Topic: Trade and Immigration

The Benefit of Free Trade Is Not Exports, It’s Lower Prices on Things We Want

In the news this morning, Sen. Orrin Hatch (R–UT), author of the Trade Promotion Authority bill, makes the usual case for trade agreements and TPA:

We need to get this bill passed. We need to pass it for the American workers who want good, high-paying jobs. We need to pass it for our farmers, ranchers, manufacturers, and entrepreneurs who need access to foreign markets in order to compete. We need to pass it to maintain our standing in the world.

It’s certainly good that the chairman of the Senate Finance Committee supports freer trade. But I fear he’s as confused as most Washingtonians about the actual case for free trade.

This whole “exports and jobs” framework is misguided. Thirty years ago in the Cato Journal, the economist Ronald Krieger explained the difference between the economist’s and the non-economist’s views of trade. The economist believes that “The purpose of economic activity is to enhance the wellbeing of individual consumers and households.” And, therefore, “Imports are the benefit for which exports are the cost.” Imports are the things we want—clothing, televisions, cars, software, ideas—and exports are what we have to trade in order to get them.

And thus, Krieger continues, point by point:

Cheap foreign goods are thus an unambiguous benefit to the importing country.

The objective of foreign trade is therefore to get goods on advantageous terms.

That is why we want free—or at least freer—trade: to remove the impediments that prevent people from finding the best ways to satisfy their wants. Free trade allows us to benefit from the division of labor, specialization, comparative advantage, and economies of scale.

I write about this in The Libertarian Mind (buy it now!):

The TPP and GDP: Let’s Wait and See

In discussions of the Trans Pacific Partnership (TPP), there are often very specific figures put out there as the estimated economic gains of this trade deal.  $78 billion of annual income gains for the U.S. is a commony cited number.

It is important to keep in mind, however, that these gains are based on assumptions about what might be in the TPP, not what is actually in the TPP.  That’s because there is no TPP yet.  

The estimates come from this study, and a more detailed previous study, by a group of trade economists.  But if you read the fine print, for example on p. 23 of the second link, they make clear that they are simply estimating the TPP benefits based on the liberalization coverage of past agreements among the same parties.

The extent of the liberalization that will be in the TPP is not clear because that’s what the parties are negotiating about right now: How much to liberalize each sector.  If trade policy were run by free market economists, everyone would liberalize on their own right now.  But trade policy is influenced heavily by special interest groups.  As a result, some import restrictions remain even after a trade negotiation.

Many commentators have come out for or against the TPP already, based on assumptions about what will be in it.  I’m waiting to see the full scope of what’s in the TPP (if the negotiations are ever concluded) before making a decision.  Any liberalization needs to be balanced out against “governance” parts, such as intellectual property protection, where the impact on GDP and welfare more generally are more uncertain.  We can’t really make that calculation until we see the final deal.

How a WTO Meat Labeling Dispute Could Prompt Congress to Change a Bad Law

After losing again at the World Trade Organization, U.S. regulations mandating country of origin labels (COOL) on meat may finally end.  Driven by the possibility that Canada and Mexico could retaliate with increased tariffs, Congress has already begun consideration of a bill to repeal the protectionist program.  If COOL regulations are indeed repealed, American consumers, meat packers, and retailers owe a debt to the WTO’s dispute settlement system.

In the latest WTO decision, the United States lost its appeal of a report originally issued last October.  At that time, I wrote about how the WTO process can help alter the political dynamics in ways that favor free market reform.

Under current U.S. COOL rules, retailers selling beef and pork must include labels stating what country the animal was in when it was born, raised, and slaughtered. This information might be interesting to a curious shopper, but it is completely useless in determining the quality or safety of meat. The same U.S. food safety standards apply regardless of where the animal came from.

Consumers are, of course, welcome to care about things that don’t really matter, and generally, more information is a good thing to have. Sometimes, though, the cost of providing that information is greater than its value. Mandating that companies provide consumers with information will overcome that hurdle by removing the low-information option and forcing consumers to pay the higher price. Making labels mandatory also introduces opportunities for rent-seeking by companies looking to shift costs onto their competitors.

That’s exactly what’s happening with the COOL regulations, and is the crux of the WTO complaint. Canada and Mexico are not complaining that American consumers, armed with their dinner’s travel itinerary will eschew immigrant cattle. Rather, they point out that complying with the rules imposes huge costs on U.S. meat processors who buy cattle that once lived across the border. If a slaughterhouse buys any cattle that rode on a truck traversing the 49th parallel, it must segregate those animals and their meat through the entire production and delivery process.

Time for Hillary to Speak Up on Trade

The Washington Post ran an editorial on Wednesday indicting Hillary Clinton for her silence on the trade agenda. Yesterday morning, the Post published an op-ed by Robert Kagan of Brookings titled “Clinton’s Cowardice on Trade.” Both pieces offer some valid observations, but the matter deserves more scrutiny still.

Is it just me or do others see it as presumptuous, disrespectful, and even contemptuous that the person who expects to head the Democratic Party ticket next year feels entitled to her silence on the single most divisive issue confronting that party? Trade policy is causing a schism between Democrats, and Clinton chooses to showcase her leadership bona fides by … refraining from taking a position? And what does that say about the judgment of her steadfast supporters, whose return silence countenances an evasion akin to deceit? On the other hand, Clinton’s supporters are accustomed to accommodating a more expansive definition of honesty, so perhaps they’re oblivious.

If I were an engaged Democrat, I’d demand to know, now, where Hillary Clinton stands on trade. And if I were a presidential candidate with a reputation for favoring expedience over principle and whose most compelling claim to the White House is that I really, really want to be president, I would want to demonstrate my worthiness by taking a firm position, explaining to my party why I believe that position is the right one, pointing out (as President Obama has) that many of the Left’s objections to trade are based on fallacies, and sticking to it, even if it alienates some factions. Making some people unhappy is a necessity of leadership.

Like President Obama, Hillary Clinton has a history of flip-flopping on trade, so people are understandably confused. As First Lady, she advocated on behalf of her husband’s efforts to forge NAFTA. As a U.S. senator, she was a solid protectionist, voting against trade barriers only 31 percent of the time and against trade-distorting subsidies only 13 percent of the time. As a candidate for president, she expressed skepticism and, at times, indignation about trade agreements and joined with the political left in vilifying NAFTA. As secretary of state, she not only embraced the Trans-Pacific Partnership (TPP), but was instrumental in making it the centerpiece of the administration’s “pivot to Asia.” Today, in the midst of a debate that will make or break the TPP and shape next year’s Democratic Party platform and more, Clinton is mum.

The Trade Promotion Authority legislation struggling to gain support from congressional Democrats would extend the terms of TPA through the entirety of the next president’s first term and into the second (it would expire in July 2021). It is a tool that would be welcomed by any president who sees trade agreements as channels for economic growth and diplomacy. Clinton’s silence implies indifference to the outcome of the TPA debate in Congress and, thus, indifference to trade liberalization as a policy tool. Clinton is well aware that the most important aspect of U.S. foreign policy to most countries is our trade and commercial policy.

So, unless the former top U.S. diplomat, as president, would turn her back on the TPP she once embraced, and pull the rug out from under the Transatlantic Trade and Investment Partnership—outcomes that would deprive the economy of valuable growth opportunities, offend 39 foreign governments, and reinforce perceptions of U.S. decline—she should affirmatively endorse TPA now.

Clinton’s endorsement would signal leadership and provide cover for scores of Democrats in Congress who are wary of the party’s dash to the far left. It would provide refuge for members who want to be on the economically responsible side of the schism. It would create an environment where it is safe to say the anti-trade, progressive emperor is stark naked. 

Luring in Foreign Investment with Subsidies

Almost every news article I read about new foreign investment in the U.S. starts off very positive and exciting.  Here’s one from earlier this week:

Volvo Cars will build a factory in South Carolina, the company said on Monday, making it the first time a Chinese-owned automaker will have an auto assembly plant in the United States.

Volvo will invest $500 million in the new factory, which will be in Berkeley County, S.C., outside Charleston. The company estimated that the plant — its first in the United States since entering the market 60 years ago — would employ 2,000 people in its early years and eventually be closer to 4,000. Construction will begin this fall and the factory will begin producing vehicles in 2018.

Volvo, which remains based in Sweden, has gone through a number of owners in recent years. In 2010, Zhejiang Geely Holdings, its current owner, bought it from Ford, which acquired it in 2000 from the Volvo Group.

It’s good news that the U.S. is so welcoming to foreign investors, including those from China.  That kind of openness is great for our economy.

But then, inevitably, the article says something like this:

South Carolina officials lined up sizable incentives to lure the Volvo plant. The automaker will receive about $200 million in combined incentives. That includes $120 million in economic development bonds, $30 million in state grants and an additional $50 million of incentives from a state-owned utility company, Santee Cooper.

Foreign investment is great, but governments competing for it with massive subsidies makes absolutely no sense.  One of the most important issues related to foreign investment right now is how to rein in these subsidies.

Unfortunately, the actual debate over foreign investment rules focuses on special provisions in trade and investment agreements that let foreign investors sue governments.  We are debating the issue right now at Cato Unbound; I’m one of the two critics of such provisions, and two others are writing in support of these provisions.  One of the points I make is that subsidies to foreign investors are the real problem, and any international rules in this area should focus on that.  We’ll see how the supporters respond.

Rand Paul’s “No” on Trade Promotion Authority Gets It Backwards

Not entirely unsurprisingly, the Senate failed to reach cloture on Tuesday, falling eight votes shy of the 60 needed to start the timer on debate over Trade Promotion Authority (TPA), which will be needed to conclude the Trans-Pacific Partnership (TPP) negotiations and bring it to a timely vote in Congress.  The cloture vote concerned two of four pieces of trade legislation voted out of the Finance Committee two weeks ago (TPA and Trade Adjustment Assistance).  Senate Majority Leader Mitch McConnell excluded the other two bills, which contain language that would attract Democratic support. So, while I wouldn’t bet the ranch on TPA’s passage, there’s still room for horse trading.

In more surprising (and disappointing) news, one senator who will say “no” if TPA makes it to the floor for a vote is Rand Paul, who explained his reasoning on a New Hampshire television news broadcast:

We give up so much power from Congress to the presidency, and with them being so secretive on the treaty, it just concerns me what’s in the treaty.

Let me take Paul’s issues with power, secrecy, and content in order.

Appealing President Obama’s Executive Action on Immigration

On November 20, 2014, President Obama unveiled DAPA, an executive policy that would defer the deportation of up to four millions illegal aliens and afford them work authorization. One week later, Texas, joined by 25 other states, filed a lawsuit against this unprecedented expansion of executive power.

Cato, joined by law professors Josh Blackman, Jeremy Rabkin, and Peter Margulies, filed an amicus brief supporting the challenge. While we broadly support comprehensive immigration reform, we argued that DAPA violated the president’s constitutional duty to take care that the laws were faithfully executed because this action went far beyond merely setting priorities on who will be pursued and deported given finite enforcement resources. It was highly unusual for Cato to file in a district court—amicus briefs of any kind are rare at this level—but this was a highly unusual situation.

On February 16, 2015, Judge Andrew Hanen blocked DAPA from going into effect, finding that the executive branch did not follow the proper administrative procedures—such as seeking comments from the public—before implementing what is effectively a substantive change in established immigration law.