Topic: Trade and Immigration

The Washington Post On Dodd-Frank’s Conflict Minerals Fiasco

Economic sanctions, when they have an effect at all, tend to inflict misery on a targeted region’s civilian populace and often drive it further into dependence on violent overlords. That truism will surprise few libertarians, but apparently it still comes as news to many in Washington, to judge from the reaction to this morning’s front-page Washington Post account of the humanitarian fiasco brought about by the 2010 Dodd-Frank law’s “conflict minerals” provisions. According to reporter Sudarsan Raghavan, these provisions “set off a chain of events that has propelled millions of [African] miners and their families deeper into poverty.” As they have lost access to their regular incomes, some of these miners have even enlisted with the warlord militias that were the law’s targets. 

Congress added the provisions to Dodd-Frank in a fit of moral self-congratulation over making sure Americans had the chance to be ethical and thoughtful consumers of such products as jewelry and cellphones (as well as thousands of other products, as it turned out, from auto parts to the foil in food packaging). Publicly held companies would be required to report on their supply connections to “conflict minerals” such as tin, tungsten, and gold mined in war-torn areas of the Democratic Republic of the Congo. Lawmakers assigned enforcement of the law to the Securities and Exchange Commission – a body with scant discernible expertise in either African geopolitics or metallurgy – and barbed it with stringent penalties for disclosure violations, to which are added possible liability in class-action shareholder lawsuits.

Reactions to this morning’s Post account frequently employ words like “unintended” or “tragic” to describe the effect on miners of the law, which people in the Congo soon came to call “Loi Obama” – “Obama’s law”.  Unintended and tragic? Maybe. But not unforeseen, because the signs that the law would backfire this way have been in plain sight for years now – as in this 2011 account by Prof. Laura Seay (via) of how “electronics companies now have a strong incentive to source minerals elsewhere, leaving Congolese miners unemployed.” Or this 2011 account by David Aronson in the New York Times of the “unintended and devastating consequences” that he “saw firsthand on a trip to eastern Congo.” Or this more recent paper by law professor Marcia Narine.

But although the evidence has been there for years, the will to believe in the law was too strong – a will fueled by anti-corporate campaigners who take it on faith that when brutalities in the underdeveloped world occur within two or three degrees of separation of the activities of multinational businesses, the right answer must be to blame and shame the businesses.

You might call it an expensive lesson for Americans too, if you assume that anything has been learned. A recent Tulane calculation found that the costs in business compliance have already topped $700 million, with billions more ahead should nothing change. Just this September, the U.S. government conceded that it “does not have the ability to distinguish” which refiners and smelters around the globe are tainted by a connection to militia groups. That is to say, the government has demanded of business a degree of certainty that it cannot achieve itself.  Courtesy of UCLA corporate law professor Stephen Bainbridge, here’s a flowchart of what complying might involve for a given business. 

If the new Republican Congress wants to be taken seriously about fixing counterproductive regulation, it should make the repeal of this law an early priority.

Enduring Myths that Obscure the Case for Free Trade

Most economists agree that free trade works better than restricted trade to increase the size of the economic pie. By enlarging markets to span national borders, free trade increases the pool of potential producers, consumers, partners, and investors, which permits greater specialization and economies of scale – both essential ingredients of per capita economic growth.

But, in practice, free trade remains elusive. It is the exception, not the rule. Sure, many tariffs and other border barriers have been reduced in the United States (and elsewhere) over the years, but protectionism persists in various guises. There are “Buy American” rules limiting government procurement spending to local firms and US-made products; heavily protected services industries; seemingly endless incarnations of agriculture subsidies; import quotas on sugar; green-energy and other industrial subsidies; shipbuilding and shipping restrictions; the Export-Import bank; antidumping duties; and, regulatory protectionism masquerading as public health and safety regulations, to list some. Ironically, protectionism is baked into our so-called free trade agreements. It takes the form of rules of origin requirements, local content mandates, intellectual property and investor protections, enforceable labor and environmental standards, and special carve-outs that shield entire products and industries from international competition.

Trade agreements may be the primary vehicle through which U.S. trade barriers are reduced, but they are predicated on the fallacy that protectionism is an asset to be dispensed with only if reciprocated, in roughly equal measure, by negotiators on the other side of the table. If the free trade consensus were meaningful outside of economics circles, trade negotiations would be unnecessary. They would have no purpose. If free trade were the rule, trade policy would have a purely domestic orientation and U.S. barriers would be removed without any need for negotiation because they would be recognized for what they are: taxes on domestic consumers and businesses.

India Tosses out the WTO’s Agricultural Subsidy Disciplines

The World Trade Organization (WTO) seems on the verge of approving an agreement with India to allow the Trade Facilitation Agreement (TFA) to move forward.  The TFA is to be applauded.  It will make a useful contribution toward helping goods move across borders more efficiently, which will tend to increase trade and promote economic growth.

The problem is not with the TFA, but rather with the high price that the global community seems ready to pay for it.  India has asked that it be allowed to exceed the level of domestic agricultural subsidies to which it agreed twenty years ago in the Uruguay Round negotiations.  For the first time in history, those talks led to limits on the ability of countries to use trade distorting agricultural supports.  Those subsidies had been rampant, often leading to surplus production that depressed crop prices in global markets.  Farmers who were being subsidized generally were happy enough with that arrangement, but it was a very different story for unprotected farmers in other countries.  Many of the world’s farmers are quite poor to start with.  Government-driven decreases in commodity prices make them even poorer.

A teachable moment is slipping away because no WTO member has been willing to stand up and explain what’s going on.  India sanctimoniously declares that it needs to promote food security through use of a robust public stockholding program, and would like the world to believe that existing WTO rules prohibit them from doing so.  This is simply not correct.  The Uruguay Round includes specific provisions detailing how public stockholding may be used for food security purposes.  A great deal of time, effort and tough negotiating went into developing those provisions.  There is no limit on government expenditures to provide food – including free or reduced-price food – to low-income people.  However, there is a clear requirement that purchases of commodities for public stocks must be made at open-market prices.  It is not allowable to purchase commodities at above-market prices in order to provide a subsidy to farmers. 

Latest Essays in Cato’s Growth Forum

Today we add the following essays to Cato’s online growth forum:

1. Enrico Moretti wants to increase the R&D tax credit.

2. Daniel Ikenson calls for more foreign investment.

3. Scott Sumner argues for better monetary policy based on nominal GDP targeting.

4. Don Peck worries about growing dysfunction in the middle class.

5. William Galston offers a potpourri of proposals for faster, more inclusive growth.

6. David Audretsch highlights the central importance of entrepreneurship.

The remaining essays will posted next week.

Iran’s Economy, With and Without a P5+1 Agreement

The haggling between Iran and the so-called P5+1—the permanent members of the United Nations Security Council, plus Germany—is scheduled to come to a close on Monday, November 24th. The two parties each want different things. One thing that Iran would like is the removal of the economic sanctions imposed on it by the United States and its allies.

After decades of wrongheaded economic policies, Iran’s economy is in terrible shape. The authoritative Economic Freedom of the World: 2014 Annual Report puts Iran near the bottom of the barrel: 147th out of the 152 countries ranked. And the “World Misery Index Scores” rank Iran as the fourth most miserable economy in the world. In addition to economic mismanagement, economic sanctions and now-plunging oil prices are dragging Iran’s structurally distorted economy down. So, it’s no surprise that Iran would like one of the weights (read: sanctions) on its economy lifted.

Just how important would the removal of sanctions be? To answer that question, we use the Institute of International Finance’s detailed macroeconomic framework. The results of our analysis are shown in the table and charts below the jump.

Obama’s Executive Action Is Good Policy, Bad Law, and Terrible Precedent

In an excellent speech combining reasoned policy arguments, appeals to American ideals, touching anecdotes, and well-selected Scripture, President Obama launched significant positive reforms to an immigration (non-)system that I’ve long called the worst part of the U.S. government (at least before Obamacare). Unfortunately, the centerpiece of this action, the legalization of around five million people who are in the country illegally—mostly the parents of U.S. citizens and green-card holders—is beyond the powers of the president acting alone.

To be sure, the relevant statutes give executive branch officials very broad discretion in how they enforce immigration laws. For example, Section 212(d)(5)(A) gives the Secretary of Homeland Security the “case-by-case” discretion to “parole” for “urgent humanitarian reasons or significant public benefit” an alien applying for admission. The authorization for “deferred action”—a decision not to seek deportation and concomittant authorization to reside and work legally, which was the basis for Obama’s 2012 Deferred Action for Childhood Arrivals program—is similarly broad.

And all modern presidents, from both parties, have used such discretionary powers. President Ronald Reagan’s Justice Department issued regulations to comport with the family-unity provisions of the 1986 Immigration Reform and Control Act. President George H.W. Bush temporarily expanded the category of undocumented children and spouses eligible to stay in the country before Congress formalized their status. President Bill Clinton deferred action on illegal immigrants from Haiti during that country’s convulsions in the 1990s—one example of many relating to executive discretion regarding nationals of war-torn nations—while President George W. Bush took various actions regarding illegal aliens in areas affected by Hurricane Katrina. These are just a few examples, but they’re all different from what President Obama is doing, both qualitatively—discrete and temporary versus open-ended and potentially timeless—and quantitatively. (See here and here for contrasts between Reagan/Bush and Obama.)

But don’t take it from me. Here are a few solid arguments that were made by a noted constitutional lawyer over the last several years:

  • “Comprehensive reform, that’s how we’re going to solve this problem…. Anybody who tells you it’s going to be easy or that [the president] can wave a magic wand and make it happen hasn’t been paying attention to how this town works.” (March 10, 2010)
  • “America is a nation of laws, which means [the President is] obligated to enforce the law…. With respect to the notion that [the president] can just suspend deportations through executive order, that’s just not the case, because there are laws on the books that Congress has passed…. [W]e’ve got three branches of government. Congress passes the law. The executive branch’s job is to enforce and implement those laws. And then the judiciary has to interpret the laws. There are enough laws on the books by Congress that are very clear in terms of how we have to enforce our immigration system that for me to simply through executive order ignore those congressional mandates would not conform with [Obama’s] appropriate role as President.” (March 28, 2011)
  • “If this was an issue that [the president] could do unilaterally, [Obama] would have done it a long time ago…. The way our system works is Congress has to pass legislation. [The president] then get[s] an opportunity to sign it and implement it.” (Jan. 30, 2013)

The Coming Globalization of the Marijuana Industry

A couple years ago, I speculated about eventual free trade in marijuana. That was before legalization in Colorado and Washington state. The case for trade and globalization of this industry looks stronger now. 

The Economist had a good article recently, taking into account this legalization, and thinking about what the future of the industry looks like. Right now, it’s just a bunch of small companies searching for the right market strategy, but they see consolidation eventually:

As happened with alcohol after the end of Prohibition, and has also happened with tobacco, the pot industry would probably come to be dominated by a few giant corporations.

They note that the tobacco industry has looked into the marijuana sector in the past, and might be well-positioned to run things, although it really could be anyone.

Assuming the current trend of increased acceptance continues, it seems inevitable that the marijuana industry will begin to look like other industries. There will be a few major global players, possibly based in the countries where legalization first happened. There will also be trade and investment disputes, just as there are in industries such as steel, cotton, and aircraft. No doubt the industry will be highly regulated, and regulations often given rise to these complaints.

For example, as the article notes, “Both Colorado and Washington have imposed residency requirements on the owners of marijuana businesses—including anyone with an equity stake.” Why restrict investments from foreigners and others who are not residents of the jurisdiction? No doubt the regulators have some rationale for this, but whether it’s a good one or complies with the various international investment obligations that are now in effect is up for debate.