Topic: Trade and Immigration

Fred Thompson’s Questionable Views on U.S.-China Trade

Fred Thompson’s relatively late entry into the presidential race has left people scrambling to discern his views on a range of topics from social issues to trade with China. I’ll leave it to others of probe his position on the former, but I came across something this week on the latter that is not encouraging for those of us who support free trade.

Two years ago, the former Tennessee senator was one of 11 commissioners to approve and sign the “2005 Report to Congress of the U.S.-China Economic and Security Review Commission.” The commission was established by Congress in 2000 to hold hearings and write reports on the implications of America’s growing trade with China.

Americans are right to cast a sober eye toward China’s foreign policy intentions and human rights record, but the commission also dabbles in the worst sort of economic populism toward U.S.-China trade. Among the questionable assertions in its 2005 report:

China’s “active participation in the global economy … is resulting in the movement of jobs, especially manufacturing jobs but increasingly service jobs as well, from the United States to China and other countries offering higher rates of return on capital” (p.3).

“U.S. producers of advanced technology products are also subject to the growing pressures posed by China. In 2004, the U.S. trade deficit in advanced technology products with China grew to $36.3 billion” (p. 4).

“The opening of the Chinese, Indian, and former Soviet bloc economies has led to more than a doubling of the global market’s work force and likely will put downward pressure on U.S. wages for workers at all levels, including higher levels of the wage scale. Mobile capital and technology flows accelerate this trend” (p. 5).

“Congress should consider imposing an immediate, across-the-board tariff on China’s imports at the level determined necessary to gain prompt action by China to strengthen significantly the value of the RMB [its currency]. The United States can justify such an action under WTO Article XXI, which allows members to take necessary actions to protect their national security. China’s undervalued currency has contributed to a loss of U.S. manufacturing, which is a national security concern for the United States” (p. 14).

Cato’s Center for Trade Policy Studies has systematically addressed economic concerns about U.S.-China trade at our web site, but here’s the crib sheet:

U.S. job losses from trade with China have been small and have been more than offset by jobs created in sectors that do not compete directly with China. The U.S. economy has added a net 16.5 million jobs in the past decade of expanding trade and the national unemployment rate is a low 4.6 percent.

Trade with China and other emerging economies has helped to boost living standards in the United States by reducing prices for consumer goods that make our lives better everyday. Average real hourly compensation (wages and benefits) paid to American workers is up 22 percent in the past decade. Tariffs on imports from China would reduce the well being of tens of millions of American households.

Real manufacturing output in the United States is up 31 percent compared to a decade ago. As my colleague Dan Ikenson shows in a new study for Cato, U.S. manufacturers enjoyed record output, sales, profits, and returns on investment in 2006. The “advanced technology products” that the commission worries about are overwhelmingly laptop computers and other consumer electronics. A WTO panel would rightly laugh at the claim that imports from China have somehow endangered America’s “national security.”

Which brings us back to Fred Thompson. Does he really believe the many questionable assertions in the 2005 report of the U.S.-China Economic and Security Review Commission that he approved? Or was he not really paying much attention? Or has he revised his views since 2005? An enterprising economics and business reporter should ask him.

Growing Trade, Shrinking Deficit

The Commerce Department reported this morning that America’s current account deficit checked in at $190.8 billion for the second quarter of 2007. The number will undoubtedly provide fodder for critics of trade who see exports as the sole measure of success in the global economy and rising imports as a sure sign of failure.

The latest report is certainly newsworthy, but not in the negative way that many pundits and politicians will portray it.

The current account represents the broadest measure of America’s trade with the rest of the world, accounting for not only trade in goods but also services, investment income (such as interest, dividends, and profits), and unilateral transfers such as foreign aid and remittances.

The real news in today’s report is that America’s trade with the rest of the world continues to climb to new records despite the hand-wringing by many members of Congress and misguided pundits in cable TV land. Although the overall deficit declined slightly from the first quarter, our imports from the rest of the world are up 8 percent from a year ago and our exports are up 13 percent.

And although the rest of the world owns about $2.7 trillion more in U.S. assets than Americans own in assets abroad, we continue to earn more on our total investments abroad than foreigners earn on their investments here — about $16 billion more so far in 2007.

In a speech in Germany earlier this week, Federal Reserve Board chairman Ben Bernanke explained why running a current account deficit isn’t necessarily bad news for the U.S. economy, at least in the short to medium run. Among his main points:

First, these external imbalances are to a significant extent a market phenomenon and, in the case of the U.S. deficit, reflect the attractiveness of both the U.S. economy overall and the depth, liquidity, and legal safeguards associated with its capital markets….

Second, current account imbalances can help reduce tendencies toward recession, on the one hand, or overheating and inflation, on the other….

Third, although the U.S. current account deficit is certainly not sustainable at its current level, U.S. liabilities to foreigners are not, at this point, putting an exceptionally large burden on the American economy.

Check out the Center for Trade Policy Studies website for more on what the trade deficit means and what it doesn’t mean.

A Second Industrial Revolution?

Peter Goodman has a fine article in Monday’s Washington Post about the resilience and tenacity of the manufacturing sector in the United States – even in the storied ghost towns that dot the once-bustling textile regions of North Carolina.  Like my recent paper on the topic, Goodman points out that U.S. manufacturing is thriving:

The United States makes more manufactured goods today than at any time in history, as measured by the dollar value of production adjusted for inflation – three times as much as in the mid-1950s, the supposed heyday of American industry. Between 1977 and 2005, the value of American manufacturing swelled from $1.3 trillion to an all-time record $4.5 trillion, according to the Bureau of Economic Analysis.

And he reinforces a key point of my paper that has yet to penetrate the pessimistic political discourse:

With less than 5 percent of the world’s population, the United States is responsible for almost one-fourth of global manufacturing, a share that has changed little in decades. The United States is the largest manufacturing economy by far. Japan, the only serious rival for that title, has been losing ground. China has been growing but represents only about one-tenth of world manufacturing.

The major difference between my paper and Goodman’s story is that the former takes a birds-eye view of the manufacturing sector, presenting an impersonal, data-driven assessment of the state of U.S. manufacturing.  Goodman’s story focuses on a particular biotechnology company that occupies a former textile mill, producing a drug for liver ailments from a local pond weed.  The story is emblematic of the metamorphosis throughout the North Carolina and U.S. manufacturing sectors:

North Carolina encapsulates the forces remaking American manufacturing. Between 2002 and 2005, the state lost 72,000 manufacturing jobs, about three-fourths in textiles, furniture-making and electronics, according to the North Carolina Commission on Workforce Development. At the same time, the state has become a rising powerhouse in lucrative new manufacturing sectors such as biotechnology, pharmaceuticals and sophisticated textiles.

During the most recent decade, U.S. manufacturing has become increasingly oriented toward the middle and upper ends of the value-added spectrum.  Opportunities abound for workers with skills or the willingness and wherewithal to acquire them.  In fact, the title of the National Association of Manufacturers tenth annual Labor Day Report on the state of U.S. manufacturing is “Rising Incomes Cushion Economy,” and its subtitle is “Finding Highly Skilled Workers Remains a Challenge for Manufacturers.”  It seems to me that rising wages should make more workers willing to get the skills, and the need to find highly-skilled workers should induce manufacturers to assist on the wherewithal front.

A Poor Investment

The Census Bureau today released the latest figures on poverty in the U.S, showing that 12.3 percent of Americans (roughly 36.5 million people) live below the poverty line. Nothing could better illustrate the continued failure of the American welfare state. Despite spending more than $477 billion on some 50 different programs to fight poverty last year, the actual reduction in poverty was trivial. Indeed, since Lyndon Johnson declared war on poverty in 1965, the U.S. government has spent more than $11 trillion fighting poverty without success.

One definition of insanity is doing the same thing over and over and expecting different results. Perhaps its time to try something different.

Observers have known for a long time that the surest ways to stay out of poverty are to finish school; not get pregnant outside marriage; and get a job, any job, and stick with it. That means that if we wish to fight poverty, we must end those government policies—high taxes and regulatory excess—that inhibit growth and job creation. We must protect capital investment and give people the opportunity to start new businesses. We must reform our failed government school system to encourage competition and choice. We must encourage the poor to save and invest.

More importantly, the real work of fighting poverty must come not from the government, but from the engines of civil society. An enormous amount of evidence and experience shows that private charities are far more effective than government welfare programs. While welfare provides incentives for counterproductive behavior, private charities can use their aid to encourage self-sufficiency, self-improvement, and independence. Private charities can individualize their approaches and target the specific problems that are holding people in poverty.

The big question is how much more money–and how many more lives–will we waste until we realize that, as Ronald Reagan used to say, “government isn’t the solution; government is the problem.”

More Thoughts on Trade Enforcement

In addition to the sock safeguard action against Honduras, the U.S. government recently requested arbitration over alleged violations by Canada of the 2006 Softwood Lumber Agreement.  (We’ve written about this long-running dispute here, here, and elsewhere). Under the SLA, Canada is required to restrict the volume of its exports or impose an export tax (or some combination of the two) when the prevailing monthly price falls below U.S. $355 per million board feet.

The deal, which the Canadians signed with guns to their heads, was agreed during a period of a robust housing market and relatively high lumber prices.  With the decline of the U.S. housing market, lumber prices have gone south, and the stipulation that Canada intervene in the lumber market has kicked in.

Enforcement in this case, then, means that the housing market slump will endure longer than it has to.  Builders will be less capable of offsetting rising mortgage rates with lower priced homes, as the cost of their most important input remains artificially high.

Even the cost of nails should be expected to rise and for the same reason –  enforcement.  On Tuesday, the U.S. International Trade Commission determined preliminarily that imports of certain steel nails from China and the United Arab Emirates (co-winners of the 2006 Congressional Pinata of the Year Award) are being sold at less than fair value in the United States and causing material injury to domestic producers.   Additional duties are likely to be formalized by the end of the year. 

Thus, the administration’s indulgence of Congress’s demands for more trade enforcement will have the noble effect of making life more difficult, in particular, for Americans at the lower end of the income spectrum, who will need to devote more of their limited resources to housing and socks.  More often than not, trade enforcement is just another term for regressive taxation.

Sockin’ it to Honduras

A constant refrain from Democrats in Congress is that the Bush administration has been lax about enforcing the terms of U.S. trade agreements. Such a conclusion reveals a true naivete about trade diplomacy. The U.S. Trade Representative maintains ongoing dialogues with our trade partners during which many trade irritants are addressed and resolved without need of resort to the stick.

But Congress wants to see more of the stick, and more of the stick it shall see. Apparently our poor, but industrious Honduran neighbors have been shipping too many socks stateside. U.S. imports of cotton, wool, and man-made fiber socks from Honduras rose from 10.9 million dozen pairs in 2005 to 15.2 million dozen pairs in 2006, an increase of nearly 50 percent. In 2007 through June, imports from Honduras are up about 60 percent from the same period in 2006.

Under the terms of the Dominican Republic-Central America-United States Free Trade Agreement (CAFTA-DR), the U.S. government can impose special safeguards in the form of new a tariff if a textile or apparel product:

“is being imported into the United States in such increased quantities, in absolute terms or relative to the domestic market for that article, and under such conditions as to cause serious damage, or actual threat thereof, to a domestic industry producing an article that is like, or directly competitive with, the imported article.”

The Committee for the Implementation of the Textile Agreements (CITA), an agency within the Commerce Department, initiated proceedings for such a safeguard last week. If it makes an affirmative finding, duties of 13.5 percent will be imposed later in the year.

Despite the surge in sock imports from Honduras, the country still accounts for only about 4 percent of U.S. consumption. How can such a miniscule presence account for “serious damage” or even the threat thereof to the domestic industry?

The safeguard rule is a farce, and its application to a country which depends heavily on its few manufacturing industries, and where two-thirds of the citizens live in poverty, explains a lot about why international regard for
America is in decline.

Summoning the Ghosts of Smoot and Hawley

Members of the 110th Congress haven’t been shy about expressing their disdain for trade. No fewer than two dozen trade-related bills, almost all of which are antagonistic toward U.S. trade partners or outright protectionist, were introduced in the first seven months of this Congress. While some of those bills were crafted mostly for political effect, it is pretty clear that some hostile trade legislation will at least make it to the floors of both chambers this session or next. With Congress adjourned for August recess, here’s where things stand.

For all intents and purposes, the completed bilateral trade agreements with South Korea, Colombia, Peru, and Panama have been shunted aside to consider, instead, enforcement-oriented legislation and the expansion of trade adjustment assistance legislation. Although House Ways and Means Committee Chairman Charles Rangel of New York has stated his intention to promote the Peru Agreement, it is doubtful that he will take to the task with much vigor or any success. His colleagues have different plans for trade policy.

Consider the names of some of the bills before Congress: The Trade Prosecutor Act; The Trade Enforcement Act; The Trade Law Reform Act; The Japan Currency Manipulation Act; The Balancing Trade Act; The Trade Adjustment Assistance Improvement Act, and the still-nameless legislation that would revoke normal trade relations status for China. Implicit in all of this: trade liberalization is bad, our trade partners cheat, and the folly of our embrace of globalization is evidenced by its massive human toll.

The Chinese “currency issue” has dominated trade discussions on the Hill. In the Senate, the currency bill most likely to make it to the floor is S.1607 (the Baucus-Grassley-Schumer-Graham Bill). It requires the Treasury Department to issue semiannual reports on the currencies of our trade partners, with action triggered against countries whose currencies are found to be fundamentally misaligned. If a currency is designated as such (and the country has been tagged for “priority action” because its central bank has engaged in “protracted, large-scale” exchange market intervention with partial or full sterilization) the country would have 90 days to take corrective measures. If insufficient measures are taken on the part of the offending country, a series of actions by the U.S. government would be triggered.

Most problematically, the bill mandates that all subsequent antidumping calculations (for products that are subject to antidumping measures) would require the conversion of foreign prices into U.S. dollars using the rate of exchange that would be observed if the currency weren’t misaligned. It is still unclear how the “would be observed” rate would be determined, but it’s crystal clear that such actions would be found to violate the WTO Antidumping Agreement.

If after one year, the currency is still misaligned, the legislation mandates the U.S. Trade Representative to lodge a formal complaint within the WTO. Again, it’s unclear which provision of the WTO agreements would be violated by the action or inaction of the foreign government.

The House’s currency bill contains similar provisions, but is more aggressive and more problematic. It would treat currency misalignment as an export subsidy, and mandates application of countervailing duties to offset those “subsidies.”

But currency isn’t the only topic on the congressional trade agenda. They’re thinking enforcement and reparations, too.

The Trade Adjustment Assistance Improvement act would broaden the scope for compensating workers and communities adversely affected by import competition. Financial assistance would be made available to primary and secondary service workers who can demonstrate that they lost their jobs to outsourcing.

On August 1, Senate Finance Committee Chairman Max Baucus of Montana introduced S.1919, The Trade Enforcement Act of 2007, which is a bill that consolidates his favorite provisions from the various stand-alone bills introduced earlier in the year. Among other things, it would:

  • create a Chief Enforcement Officer at the USTR to identify, investigate, and prosecute cases where trade partners are not in compliance with their obligations;
  • establish a panel of retired federal judges to review adverse WTO decisions, and to advise Congress on the efficacy of those decisions before any steps toward compliance are undertaken;
  • eliminate presidential discretion to not impose tariffs or quotas recommended by U.S. International Trade Commission in so-called China Safeguard cases;
  • eliminate presidential discretion to not apply the countervailing duty law to so-called non-market economies;
  • lower the evidentiary threshold for finding “material injury” in antidumping cases, which would encourage the initiation of more antidumping cases.

In the House, the inclination toward mischief is even greater than in the Senate. While versions of most of the provisions specified in S.1919 exist in various House bills, there is also legislation that would reverse U.S. implementation of a prior WTO ruling regarding the antidumping calculation practice known as zeroing. There are also provisions in the Trade Law Reform Act that would result in the calculation of higher antidumping duties by the Commerce Department.

There seems to me a huge inconsistency in all of these provisions. On the one hand, it says, let’s beef up our enforcement and prosecutorial capacity and bring more WTO cases. On the other hand, it says, let’s enact provisions that are likely WTO-inconsistent, and while we’re at it, show defiance of the WTO by affirming our belief that its rulings are beneath us. In other words, Congress wants to rely on the WTO to compel other countries to act in accordance with their commitments, while Congress decides on a case- by-case basis whether such WTO rulings against U.S. policies have merit.

This Congress, more than any in my lifetime, is apt to upset the apple cart in ways we may regret for years to come.