Topic: Trade and Immigration

Some Quick Links on Farm Policy Reform

Cato’s Center for Trade Policy Studies is putting together its ideas for a sensible farm policy (the current farm bill comes up for renewal later this year). Needless to say, the Cato plan will look substantially different from the anachronistic, interventionist pork-fest that was the 2002 Farm Bill.

In the meantime, those interested in U.S. farm policy might like to check out the following links: today’s editorial in the Washington Post and an article by Jonathan Rauch in Friday’s National Journal. Both contain plenty of arguments for what is wrong with U.S. agricultural policy today and are best read on an empty stomach. For a good overview of the farm bill debate, this article by Catherine Richert (Congressional Quarterly) is a pretty good bet.

High-Tech Immigrants vs. Low-Tech Congress

Any scan of the business pages will reveal anecdotally that foreign-born scientists, engineers, and entrepreneurs are playing an important role in our high-technology economy. A Duke University study released yesterday on ”America’s New Immigrant Entrepreneurs” confirms that fact.

Conducted by a team of researchers at Duke’s Pratt School of Engineering, the study surveyed thousands of U.S. high-tech companies and examined a decade of patent records. The study found that:

  • One-quarter of all engineering and technology companies launched between 1995 and 2005 had at least one key founder who was foreign-born. Those companies with at least one immigrant co-founder produced $52 billion in sales and employed 450,000 workers in 2005.
  • India was the most common home country among the foreign-born entrepreneurs, followed by the United Kingdom, China, Taiwan, and Japan. Most of the immigrant-founded companies were in the software and innovation/manufacturing services sectors.  
  • Foreign nationals living in the United States were listed as inventors or co-inventors on almost a quarter of the patents filed from the United States in 2005.

Many members of Congress worry that the United States may be losing its edge in high technology industries. Yet the same Congress maintains a cap of 65,000 on H1-B visas that allow highly skilled immigrants to live and work in the United States, a cap that falls far below the actual needs of our nation’s resurgent high-tech sector.

The Duke study shows clearly why Congress should raise the cap — unless congressional leaders believe America already has too many high-tech companies and patents too many new inventions. 

Start the Engines on the Inequality Debate

With the Democrats taking over Congress, most pundits are expecting much debate about income inequality in 2007. Indeed, the debate has already begun in the blogosphere over Alan Reynold’s recent op-ed in the Wall Street Journal.

For other takes, check out econ bloggers Greg Mankiw, Brad DeLong, and Tyler Cowen and Alex Tabarrok’s Marginal Revolution.  

A few observations: 

  • Alan’s full paper on trends in income inequality will be released by Cato in the second week in January. 
  • Please join Alan, Diana Furchtgott-Roth, and Gary Burtless for a discussion of income inequality at Cato on January 11.
  • I believe Alan has uncovered some very interesting information on the use of tax return data to illustrate income trends over time. Trends have been influenced by the rising amount of business income that is now reported on individual tax returns instead of business returns, the 401(k) explosion, and the effects of two types of stock options on reported income.
  • I’m no expert on income trends, but I know enough to see that there are huge data issues here. You simply can’t look at a raw IRS or Census table and make a hard conclusion about income trends. You need to think about what is included and excluded from “income” at each point in time. 
  • The much-cited Piketty-Saez data on the share of income going to those at the top do not reveal a steady rise over recent decades. Instead, most of the rise comes sharply in a single two-year period, 1987-1988. That should make economists and pundits skeptical about whether the supposed inequality trend is actually related to long-term changes such as international trade or wage premiums for college grads.
  • I think it’s still an open question whether income inequality has increased or decreased in recent decades, but we’ll see what the experts say on January 11.

The iPod Nano: Assembled in China, designed and enjoyed in America

Among the Christmas presents in our house this year were two iPod Nanos. On the back of each of these nifty devices is the inscription, “Designed by Apple in California. Assembled in China.”

That tells a more accurate story than the more common but misleading “Made in China.” As with many other high-tech devices, iPods are indeed assembled in China, but the real guts of the device—the design, the brand name, the more sophisticated components—come from countries outside of China.

To those obsessed with the trade balance as a zero-sum scorecard, another iPod imported from China merely adds to our growing bilateral trade deficit with China. Granted, assembling iPods does create jobs for Chinese workers that probably pay higher than average wages, so China does benefit. But who is getting rich from all the iPods Americans bought this Christmas, and who is getting the most enjoyment from them?

The answer: Americans.

Gerald Ford Helped Lead GOP Away from Isolationism

During a speaking trip to Grand Rapids, Michigan, a couple of years ago, I whiled away a few spare hours touring the Gerald R. Ford Presidential Museum.

The news stories today about Ford’s death rightly focus on his “accidental presidency,” his pardon of Richard Nixon, and the important if transitional role he played in helping our nation recover from the trauma of Watergate and the fall of South Vietnam.

One underappreciated aspect of Ford’s record that I learned from my visit to the museum in Grand Rapids is that he was a committed internationalist. When Ford won his first race for Congress, in 1948, he ran as an internationalist Republican, defeating an isolationist incumbent.

It is easy to forget today, but before World War II, the Republican Party was the protectionist, isolationist party. Republicans sponsored the 1930 Smoot-Hawley tariff bill that deepened and prolonged the Great Depression, contributing to a downward spiral in global trade and feeding the resentments that set the stage for World War II.

After the war, Republicans such as Sen. Arthur H. Vandenberg of Michigan broke from the party’s past to work with Democrats to forge a bipartisan trade and foreign policy. In the late 1940s, the United States not only joined NATO but also the General Agreement on Tariffs and Trade. Under this bipartisan consensus, U.S. government barriers to international trade and foreign investment continued to fall from their peaks in the 1930s to their relatively low levels of today.

Gerald Ford’s presidency and career are open for critique, but on the basic question of whether the United States should engage in the global economy or wall itself off in fear, Gerald Ford was on the right side of history.

Antidumping Reformers Rejoice

Antidumping policy moves incrementally in the right direction only on rare occasions.  In that regard, last week was nothing short of historic.  In addition to the U.S. International Trade Commission deviating from its conventional script and revoking 15 longstanding antidumping measures on key steel products (described here), the Office of the U.S. Trade Representative announced to Congress the administration’s decision to implement a critical change to the Commerce Department’s antidumping calculation methodology, which, if implemented in good faith, will likely reduce the incidence and disruptive impact of antidumping measures henceforth. 

In response to a series of rulings from the dispute settlement body of the World Trade Organization, which found a U.S. methodological practice known as “zeroing” to violate Article 2.4.2 of the WTO’s Antidumping Agreement, Commerce decided (albeit, grudgingly) to change it’s policy.  I have described zeroing and its impact in a few previous papers and in this blog post, but here’s a brief summary.

In a typical antidumping investigation, the sales and cost data of each foreign company under investigation are subject to a series of calculations before the bottom line “dumping margin” is produced.  Usually, the Commerce Department calculates average net prices for each product (i.e., widget model 1, widget model 2, etc.) sold in the U.S. and home markets.  The average U.S. and average home market prices of widget model 1 are compared, the average prices of widget model 2 are compared, and so on.  In some cases there may be few comparisons, and in others there may be hundred or even thousands of comparisons.  Some of those comparisons may generate positive dumping margins (when average home market price exceeds average U.S. price) and some may generate negative dumping margins (when U.S. price is higher).

Commerce then calculates from all of these model-specific comparisons an overall weighted-average dumping margin.  But before calculating the overall average, Commerce tinkers with the mathematics by zeroing.  Zeroing refers to the practice of assigning a value of zero to all of the comparisons that generate a negative dumping margin.  Only after zeroing does Commerce calculate the average dumping margin.  So, in other words, zeroing precludes the negatively dumped sales from having the proper impact on the “average” dumping margin.  Thus, if 99 of 100 comparisons generate large negative dumping margins and 1 of 100 produces a positive dumping margin, zeroing ensures that the average dumping margin calculated is positive.  Pretty fair, huh?

In research that Brink Lindsey and I conducted a few years ago, we found that zeroing is highly distorting.  In a sample of 18 actual antidumping determinations, we found that calculated dumping margins would have been on average 86% lower had zeroing not been employed.  Five of those 18 cases would have resulted in the cases being dropped, and antidumping measures never having been imposed.  So the change in policy is laudable and potentially very significant. 

I say “potentially” because zeroing reform remains incomplete.  The policy change announced last week pertains to zeroing in what are called average-to-average comparisons.  In some cases, the Commerce Department compares average prices to transaction-specific prices and in others it compares transaction-specific to transaction-specific prices.  It is possible that Commerce will use these methodologies more frequently now and continue to zero (at least until zeroing under these comparison methodologies is found in violation of our WTO commitments as well).

And there is one other possible obstacle on the road to implementing this change: Congress.  Although zeroing is not mandated by law, the practice has been in use for a very long time.  Cases have been heard in the Court of International Trade and the Court of Appeals for the Federal Circuit concerning the question of whether zeroing is even permitted under the statute.  Both courts have ruled that zeroing is a permissible interpretation of the statue, which has been taken by some in Congress to mean, wrongly, that zeroing is a requirement of the statute. 

Congress, which is bipartisan in its broad support of a strong (i.e., menacing and unfair) antidumping law, may seek a fight with the administration over the propriety of changing the zeroing practice without input from the legislative branch.  But, by and large, last week’s zeroing announcement was another rare victory for antidumping reform.

The Good News behind This Morning’s Trade Deficit Report

This morning the U.S. Commerce Department reported another record deficit in the America’s broadest trade account with the rest of the world. In the July-September quarter of 2006, the U.S. current account deficit reached $225 billion, another record. The current account is the broadest measure of America’s international commerce, comprising not only trade in goods and services but also income flows from foreign investment and unilateral transfers such as foreign aid worker remittances.

The report is bound to throw more fuel on the debate over U.S. trade policy. Here’s how the Associated Press described the political fallout from the latest trade numbers:

“Democrats, who took over control of the House and Senate in the November elections, attacked President Bush’s trade policies, charging that the administration has run up record deficits for five straight years by failing to protect U.S. workers from unfair foreign trade practices.” 

To all this hand-wringing about the trade deficit, I say, “Bah Humbug.” The trade deficit itself tells us very little about the success or failure of U.S. trade policy. It is largely driven by differing rates of savings and investment in the United States and our major trading partners. (Check out http://www.freetrade.org for the details.)

Obsession with the trade deficit also obscures the real story behind this morning’s trade numbers: Both our imports and exports are rising at a healthy rate.

Compared to the third quarter of last year, U.S. imports of goods and services from the rest of the world are up 12.7 percent while our exports are up an even steeper 14.1 percent. America’s total two-way trade with the world, including income from investments, is up a spectacular 16.4 percent from a year ago. Imports, exports and investment income have all reached record levels.

The bottom line: Despite the complaints of politicians, Americans have never earned or spent a higher share of their income in the global economy than we do today. We are voting with our dollars every day for more trade and globalization.