Topic: Trade and Immigration

When Will Ford Defend its Interests?

Earlier this week, the Congress and President Obama authorized a $787 billion borrow-and-spend plan to create “or preserve” 3.5 million American jobs. So, could there be a better time than now for GM and Chrysler to announce they will need billions more taxpayer dollars to avoid having to let go hundreds of thousand of workers? How likely is Washington to cut off the auto producers at this particular juncture?

It shouldn’t come as a surprise that GM and Chrysler are asking for a lot more money because, well, the warnings were issued. In fact, Bush’s decision to defy Congress and provide “loans” to GM ($9.4 billion) and Chrysler ($4 billion) back in December wasn’t even intended as a cure all. It was designed to buy time for the producers to come up with detailed viability plans for their next bite at the apple. And as expected, central to both viability plans, which were unveiled yesterday, is more taxpayer money.  At the moment, a combined $22 billion is being requested, which would bring the total doled out to just under $40 billion.

Just as stunning as the implied blackmail (give us money or we’ll give you idled workers) being perpetrated by GM and Chrysler is the continued silence of Ford. There is probably no company in America that stands to lose more from taxpayer subsidization of GM and Chrysler. (The foreign nameplate producers in the United States are also penalized by subsidies to GM and Chrysler, but in the current environment it is probably wiser for them to bite their tongues. And Ford is more of a direct competitor with the other Detroit producers than are the foreign nameplates, anyway.)

If GM and Chrysler were no longer producing, Ford would be able to pick up market share and productive assets from the others, and ultimately improve its own long term prospects. By keeping GM and Chrysler afloat with subsidies, the government is implicitly taxing Ford. Ford is facing unfair, government-subsidized competition, of the sort alleged against foreign producers all the time. But in this case, the subsidies are real, direct, quantifiable, and large. Ford is relatively healthy now, but continued subsidization of the others could well drive Ford to the trough, too.

When companies are losing billions per month with sales revenues continuing to shrink, it doesn’t require a finance degree to discern an imminent cash flow crisis. Even if the demand environment were picking up, these companies would still be losing money because their cost structures are impossibly inefficient. GM and Chrysler have nibbled around the edges to cut costs. Brands are being sold off or scrapped. Factories are being closed. Dealership arrangements are being terminated. But none of those changes addresses the big issues, particularly for GM: an unmanageable capital structure (its debt burden is too heavy), unmanageable legacy costs (paying for lavish promises made in the past), and uncompetitive operating costs (including still much higher than industry-average compensation).

Reorganization or liquidation under one of the bankruptcy chapters will condense the timetable for resolving this problem, will save taxpayer money, and very importantly, will speed the return to stability in the automobile market worldwide. It’s time for Ford to speak out on behalf of this solution too.

German High Court Challenges EU and Lisbon Treaty

The forces of European consolidation are attempting to force through the Lisbon Treaty without allowing anyone other than the Irish to vote.  And, of course, the Irish have been pressed to vote a second time since they made the “wrong” decision last year, rejecting Lisbon.

But now the treaty faces a serious challenge before the German high court.  Reports the EU Observer:

Several of the eight judges in charge of examining whether the EU’s Lisbon Treaty is compatible with the German constitution have expressed scepticism about the constitutional effects of further EU integration.

According to reports in the German media, the debate during the crucial two-day hearing starting on Tuesday (10 Februrary) on the treaty centred on criminal law and the extent to which it should be the preserve of member states rather than the EU.

The judges questioned whether the EU should be allowed to increase its powers in criminal law.

Judge Herbert Landau said new EU powers in criminal justice affected “core issues” of German legislative authority.

“These are issues affecting the shared values of a people,” he said.

Judge Udo Di Fabio, who prepared the procedure and will deliver the judgement on the treaty, asked whether the transferral of powers to the EU really means more freedom for EU citizens.

“Is the idea of going ever more in this direction not a threat to freedom?” he asked, according to FT Deutschland.

Judge Rudolf Mellinghoff asked whether the treaty was already “in an extensive way” being applied when its comes to the area of criminal sanctions in environment issues – the European Commission may sanction companies for polluting the environment

In all, four of the eight judges questioned the Lisbon Treaty.

The Irish vote was bad enough, causing wailing and gnashing of teeth throughout the continent’s Eurocratic elite.  If the EU’s most important country rejects the Lisbon Treaty, the entire EU project will be in doubt.  After all, it’s one thing to browbeat the Irish, threatening to toss them out of the EU or push them into some form of second-rate status.  But the EU couldn’t do that with Germany and survive.

It’s hard to imagine the German court overturning the government’s ratification of the treaty.  But no one expected the Irish to say no as well.  Europe might soon find itself dealing with a political as well as economic crisis.

Lamar Smith vs. the WSJ

House Judiciary Committee ranking member Lamar Smith (R-TX) wrote a plea for E-Verify, the federal worker background check system, in the Washington Times yesterday. He dedicates the first paragraphs to a broad analogy between immigrant workers and burglars, then says:

E-Verify is the federal government’s system that enables businesses to hire legal workers. It is a sure way to protect jobs for U.S. citizen and legal immigrant workers alike, and ensure their jobs aren’t stolen by illegal immigrants.

Time was when Republicans opposed regulation rather than extolling it.

Smith’s advocacy for increased regulation in the name of a closed society is handily eclipsed by the Wall Street Journal’s editorial on the topic this morning, reporting on the status of the effort to expand E-Verify through the economic stimulus legislation:

[W]e’re happy to report that negotiators so far have rejected a troublesome amendment that would require any business receiving stimulus funds to enroll in E-Verify, a government program for determining work eligibility. The last thing employers need now is more bureaucratic red tape.

And the Journal is talking about solutions:

Illegal immigration tends to flow and ebb based on the strength of the U.S. economy. Given the recession, it’s likely to decline in the short-run, and Congress might use the lull to enact some substantive policy reforms. Work-site enforcement should be part of a broader immigration debate, not something slipped into a stimulus bill to placate protectionists.

The winner, by a knockout: the Wall Street Journal.

Deciphering the ‘Buy American’ Dispute

Many of you may have heard the argument that the United States already has Buy American laws, so therefore all of the whining about the provisions in the spending bill is nothing but bluster. Well, that’s not really an argument. That’s just the pep rally speech that Steel Caucus representatives give before sympathetic, unquestioning fans.

A short (but by no means complete) summary of Buy American laws might help give some perspective to the significance of the language in the spending bills.

Yes, since 1933, Buy American laws have been used to limit competition for government procurement projects to domestic firms. Under current law, there are general Buy American restrictions affecting all government procurement of supplies and materials for use within the United States. And there are even more restrictive Buy American provisions governing Transportation Department procurement rules for highway and related projects. In a nutshell, the language in the spending bill would subject its appropriations to the more restrictive Buy American process, while denying the waivers we currently grant to most major trade partners.

The “general” Buy American provision requires all “unmanufactured” products (essentially, raw materials) procured to be mined or produced in the United States and that all manufactured articles procured fit the definition of a “domestic end product,” which is an article manufactured in the United States from components, which are at least 50 percent (by value) U.S.-produced.

Those Buy American restrictions can be waived if any one of three conditions applies: (1) a waiver would be in the public interest; (2) the products are not available from domestic sources in sufficient quantity or of satisfactory quality, or; (3) the cost of using U.S.-made products is deemed “unreasonable.” Under the Federal Acquisition Regulations, “unreasonable cost” is defined as a situation where foreign supplies and materials are offered at a price that is six percent or more below the price of domestic supplies and materials.

The more restrictive Buy American provision governing Transportation Department procurement requires that all of the iron, steel, and manufactured products used be produced in the United States. The definition of U.S.-manufactured products is the same here as under the general Buy American provision, and the same thresholds for public interest and short supply waivers also apply. However, the unreasonable cost waiver is considerably different. Under this provision waiving the restriction on the basis of unreasonable cost requires that the total project cost (not the input cost) be at least 25 percent higher. That is an enormous cushion for domestic suppliers.

For example, under the general provision, a domestic supplier has to be mindful of the world price for steel. The domestic offer could be rejected in favor of a foreign supplier if there is more than a six percent price differential. But under the more restrictive Transportation Department provisions, the domestic supplier’s price is not even remotely disciplined by the potential of foreign participation in the bidding process because it is the total cost of the project—and not a competitor’s bid—that would trigger the waiver. So, if the steel in a highway project constitutes about 10 percent of the total cost of the project—say $10 million out of $100 million—then the steel price can rise from $10 million to $260 million before the project cost increases by 25 percent. Effectively, suppliers under the more restrictive Buy American rules can charge whatever they want to charge.

There is another set of waivers that are perhaps the most effective at ensuring some competition in the U.S. government procurement market. Under the Trade Agreements Act of 1979, the president is authorized to invoke the public interest waiver of the Buy American rules and exempt countries which reciprocally waive their own buy-local restrictions for U.S. firms. Those countries include signatories to the World Trade Organization’s Government Procurement Agreement or parties to U.S. free trade agreements (like the North American Free Trade Agreement) that contain full government procurement chapters.

The Buy American provisions in the recently-passed House bill and the still-pending Senate bill seek to apply the more restrictive Transportation Department rules to all public works projects funded by the legislation—with the exception that in the House version manufactured goods are excluded. Not only would the unrealistic 25 percent “unreasonable cost” waiver threshold apply, but the waivers granted to U.S. trade partners under obligation of international agreement would not apply. And that is why there has been so much resistance and opposition to this proposal from overseas.

Now we can properly assess the meaning of language inserted into the Senate bill last night. The amendment simply inserts the “assurance” that the Buy American provision will be “applied in a manner consistent with United States obligations under international agreements.” That is no doubt a subjective and therefore vague assurance. It doesn’t preclude the promulgation of new regulations that intend, but fail, to administer the law in a manner consistent with U.S. obligations under international agreements. It would be clear, objective, and reassuring to stipulate that the same waivers that firms in foreign countries enjoy now will be honored with respect to the appropriations authorized under the legislation. That would make things right with Canada, Europe, Mexico, Japan and about 12 other important trading partners, and the talk of trade retaliation would subside.But it still stinks for U.S. taxpayers (and will foster some ill-will abroad) because the U.S. government procurement market will be made even less accessible to suppliers from countries that are not signatories to the various procurement agreements. The more rigid cost waiver will exclude bids from, among others, Chinese suppliers of iron, steel, and manufactured goods (in the Senate version). And with low-cost suppliers of crucial materials effectively excluded from the process, U.S. suppliers will be less restrained in their cost proposals. And that means fewer projects, fewer higher, and more wasted resources.

‘Buy American’ Debate Is Not Dead Yet

The near-$1 trillion spending bill working its way through Congress has all the hallmarks of business as usual in Washington. It includes billions of dollars for home-state pet projects, billions more in spoils for majority-party benefactors, and numerous provisions that its sponsors hoped would elude close scrutiny.

One such provision is the Buy American requirement, which restricts competition to domestic suppliers on infrastructure projects financed through the spending bill. The provision clearly violates U.S. commitments under various international agreements to allow most major trading partners to compete for government procurement. And it invites frivolous waste of the kind reserved for people spending other people’s money.

By limiting competition, expanded Buy American requirements mean that taxpayers would get the smallest bang for their infrastructure buck. Cordoning off the market for U.S. suppliers would mean higher price tags, fewer projects funded, and fewer people hired. And by abrogating our obligations to allow major trading partners to compete for those projects, any short-term increases in U.S. economic activity and U.S. job creation likely would be offset by lost export sales–and the jobs that go with them–on account of copycat protectionism abroad.

Buy American requirements have been a part of U.S. procurement rules for 75 years. But those restrictions have been eased over the decades. Under various international agreements, the United States grants waivers to most major trade partners from many of the law’s restrictions. But the House-passed and original Senate-proposed legislation would supersede the waivers and raise considerably the threshold for issuing case-specific exemptions to foreign firms that wish to bid on procurement projects funded from the legislation.

On February 3, one week after passage of the House-version of the spending bill, President Obama finally broke his silence over the issue, expressing aversion to “sending a protectionist message” and opposition to provisions that could “trigger a trade war.”  The president’s comments were expected to soften the stance of some proponents of Buy American in both chambers.  Indeed those comments appear to have made some impression in the Senate.

Although the Senate voted down an amendment by Sen. McCain to exempt all of the infrasturcture spending in the bill from Buy American laws, it agreed to insert an amendment (sponsored by longtime trade skeptic Byron Dorgan, of all people) to ensure that the Buy American clause would be “applied in a manner consistent with United States obligations under international agreements.”  But that’s still no guarantee.  Unless the Buy American language is stripped entirely or the legislation includes language explicitly granting the waivers that currently exempt most of our major trade partners, there will be room for interpretation.

And there is still the problem of the House of Representatives, where the President’s concerns have not registered with the Congressional Steel Caucus or the chairman of the House Transportation Committee, James Oberstar, who said, “If [Buy American provisions are] not in, I’m not supporting this package and I’ll bring a lot of votes with me.”

So, will congressional Democrats very publicly shun their president on this issue or can they resist their growing habit of acting unilaterally and provocatively on trade?  The issue remains quite unresolved.

Welcome Developments on Trade

Yesterday, President Obama broke his long silence about the Buy American provisions in the congressional spending bills. In an interview with ABC’s Charlie Gibson, Obama expressed support in principle for removing the provocative language to expand Buy American provisions:

CHARLES GIBSON: A couple of quick questions. There are “Buy America” provisions in this bill. A lot of people think that could set up a trade war, cost American jobs. You want them out?

PRESIDENT OBAMA: I want provisions that are going to be a violation of World Trade Organization agreements or in other ways signal protectionism. *** I think that would be a mistake right now. That is a potential source of trade wars that we can’t afford at a time when trade is sinking all across the globe. (***Per the White House, President Obama misspoke and meant to say, “I want provisions that are not going to be a violation of World Trade Organization agreements or in other ways signal protectionism.” )

CHARLES GIBSON: What’s in there now? Do you think that does that? Do you want it out?

PRESIDENT OBAMA: I think we need to make sure that any provisions that are in there are not going to trigger a trade war.

And in an interview with Fox, the President said:

I agree that we can’t send a protectionist message…I want to see what kind of language we can work on this issue. I think it would be a mistake, though, at a time when worldwide trade is declining, for us to start sending a message that somehow we’re just looking after ourselves and not concerned with world trade. (my emphasis)

It looks like President Obama gets it, although I would be more convinced of that if his last statement didn’t seem to regard “world trade” and “just looking after ourselves” as mutually exclusive. More engagement in world trade is one of the best ways to look after ourselves.

Finally, just a word of caution to our friends in Europe and Canada, where this morning’s newspapers are gleeful about the development: even though the U.S. president opposes the Buy American restrictions, the Congress still needs to strip out those provisions. If Congress keeps those provisions in a final spending bill, which passes both chambers of Congress, it’s going to be very tough for the President to veto the legislation.

Administration Delays E-Verify for Federal Contractors

The Washington Post reports that the Obama administration is delaying the Bush administration plan to require federal contractors to use the E-Verify worker background check system.

Criticizing the move, Lamar Smith (R-TX), ranking minority member on the House Judiciary Committee, says, “It is ironic that at the same time President Obama was pushing for passage of the stimulus package to help the unemployed, his administration delayed implementation of a rule designed to protect jobs for U.S. citizens and legal workers.”

E-Verify may well have been designed or intended to protect jobs for citizens and legal workers, but that’s not at all what it would do. I wrote about it in a Cato Policy Analysis titled “Electronic Employment Eligibility Verification: Franz Kafka’s Solution to Illegal Immigration” (a 10-year follow-on to Stephen Moore’s “A National Id System: Big Brother’s Solution to Illegal Immigration”):

A mandatory national EEV system would have substantial costs yet still fail to prevent illegal immigration. It would deny a sizable percentage of law-abiding American citizens the ability to work legally. Deemed ineligible by a database, millions each year would go pleading to the Department of Homeland Security and the Social Security Administration for the right to work.

Even if E-Verify were workable, mission creep would lead to its use for direct federal control over many aspects of American citizens’ lives. Though it should be scrapped, the longer E-Verify is delayed, the better.