Topic: Trade and Immigration

Bipartisan Nonsense on “Energy Independence” and Trade

Sen. John McCain reinforced his bipartisan credentials Thursday evening by sounding as confused as the Democrats on the nation’s assumed need for “energy independence.”

In his acceptance speech at the GOP convention in St. Paul, McCain pledged federal support for alternative energy so the United States can reduce the amount of energy it imports from abroad. “When I’m president,” McCain told cheering delegates, “we’re going to embark on the most ambitious national project in decades. We are going to stop sending $700 billion a year to countries that don’t like us very much. We will attack the problem on every front.”

He then pledged his support for more offshore drilling, nuclear power plants, wind, tide, solar and natural gas.

Whoa! Before we embark on a project that could cost tens or hundreds of billions of dollars, let’s get the facts straight. Specifically, where did that $700 billion number come from?

That is far more than what we pay for imported energy. In 2007, Americans spent less than half that amount—$319 billion—for imported energy of all kinds, including oil and natural gas. Even with higher energy prices in 2008, our total bill for imported energy this year will be nowhere near $700 billion.

Contrary to popular perception, most of our oil imports come such friendly countries as Canada, Mexico, Colombia, Brazil, and the United Kingdom, or from more neutral suppliers such as Iraq, Kuwait, Nigeria, Angola, Chad and Congo (Brazzaville).  Only a third of our imported oil comes from the major problem countries of Saudi Arabia, Venezuela, Algeria, Ecuador and Russia. We don’t import any oil directly from Iran. [You can check out the latest Commerce Department figures here.]

The $700 billion that Sen. McCain probably had in mind is America’s total trade balance, known as the current account. Last year, Americans rolled up a $731 billion current account deficit with the rest of the world. That account includes not just energy but also manufactured goods, farm products, services, and income from foreign investments.

The current account deficit is not driven by energy imports but by the underlying level of savings and investment in the U.S. economy. We run a current account deficit because, year after year, more is invested in the American economy than Americans save to finance that investment. Foreign capital fills the gap, and the resulting net inflow of foreign investment more or less directly offsets the gap between what we import and what we export.

If the federal government dramatically increases spending on alternative energy, as Sen. McCain and his Democratic opponent both seem to want, the result will be a bigger federal budget deficit, a smaller pool of domestic savings, more foreign capital flowing into the United States, and an even larger current account deficit.

The Uncool Animal Farm Bill

Congress believes some Americans are more equal than others. How else could it have passed (by overwhelming margins and over a presidential veto) the 2008 Farm Bill, which amounts to about a $7 billion annual transfer from the pockets of American taxpayers to high-on-the-hog agribusinesses?

To leave no doubt that these “farmers” are the exalted class, Congress included a truly Orwellian set of requirements referred to euphemistically as “Country-of-Origin Labeling” (COOL) for agricultural products like beef, chicken, pork, lamb, vegetables, and fruit.

COOL is justified by its proponents as a means of helping consumers make informed decisions. But COOL is nothing more than a ploy to thrust the marketing costs of U.S. producers on processors, packers, wholesalers and retailers, while stimulating demand for U.S. beef, chicken, pork, vegetables and the like by raising the costs of handling imports. And with the supermarket industry operating at about one to two percent profit margins, there isn’t any doubt about who will be flipping the bill.

A story in today’s Wall Street Journal gets right to the bottom line in its opening paragraph: “Grocery bills, already surging because of higher commodities costs, will almost certainly rise as costs are passed along for implementing a new country-of-origin food-labeling law, the supermarket industry says.”

The Department of Agriculture estimates first year compliance costs for entities in the supply chain to be $2.52 billion. But USDA grossly underestimated the cost of implementing COOL for fish and shellfish in 2005: the actual costs were 6 to 11 times higher than estimates.

COOL provisions for agricultural products were originally included in the 2002 Farm Bill, but implementation (for all but fish and shellfish) was stopped by congressional moratorium, as a debate, in which proponents used fears of mad cow disease and other health concerns, raged on. In a 2004 Cato Institute paper on the topic, I wrote

Proponents argue that mandatory COOL is desired by both producers and consumers. A “made-in-the-USA” label, they contend, would help identify U.S. products for consumers who are otherwise unsure and who may be willing to pay a premium to know they are buying American food.

That sounds fair enough. But there’s more to the story. If, in fact, consumers are overwhelmingly in favor of country of origin labeling, then why haven’t domestic producers voluntarily obliged? After all, if there is demand for it, why does there need to be a law mandating it?

Proponents argue that the costs of implementing COOL are small, yet none of them has been willing to implement it voluntarily. Instead, they have been expending considerable time and money to force those requirements further down the supply chain. Processors, wholesalers, and retailers-firms that buy and sell both domestic and imported products-would incur the costs of segregating inventory, keeping records, constructing and maintaining compliance systems, and often physically labeling products. Burdensome compliance costs may induce those firms to limit their sources, in some cases to only domestic suppliers.

Although consumers may be interested in having country of origin information, it is a relatively unimportant determinant of the purchasing decision. If it were important, consumers would be willing to pay higher prices for products labeled with that information, and producers would supply that information voluntarily if the increase in revenues exceeded the increase in the costs of providing it. That such information is not provided voluntarily indicates that any preference for commodities of U.S. origin is marginal.

Mandatory labeling is nothing more than a scheme to pass on what should be the marketing costs of U.S. producers to other firms in the supply chain. It is also intended to drive up the costs and reduce the revenues of businesses that produce, process, distribute, and retail imports.

What was true in 2004 remains true today. Only this time Congress succeeded in doing the bidding of our “more equal” farmers.

 

The Predictable Fallout from Doha

Following the collapse of the Doha round of multilateral trade negotiations last month, WTO members have chosen to pursue their trade objectives through litigation.

Brazil (through its foreign minister, Celso Amorim) said Wednesday (eastern Australian time) that it plans to ask for billions of dollars of punitive damages from the United States in retaliation for U.S. cotton subsidies (more on that dispute here). The precise figure has yet to be released, but the United States has lost at every point in this dispute and although the Office of the United States Trade Representative plans to defend the subsidies “vigorously,” another loss for the U.S. would be expected. (Note that in WTO litigation proceedings, ‘damages’ aren’t paid by check; rather, the aggrieved member is given permission to retaliate by suspending its own obligations to the errant member. Usually this involves the injured party raising tariffs on the errant member’s exports, economically insane though that action might be.)

The United States has joined the melee by making preliminary legal moves of its own–against China. In a communication to the WTO posted on Monday, the United States listed its grievances as a series of questions to China about its allegedly discriminatory tax treatment for domestically-reared pork, as well as other subsidies. The United States has pitched these questions as part of the “transitional review mechanism” that was part of the deal when China joined the WTO but it could form the basis of a dispute settlement action if the questions aren’t addressed to the United States’ satisfaction.

The collapse of the Doha round, as well as political pressure to enforce the terms of trade agreements and to save special firepower for China, is bearing predictable fruit.

New Income and Poverty Figures Spoil the Pity Party

The Census Bureau’s release this morning of the latest income, poverty and health insurance numbers did not follow the script of those who want to paint a picture of a nation in crisis.

Opponents of free trade, immigration, and limited government constantly tell us that the middle class is shrinking, the poor are getting poorer and more numerous, and the number of Americans without health insurance is climbing inexorably. Their solution is always to restrict trade and immigration and launch expensive new programs to alleviate the obvious misery.

Spoiling the pity party is this morning’s widely anticipated report, “Income, Poverty and Health Insurance Coverage in the United States: 2007.” Among its major findings:

  • The number and percentage of Americans without health insurance actually declined slightly in 2007 compared to 2006. The share without insurance in 2007, 15.3 percent, is actually lower than it was a decade ago.
  • Median household income is not falling: “Between 2006 and 2007, real median household income rose 1.3 percent, from $49,568 to $50,233—a level not statistically different from the 1999 prerecession income peak.”
  • The share of households earning a middle-class income of between $35,000 and $100,000 in real 2007 dollars has indeed shrunk slightly compared to a decade ago, but so too has the share earning less than $35,000 a year, while the share earning more than $100,000 continues to rise. The middle class is not shrinking; it is moving up.
  • The 12.5 percent of Americans living below the poverty line in 2007 was statistically unchanged from 2006, and remains below the 13.3 poverty rate in 1997. The poverty rate has been trending downward since the early 1990s during a time of growing trade and immigration flows.
  • The Gini coefficient, a statistical measure of income inequality, was .463 in 2007, down slightly from earlier in the decade and virtually the same as it was a decade ago.

We can argue all day about what policies should be adopted to spur growth and higher incomes for the broadest swath of Americans. We certainly have plenty of ideas here at Cato. But it flies in the face of reality to argue that the major indicators of economic well being in America are trending downward in some sort of crisis that demands sweeping government intervention.

Joe Biden’s So-So Record on Trade

During his long tenure in the Senate, Joe Biden of Delaware has compiled a mixed record on votes affecting our freedom to participate in the global economy. The record of the Democratic vice-presidential hopeful is more pro-trade than Barack Obama’s but much less so than John McCain’s.

According to our “Trade Vote Records” feature on the Cato trade center web site, Biden has voted in favor of lower trade barriers on 24 out of 48 votes in the past 15 years. On trade-distorting subsidies, such as farm price supports, he has voted for lower subsidies on only 3 of 11 votes. Since Obama joined the Senate in 2005, he has voted for lower barriers 36 percent of the time and for lower subsidies 0 percent. John McCain has voted for lower barriers on 88 percent of votes and for lower subsidies on 80 percent.

Here are the highlights and lowlights of Biden’s voting record on trade:

On the positive side from a free trade perspective, he voted consistently to maintain normal trade relations with China, including permanent NTR in 2000; for the North American Free Trade Agreement with Canada and Mexico in 1993; for the Uruguay Round Agreements Act in 1994; for the Freedom to Farm Act in 1996; for fast-track trade promotion authority in 1998; to defund enforcement of the travel ban to Cuba; to cut sugar production subsidies; and in favor of the Morocco and Australian free trade agreements in 2004.

On the negative side for those who support the freedom to trade, Biden voted for steel import quotas in 1999; for the 2002 and 2008 protective and subsidy laden farm bills; against trade promotion authority in 2002; against the Chile, Singapore, Oman, and Dominican Republic-Central American FTAs; in favor of the Byrd amendment directing anti-dumping booty to complaining companies; in favor of imposing steep tariffs on imports from China to force changes in that country’s currency regime; and in favor of screening of 100 percent income shipping containers by 2012.

For a senator who prides himself on his foreign policy experience, Biden’s record shows great ambivalence about American participation in the global economy.

Our Convoluted, Less-than-open Immigration System

If you think the United States has an “open border” policy toward immigrants, check out this immigration flowchart put together by our friends over at the Reason Foundation.

In one graphic sweep, it explains better than mere words why we need comprehensive immigration reform.

Of course, if you are one of those people who like to read the articles and not just look at the pictures, you can check out Cato research on immigration at the Center for Trade Policy Studies web site.

The Democrats and Free Trade

If and when trade and globalization come up at the Democratic National Convention next week, I can almost guarantee that the take will be negative. It has become part of the party’s core message these days that free trade favors the rich at home and our unfair trading partners abroad. Just yesterday, in a tour of southern Virginia, Democratic hope Barak Obama took an indirect swipe at trade when he told a crowd in Martinsville, “You’re worried about the future. Here people have gone through very tough times. When you’ve got entire industries that have shipped overseas, when you’ve got thousands of jobs being lost… . That’s tough.”

Not all Democrats share the pessimistic view of trade. In the latest edition of the Cato Journal, hot off the presses, I review a new book by pro-trade Democrat Ed Gresser of the Progressive Policy Institute. In my review of Freedom from Want: American Liberalism and the Global Economy, I wrote:

Although it is easy to forget today as Democratic candidates rail against NAFTA and globalization, but for decades it was the Democratic Party that championed lower tariffs. Democrats opposed the high tariff wall maintained by Republicans from the Civil War to World War One, arguing that tariffs benefited big business at the expense of poor consumers. Under President Woodrow Wilson, Congress drastically lowered tariffs in 1913 and replaced the revenue with an income tax, only to see Republicans raise tariffs again in the 1920s, culminating in the Smoot-Hawley Tariff of 1930 and the Great Depression that followed.

The Democrats should think long and hard before they give up that legacy altogether.

You can read the full review here.