force a defining moment for a president who has preferred obfuscation to clear direction on trade policy.

Under the statute (which became U.S. law as a condition of China’s accession to the World Trade Organization in 2001), the ITC has 20 days to provide remedial recommendations to the president and the U.S. trade representative. Those recommendations are likely to include quotas, tariffs, or some combination that will ultimately curtail the supply and raise the prices of all tires in the United States – not just those imported from China. However, the president has the discretion to deny import “relief” if he determines that such restrictions would have an adverse impact on the U.S. economy that is clearly greater than its benefits, or if he determines that such relief would cause serious harm to the national security of the United States.

I will forego my own explanation as to why restrictions would have an adverse impact that is clearly greater than its benefits, and instead give you the statement of the U.S. Tire Industry Association, which represents “all segments of the tire industry, including those that manufacture, repair, recycle, sell, service or use new or retreaded tires, and also those suppliers or individuals who furnish equipment, material or services to the industry.” Suffice it to say that no producers of tires in the United States supported this petition, so it is not a matter of U.S. tire producers against Chinese tire producers. It is really nothing more than a matter of a U.S. union objecting to management’s decision to produce its lowest grade (lowest quality, lowest priced, lowest profit margin) tires abroad. Yet the consequences of trade restraints could affect interests across and throughout the economy, particularly if China responds in kind.

During the Bush administration, there were six Section 421 cases filed by domestic parties, four of which were found by the ITC to warrant import relief. In each of those four cases, President Bush exercised his discretion to deny relief. The tires case is a test case for President Obama. Will 421 fly under this president? Or will it remain the dead letter that petitioners considered it to be under President Bush?

The stakes are much higher for Obama than they were for Bush because the unions (the United Steel Workers union is the petitioner in the tires case) and the Chinese both feel more emboldened in their positions now. Bush didn’t win the near-unanimous support of organized labor in his elections, nor did he promise to get tough on Chinese trade practices, as Obama did.

Instead, Bush set the precedent of denying relief. And he did it four times. So, the Chinese see this firmly as a matter of presidential discretion – unlike antidumping or countervailing duties, which run on statutory auto pilot without requiring the president’s attention or consent. In other words, although there are over 50 outstanding U.S. antidumping and countervailing duty orders against various Chinese products, none of them is considered to reflect the direct wishes of the U.S. president, and thus don’t rise to the level of a potentially explosive trade dispute. But trade restraints under the 421 will no doubt be considered by the Chinese to be a directive of the U.S. president, thus the offense taken and the consequences wrought could be profound.

The good news is that President Obama will finally be forced to take a stand – to match his words and deeds. After a campaign in which trade was disparaged, President Obama’s first 100 days were characterized by a conciliatory tone and some enlightened actions. He told the Mexican president and the Canadian prime minister that he no longer wanted to reopen NAFTA. He spoke out against the most protectionist provisions of the Buy American language in the so-called stimulus bill. He repudiated protectionism and pledged to avoid new protectionist measures at the G-20 and before other international gatherings. His Treasury Department declined to label China a currency manipulator. And his trade representative set about articulating a pro-trade agenda, including support for a push to pass pending bilateral trade agreements and concluding the Doha Round.

But there’s been very little follow through and trade partners are beginning to doubt his sincerity. Efforts to schedule votes on pending trade agreements have been shunted aside as too controversial to happen before health care reform legislation. In the meantime, imports are being turned away from U.S. procurement projects on account of some mindless Buy American caveats and overzealous interpretation of other Buy American rules by project administrators, which is inciting copycat rules in Canada and China.

The time has come for the president to stop wavering and to take decisive actions on trade policy. Of course, he will have until September 17 to render his decision about whether to grant or deny relief in the tires case. Between now and then he should conclude that trade restrictions are not the appropriate course – that among other problems, they will also undermine his economic and diplomatic objectives. And while he’s denying relief, he should take some advice from Scott Lincicome and me to speak the truth about trade to those constituencies who will feel betrayed. Directly and honestly making the case for trade to those who doubt is more durable than rationalizing each pro-trade decision, which has been the norm for too long in Washington. Besides, the polls show that Americans have already turned the corner and are moving away from their misguided flirtation with protectionism. That may help inspire an uncommitted president to take the baton.

A Nation of Lawlessness

The matter of Chrysler’s bankruptcy seems to have rendered quaint our system of checks and balances. President Obama is breaking the law and the other two branches are letting him get away with it. One can probably understand how a smitten public might casually allow this president a stipend of unconstitutional acts, since he doesn’t scowl like Nixon or stutter like Bush. But, even a popular president (in particular, a popular president) must be held in check by the legislative and judicial branches.

And that’s not happening.

On Tuesday at 4:00 pm, Justice Ruth Bader Ginsburg “stayed pending further order” the bankruptcy-related transactions of Chrysler, giving hope the Supreme Court might hear the appeal filed on behalf of certain Indiana state pension and construction funds, who claim that their property rights as secured creditors were violated by the forced sale and that the use of Troubled Asset Relief Program funds to support Chrysler and facilitate its restructuring was illegal. Only 28 hours later, the Supreme Court decided against taking the appeal, despite the seemingly compelling issues at hand.

Just as the Bush administration was telling Congress last September that there was no time to debate the merits of a financial bailout and that the only course was to give Treasury Secretary Paulson carte blanche immediately to spend $700 billion, the Obama administration was telling the Supreme Court this week that time was of the essence and that Fiat would walk away from the Chrysler deal if it wasn’t allowed to proceed right away. Was that the decisive factor in the Supreme Courts rejection of the appeal? It seems to me the appeal contains some serious constitutional issues worthy of judicial consideration (consideration that goes beyond merely rubber-stamping the Obama administration’s pre-packaged, politically-driven bankruptcy plan for Chrysler, which is what Judge Gonzalez appears to have done).

But it’s now a done deal, possibly facilitated by illegalities.

I’m struck by the relative quiet about this issue (in the mainstream media and the blogosphere). Maybe we’re all just too numb and shell shocked by the blitzkrieg of government interventions over the past 9 months that it’s no longer possible to feel alarmed or outraged by just another government act that would have been unthinkable this time last year.

Well wake up!

There is a compelling legal argument against using TARP funds to support automobile producers. (Obviously, there is a compelling economic argument, as well.) Convincing the courts to hear the argument and subsequently persuading judges (probably up to the Supreme Court) of its merits will likely be the last chance to spare us the nationalization of General Motors.

As you may recall, there wasn’t a whole lot of clarity about how the Treasury’s use of TARP funds would be limited or defined. Lots of discretion was granted the Treasury Secretary. However, Section 101(a)(1) of the law establishing the TARP stipulates:

“The Secretary is authorized to establish the Troubled Asset Relief Program (or ‘TARP’) to purchase, and to make and fund commitments to purchase, troubled assets from any financial institution, on such terms and conditions as are determined by the Secretary, and in accordance with this Act and the policies and procedures developed and published by the Secretary.” (My emphasis).

Neither Chrysler nor GM is a financial institution and therefore neither can receive TARP money.  There’s the argument, plain and simple.  Congress authorized funds for a defined use; the executive breached those boundaries, and thus acted illegally. Is it more complicated than that?

President Bush was the first to break the law by authorizing $17.4 billion in TARP funds for GM and Chrysler, circumventing the wishes of Congress, which had recently voted against an auto bailout.  And President Obama has followed suit, providing funding the Chrysler and GM during bankruptcy.

If there’s any doubt that TARP funds were not to be used for automobile companies, consider the fact that the same House of Representatives that passed the legislation creating the TARP in October also passed a bill specifically authorizing the use of TARP funds for automobile companies in December. (There was never a vote in the Senate so it never became law.)  Such legislation wouldn’t have been necessary if the intent of Congress was to allow TARP funds to be used for automakers originally.  Thus, there are two conclusions to draw here. First, the 110th Congress didn’t think the TARP legislation, which it had passed two months earlier, allowed TARP funds to be used for automakers; and second, Congress was too cowardly to bring the matter to the Supreme Court, thereby exercising its constitutional responsibility and allowing the judiciary an opportunity to exercise its.

Let’s hope the judiciary finds the opportunity to check the legality of the executive’s implementation of the legislature’s instructions, as far as the people’s money is concerned.

Online Gambling: According to the Feds, You’ll Be Holding Today

From The Wall Street Journal today, an article about the federal freezing or seizing of 27,000 online gambling accounts (including that of one of my colleagues, who shall remain nameless but is $150 short today).

I blogged a few weeks ago about some (admittedly very dim) light on the horizon so far as the freedom to gamble online is concerned, but this is a setback indeed. The Poker Players’ Alliance (a lobby group for online poker players) says this is the first time that players’ accounts (as opposed to the gambling site operators themselves) have been targeted.

U.S. laws  against gambling online, and the way those laws are administered, are an affront to personal freedom and a threat to our trading relationships.

How Many Jobs Saved? We Do Not Know

In the past couple of days the administration has been discussing the employment impact of its stimulus package. Employment has declined steadily since adoption of the package, so it might seem odd to claim that it has already had beneficial impacts. The administration’s response is that employment would have declined even faster without the stimulus, so hundreds of thousands of jobs have been saved.

The administration might be right, but how can we know? The short answer is, we cannot know with any confidence because we cannot know what employment would have been in the absence of the stimulus. Thus, the concept of “jobs saved” is problematic; it allows the administration to conclude, no matter how bad things get, that the stimulus worked because the economy would have been even worse without the stimulus.

Buy American Hurts Most Americans

Earlier today, Doug Bandow weighed in with some commentary on the problems that Buy American provisions are creating for both Canadian and American businesses. Let me reinforce his view that such rules are anachronistic and self-defeating with some thoughts from a forthcoming paper of mine about the incongruity between modern commercial reality and trade policies that have failed to keep pace.

Even though President Obama implored, “If you are considering buying a car, I hope it will be an American car,” it is nearly impossible to determine objectively what makes an American car. The auto industry provides a famous example, but is really just one of many that transcends national boundaries and renders obsolete the notion of international competition as a contest between “our” producers and “their” producers. The same holds true for industries throughout the manufacturing sector.

Dell is a well known American brand and Nokia a popular Finnish brand, but neither makes its products in the United States or Finland, respectively. Some components of products bearing the logos of these internationally recognized brands might be produced in the “home country.” But with much greater frequency nowadays, component production and assembly operations are performed in different locations across the global factory floor. As IBM’s chief executive officer put it: “State borders define less and less the boundaries of corporate thinking or practice.”

The distinction between what is and what isn’t American or Finnish or Chinese or Indian has been blurred by foreign direct investment, cross-ownership, equity tie-ins, and transnational supply chains. In the United States, foreign and domestic value-added is so entangled in so many different products that even the Buy American provisions in the recently-enacted American Recovery and Reinvestment Act of 2009, struggle to define an American product without conceding the inanity of the objective.

The Buy American Act restricts the purchase of supplies that are not domestic end products.  For manufactured end products, the Buy American Act uses a two-part test to define a domestic end product: (1) The article must be manufactured in the United States; and (2) The cost of domestic components must exceed 50 percent of the cost of all the components. Thus, the operational definition of an American product includes the recognition that “purebred” American products are increasingly rare.

Shake your head and chuckle as you learn that even the “DNA” of the U.S. steel industry, which pushed for adoption of the most restrictive Buy American provisions and which has been the manufacturing sector’s most vocal proponent of trade barriers over the years, is difficult to decipher nowadays. The largest U.S. producer of steel is the majority Indian-owned company Arcelor-Mittal. The largest “German” producer, Thyssen-Krupp, is in the process of completing a $3.7 billion green field investment in a carbon and stainless steel production facility in Alabama, which will create an estimated 2,700 permanent jobs. And most of the carbon steel shipped from U.S. rolling mills—as finished hot-rolled or cold-rolled steel, or as pipe and tube—is produced in places like Canada, Brazil and Russia, and as such is disqualified from use in U.S. government procurement projects for failure to meet the statutory definition of American-made steel.

Whereas a generation ago the cost of a product bearing the logo of an American company may have comprised exclusively U.S. labor, materials, and overhead, today that is much less likely to be the case. Today, that product is more likely to reflect foreign value-added, regardless of whether the product was “completed” in the United States or abroad. Accordingly, Buy American rules and trade barriers of any kind (as appealing to politicians as they may be) hurt most American businesses, workers, and consumers.

It’s time to wake up and scrap these stupid rules.

Echoes of Smoot-Hawley

President Barack Obama appears to have learned something compared to candidate Obama: protectionism isn’t to America’s advantage.  Unfortunately, it is not clear that Congress has learned the same lesson.  Three free trade agreements negotiated by the Bush administration remain in limbo, while no one is pushing to reinstate the president’s so-called fast track negotiating authority.

And past protectionist actions are now bearing ill fruit.  The “stimulus” bill required that construction money be spent in the U.S.  Although the provision was amended in response to foreign criticism, some Canadian firms have been adversely affected.  So Canadian cities have begun boycotting American products.

Reports Reuters:

Canadian municipal leaders threatened to retaliate against the “Buy America” movement in the United States on Saturday, warning trade restrictions will hurt both countries’ economies.

The Federation of Canadian Municipalities endorsed a controversial proposal to support communities that refuse to buy products from countries that put trade restrictions on products and services from Canada.

The measure is a response to a provision in the U.S. economic stimulus package passed by Congress in February that says public works projects should use iron, steel and other goods made in the United States.

The United States is Canada’s largest trading partner, and Canadians have complained the restrictions will bar their companies from billions of dollars in business that they have previously had access to.

“This U.S. protectionist policy is hurting Canadian firms, costing Canadian jobs and damaging Canadian efforts to grow our economy in the midst of a worldwide recession,” said Sherbrooke, Quebec, Mayor Jean Perrault, also president of the federation that represents cities and towns across Canada.

The municipal officials meeting at the federation’s convention in Whistler, British Columbia, endorsed the measure despite complaints by Canadian trade officials.

Trade Minister Stockwell Day told the group on Friday that Ottawa was actively negotiating with Washington to get the “Buy American” restrictions removed.

Thankfully, this bilateral spat isn’t likely to spark another Great Depression.  However, it illustrates how protectionism is self-defeating.  Other countries will not stand by silently as American legislators attempt to bar their products from the American market.  And U.S. workers will be the ultimate victims as the cycle of retaliation spreads.

National ID: Barrier to Re-Entry

Via Radley at Hit & Run, it’s a clear outrage that Larry Moore — homeless, but working his way back up — should be kicked back down by a costly and unhelpful city bureaucracy.

But don’t overlook how identification requirements act as a “barrier to re-entry”:

The only one who isn’t furious about this is Moore. He insists that city functionaries are giving him a break because they are letting him continue to shine shoes while he waits for a copy of his birth certificate to be sent from Kansas. Once it arrives they will allow him to get an ID card and then hand over almost every cent he has.

It’s already a burden for people overcoming alcohol or drug problems — and disasters like flood or fire — to produce satisfactory identification. For every Larry Moore who gets a break and gets in the paper, there are probably hundreds who never break back into legitimate employment. Imagine what it will be like when we have the more “secure” licenses envisioned under the REAL ID Act or the proposed REAL ID revival bill.