Topic: Trade and Immigration

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.

What We Do Next Is Correct the “Powerful Perception”

Reihan Salam comments on Alan Reynolds’ important op-ed in yesterday’s Wall Street Journal:

Anyway, even if Reynolds is right and we haven’t actually seen as big an increase in inequality as most observers believe, we still have a powerful perception that is driving political outcomes, including the drift of centrist Democrats away from pro-market policies. Merely pointing out that the statistics are somehow misleading (an important and valuable contribution if it’s true) won’t change that. So even if Reynolds is right, the political question — what do we do next? — remains an open question.

I find this a puzzling statement. The “powerful perception” of outsized increases in inequality is driven in large measure by the drumbeat of media rhetoric played to the time of misread inequality stats. If correcting that mistake cannot change the false perception driving political outcomes, then what can?

If Reihan believes, as I do, that Reynolds is right, then he ought to use his voice as a political commentator to help try to correct the misperception. If the correct belief about inequality becomes more widespread, then inequality will be seen as less of a problem and demand for policies meant to “fix it” will start to dry up. Then, maybe, what we do next won’t be misguided or counterproductive.

Signs of Sanity at the International Trade Commission

Today is a pretty good day, as far as trade policy goes.

This morning, pursuant to a five-year “Sunset Review,” the U.S. International Trade Commission voted to revoke longstanding antidumping and countervailing duty restrictions against imported carbon steel plate and corrosion-resistant steel from 15 different countries.  The ITC also voted to continue the measures against corrosion-resistant steel from Korea and Germany for at least another five years.

While not perfect, today’s outcome is something to rejoice.  Revocation of trade remedy restrictions is rare, indeed, and rarer still where steel is concerned.

As described in this recent paper, the U.S. steel industry is doing phenomenally.  And given the dramatic growth in demand for steel in other regions of the world, today’s decision is unlikely to produce a significant surge in U.S. steel imports.  But at least now, U.S. steel consuming industries, which have been forced to endure some of the highest steel prices in the world on account of the limited competition, will have greater flexibility and negotiating leverage to counter the growing market power of the domestic steel industry.

WTO Membership Promotes a More Open China

Each year the U.S. Trade Representative’s Office issues a report on the status of China’s compliance with its obligations as a member of the World Trade Organization to open its market further to global competition. Mandated by law, the most recent report was issued yesterday, all 109 pages, and it is generating media buzz (check out this New York Times story, for example) for its critical comments about China’s failure to fully comply with its commitments.

The report was certainly well timed to make a spalsh. This week, a high-powered U.S. delegation is heading to China, led by U.S. Treasury Secretary Henry Paulson and including Federal Reserve Chairman Ben Bernanke. The delegation aims to cajole the Chinese to speed up not only trade liberalization but the flexibility of their currency.

This week also marks the 5th anniversary of China’s accession to the WTO as its 143rd member after 15 years of negotiations. As a condition of its entry, the Chinese government agreed to lower tariffs on imports and open its market further to foreign investment and services trade. After five years, the phased implementation process is officially over.

I’ve been reading through the USTR’s report today and I think the news media have been somewhat hyping its negative aspects (surprise, surprise). It does rightly criticize China for not doing enough to stop piracy of intellectual property and to freely allow certain imports and services. But the report also notes impressive progress.

China’s market is significantly more open today than it was even five years ago. For example, before its accession, China did not allow foreign-owned companies to freely import, export, and distribute goods within China. Today those so-called trading rights are widely permitted. China’s tariffs on goods of the greatest importance to U.S. industry have fallen from an average of 25 percent in 1997 to 7 percent. Tariffs on information technology goods from the United States have fallen to zero. Overall U.S. exports to China are up 35 percent so far in 2006 compared to last year and are up 158 percent since 2000.

My Cato colleague Daniel Ikenson goes beyond the USTR report in an op-ed titled “Toasting China: Why Their WTO Membership is a Blessing,” to show that China’s entry into the WTO has been good for the U.S. economy.

All in all, this should be a happy anniversary for everyone who supports freer markets and expanding trade.   

More Trade, More Jobs, Higher Wages

Critics of international trade argue that imports mean fewer jobs and lower wages for American workers. They repeat this mantra despite plain evidence to the contrary.

The latest evidence comes this morning with another U.S. Labor Department report that the U.S. economy continues to create new jobs at a healthy clip. U.S. payrolls grew by another 132,000 in November. The unemployment rate ticked up slightly to a still relatively low 4.5 percent because new workers surged into the labor market.

In the past year, total payroll employment has jumped by 1.8 million. Since mid-2003, payroll jobs have grown by 6.2 million, and since 1990 total payroll jobs have grown by 27 million. That impressive job growth has occurred against a backdrop of rising U.S. trade with the rest of the world, so clearly trade does not mean fewer jobs for American workers.

What about wages? They too are rising again, according to the same labor-market reports this morning. Average wages are up 4.1 percent from a year ago, ahead of inflation. When benefits are added, total compensation for U.S. workers continues to rise faster than inflation and is up significantly in real terms compared to previous years.

Like technology, trade can cause turnover in the labor market. But also like technology, trade raises the overall productivity of American workers, leading to better jobs and higher real wages.

The best analysis on this subject remains the 2004 Trade Briefing Paper, “Job Losses and Trade: A Realty Check,” by my Cato colleague Brink Lindsey.