Topic: Trade and Immigration

Thomas Sowell on Immigration

Thomas Sowell is an influential and prolific writer whose books span the social sciences.  My shelves are full of them, decorated with underlines, marginalia, and dog-eared pages.  But in his recent columns and comments on immigration, Sowell has not approached that topic with the same rigorous attention to detail that he has in his books.  His reliance on incomplete historical examinations in his columns leads him to seemingly support a vast array of government interventions.  In these writings, Sowell makes the same mistakes that he accuses the “anointed” of making in many of his books.

In the column I’ll focus on, professor Sowell’s claim that today’s debate about immigration reform is not as fact-based as previous debates.  The implication is that a lack of facts will lead to poor policy decisions today whereas the policy changes 100 years ago were well thought out and fact-based.  He wrote:

A hundred years ago, the immigration controversies of that era were discussed in the context of innumerable facts about particular immigrant groups. Many of those facts were published in a huge, multi-volume 1911 study by a commission headed by Senator William P. Dillingham.

First, Sowell’s description of the Dillingham Commission’s commitment to facts is inaccurate.  It was a bi-partisan committee formed in 1907 to investigate the impacts of immigration on the United States – especially the so-called “new immigrants” from Eastern and Southern Europe.  The Commission was staffed by Progressives who believed that scientific managerial methods could effectively plan large parts of society and the economy by using the power of the government.  With the exception of one member, William S. Bennet of New York, the commission was stacked with members who had previously supported immigration restrictions. 

The Dillingham Commission produced 42 volumes by 1911, arguing that the “new immigrants” were fundamentally different from old immigrants who came from Western and Northern Europe.  Their culture, rates of economic success, and assimilative potential were supposedly severely constrained.  Those are the same claims made by today’s immigration opponents.  The Dillingham Commission suggested that immigration restrictions (ranging from relatively modest literacy tests to outright quotas and other massive interventions) could solve this “problem.” 

US-EU Trade Talks: Don’t Forget about the Tariffs

In the context of the recently launced US-EU free trade talks (formally, the “Transatlantic Trade and Investment Partnership,” or TTIP), commentators have noted that tariffs between the US and EU are low, and thus the key part of the talks will deal with so-called regulatory barriers to trade.  An article in Inside U.S. Trade observes: “Overall, the U.S. average tariff rate is 3.5 percent, although the average tariff rate on goods that the EU actually shipped to the U.S. last year was even lower, at 1.2 percent, … .”

But these average figures mask some significant “tariff peaks.”  There are lots of individual tariff rates, so if many are low or zero, that makes the average figure fairly low; nonetheless, there are plenty of high tariffs still out there.  The same article points out some US and EU tariff rates that may come up during the negotiations.  Here is the US:

U.S. light trucks tariff of 25 percent; a tariff on wool sweaters of 16 percent; a tariff on sardines of 20 percent; a tariff on tuna of 35 percent; and a tariff on leather at 20 percent

Here is the EU:

applied tariffs on honey of 17.3 percent; carrots at 13.6 percent; potatoes at 14.4 percent; strawberries at 20.8 percent; lemons at 12.8 percent, beef at 12 percent; and lamb at 12 percent

And all of those tariffs add up:

the U.S. collected about $4.5 billion in tariffs from EU products in 2012. … [Of this amount,] $900 million comes from imported German cars; about $260 million comes from Italian clothes and shoes; and about $72 million comes from cheese imports.” 

These negotiations will be complicated in a number of ways, including how to deal with diverging regulations in the US and EU.  But hopefully negotiators won’t forget the basics of free trade: Lowering or eliminating tariffs is a simple and straightforward way to boost economic growth. 

Thomas Sowell on the Economics of Immigration

Thomas Sowell, distinguished social scientist and columnist, recently criticized Rep. Paul Ryan (R-WI) for his statement that America needs immigration reform to avoid a “worker shortage.” Ryan was trying to explain that allowing more workers to come in the future would allow the economy to grow. He incorrectly used the word “shortage, which has a specific meaning in economics, and Sowell was right to criticize him for that. 

However, the economics of immigration are far more complex than Sowell’s writings let on. After dinging Ryan for his word choice, Sowell went on to explain that if American farmers don’t have enough workers, they will just raise their wages to attract Americans into the profession:

In agriculture, the farmers would obviously prefer to get workers who get low pay rather than workers they have to pay a higher wage… And as long as there is an unlimited supply of farm workers coming in from Mexico, they will never have to raise the wages very much… And it’s a time when millions of Americans are out of work, and are looking for any kind of work. And so this is utter nonsense.

If Sowell is going to quibble about words like “shortage,” it’s fair to criticize Sowell’s use of the word “unlimited” to describe the supply of farm workers coming from Mexico. If the supply of workers in agriculture was truly unlimited, or infinite, the wage would be 0. Furthermore, Americans are not “looking for any kind of work.” If they were, they would be lowering their wages quite a bit more than they currently are, until they become attractive hires. Relatively sticky wages even during periods of high unemployment are evidence that people are not “looking for any kind of work.”        

Issues of economic vocabulary aside, Sowell only described one possible outcome from a reduction in the supply of low-skilled immigrant farm workers: an increase in wages. The far more likely reaction is that American farmers will stop growing crops that require many workers. Without a large supply of low-skilled immigrant farm workers, labor-intensive farming would either shrink dramatically or disappear entirely.  American farmers would either grow different crops that could be profitably harvested mechanically or stop farming. American consumers would either import fruits and vegetables that require large numbers of workers from countries where those workers are abundant, or scale back their consumption of those food stuffs. Fewer workers also means fewer consumers of these agricultural goods, decreasing demand and partly offsetting some of the increase in price that would occur from a decrease in supply. Those effects would be the economically efficient outcome if increased labor scarcity was driven by changes in the free market. In this case, however, the increase in labor scarcity would come from legislation mandating such scarcity.

Battling Protectionism in the States

With much of the focus of the EU-US preferential trade agreement on regulatory matters, agricultural barriers, and other areas supposedly relating to vital product standards (as opposed to tawdry protectionism, you understand), one potentially beneficial part of the negotiations is being overlooked: the potential to tackle the overt protectionism still very much alive at the state level. While the federal government has constotutional authority over regulating trade with other nations, the states still have some leeway in certain areas, and the European Union negotiators are reportedly very interested in loosening state-level policies on public procurement contracts. From Inside U.S. Trade:

Michel Barnier, the top European Commission official on public procurement matters, yesterday (July 16) said the European Union will use trans-Atlantic trade talks to address a U.S. government contracting practice that some EU firms view as discriminatory because it locks in preferential, multi-year procurement contracts with a set list of suppliers…

The EU has complained in the past that these multi-year deals, known as task and delivery orders in the United States or “framework agreements” in the EU, can lock EU firms out of the market for extended periods. One EU source said the commission will likely press the U.S. to reduce the length of these multi-year contracts…

In addition to framework agreements, other EU priorities in the area of procurement with respect to the Transatlantic Trade and Investment Partnership (TTIP) include expanding the number of U.S. states and sub-federal entities that are covered by procurement rules barring discrimination. That is a difficult proposition for the Office of the U.S. Trade Representative, as it does not have automatic authority over sub-federal entities, and instead must convince them individually to take on new obligations.

But if the U.S. is willing to take on new commitments, it could reap rewards in the form of expanded access in the EU, Barnier said, although he did not elaborate…

Under the [World Trade Organization’s Government Procurement Agreement], the EU has opened the procurement of some entities to other GPA parties but not the U.S., as the EU does not view the U.S. as offering reciprocal market access in these areas. If the U.S. offered greater procurement access under TTIP, the EU could ostensibly extend to the U.S. this greater level of coverage that it offers to some other GPA partners…[emphasis added]

OK, ignore for a moment the usual faulty “if you stop punishing your taxpayers, we might stop punishing ours” thinking of trade negotiators, just for a second. It is true that neogtiators seem to have little time for the costs of “Buy American” policies, but here we see an excellent example of how protectionism is not dead, it’s just moved to a different jurisdiction. States still have overtly discriminatory procurement policies on their books, and they are costing their own taxpayers money (by not necessarily choosing the best value for money) and American exporters opportunities abroad. Perhaps the EU-US deal can change that, assuming the USTR can successfully “convince” sub-federal entities to do the right thing.


Subtle as a Sledgehammer

I’m sure you’ve heard quite enough of me on the farm bill over the last week or so, but I did just want to draw readers’ attention to a quote from Mary Kay Thatcher of the American Farm Bureau Federation, speaking on the AgriTalk radio program regarding the need for the 1949 Agriculture Act (the so-called permanent law) to “motivate” Congress to pass farm bills every five years:

It’s really the sledgehammer that’s there to make sure we don’t just let the farm bill expire and do nothing about it.  And so to remove that, even to replace it with the 2013 law for Title I is just that sledgehammer isn’t going to be there. [emphasis added]

At least she’s honest.

Do We Need an Investment Treaty with China?

From the Washington Post today:

China and the United States have agreed to restart negotiations over a possible investment treaty that could substantially open the Chinese economy to more American companies.

I’m all for countries opening their economies to foreign investment. One hot issue right now is a proposed takeover of a Virginia pork producer by a Chinese company. Some members of Congress are wary and have raised a number of concerns, such as food safety. In my view, these concerns have no merit. Aside from the standard review of whether a particular foreign investment raises national security concerns, I don’t think we should restrict foreign investment.

But I’m not convinced that investment treaties as currently formulated are necessary for a liberalized foreign investment policy. In fact, through the controversy they cause, they may even undermine it.

I wrote specifically about the possibility of a U.S.-China investment treaty here. Then just recently I wrote more generally on whether investment treaties are about liberalization or litigation. In a nutshell, the way these treaties work is that they give foreign investors an opportunity to sue host country governments before an international tribunal when they feel they have been treated badly. (There are several legal obligations, but one example of the standard that applies is whether the foreign investors have received “fair and equitable” treatment. This is pretty broad and vague, and people can’t seem to agree on what it means.)

My concern is that these treaties mostly result in lots of litigation by companies that have already invested abroad, rather than focusing on removing actual barriers to foreign investment. If we could draft a treaty under which both sides (or all sides, if it was done multilaterally) promised to allow foreign investment and not discriminate against foreign investors once they have invested, that might work. But the current system isn’t well calibrated for that task. Instead, it puts administrative and constitutional law principles into international law, and leads to high-profile litigation on issues unrelated to discrimination against foreign investment. In regard to Chinese investment, it raises the following prospect: A Chinese state-owned company invests in the United States, gets badly treated by some domestic regulator (not hard to imagine), then sues the U.S. government in an international tribunal for billions of dollars. Somehow I don’t think that will play very well politically.

So by all means, I think we should liberalize investment with China (allow their investment in here, and talk to them about letting our investment in over there). I’m just not sure that investment treaties in their current form are a very good approach to this issue.

Farm Bill Passes House

The “new” farm bill (with food stamps jettisoned because “conservatives” object to what they see as lavish welfare spending)–you know, the one I was kinda for before I was against–passed the House today on strictly partisan terms, 216-208 (roll call), with a mere 12 brave Republicans voting no. The bill passed under a “closed rule,” which meant that no amendments could be made to improve the thing. The bill will ostensibly “save” $12 billion over 10 years, but the savings will likely be eaten up by new crop insurance provisions. In any event, the bill saves less than the Senate farm bill, and less than the Obama administration proposed. If you want to think in simplistic terms, this bill–proposed by Republicans, remember–is fiscally to the left of the Senate Democrats’ and President Obama’s proposals (here’s more on that). I guess welfare is ok if it is for farmers and other rural dwellers.

While the bill included the welcome repeal of the 1938 and 1949 permanent laws that force farm bills upon us every five years (lest we return to worse policy provisions), it effectively makes the new Title 1, which covers “commodity programs” (a euphemism for farm welfare), permanent. There are no means testing requirements for subsidies, and the bill includes new target price programs that could leave the taxpayer worse off than they are currently, and the United States in jeopardy of breaching internationally agreed-upon limits on agricultural support. There goes our credibility in urging others to “play by the rules” of world trade.

While it is unclear what future awaits this bill (it will be difficult to reconcile with the Senate bill, which includes food stamps), it is certainly not an improvement. If this is the new normal, then we’re in trouble. Shame on the House GOP leadership for promoting this thing, and passing it under dubious circumstances.