Topic: Trade and Immigration

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.

Nike, Trade, and the Left’s “Race to the Bottom” Canard

To capitalism’s detractors, Nike symbolizes the Dickensian horrors of trade and globalization – a world ripened for mass exploitation of workers and the environment for the impious purpose of padding the bottom line. They are offended by President Obama’s selection of Nike headquarters as the setting for his speech, last week, in which he touted the benefits of the emerging Trans-Pacific Partnership agreement. But Nike exemplifies the redeeming virtues of globalization and illustrates how self-interested capitalism satisfies popular demands – including, even, the demands of its detractors.

Fealty to the reviled bottom line incentivizes companies like Nike to deliver, in a sustainable manner, what those genuinely concerned about development claim to want. U.S. and other Western investments in developing-country manufacturing and assembly operations tend to raise local labor, environmental, and product safety standards. Western companies usually offer higher wages than the local average to attract the best workers, which can reduce the total cost of labor through higher productivity and lower employee turnover. Western companies often use production technologies and techniques that meet higher standards and bring best practices that are emulated by local firms, leading to improvements in working conditions, environmental outcomes, and product safety.

Perhaps most significantly, companies like Nike are understandably protective of their brands, which are usually their most valuable assets. In an age when people increasingly demand social accountability as an attribute of the products and services they consume, mere allegations – let alone confirmed instances – of labor abuses, safety violations, tainted products, environmental degradation, and other objectionable practices can quickly degrade or destroy a brand. Western brands have every incentive to find scrupulous supply chain partners and even to submit to third party verifications of the veracity of all sorts of practices in developing countries because the verdict of the marketplace can be swift and unambiguous.

Nike remembers the boycotts and the profit losses it endured on account of global reactions to its association with “sweatshop” working conditions in the past. Mattel’s bottom line took a beating when some of its toys manufactured in certain Chinese factories were found to contain dangerous levels of lead paint. There have been numerous examples of lax oversight and wanting conditions, but increasingly they are becoming the exception and not the rule.

Roger Milliken’s Company Joins the Global Economy

Roger Milliken, head of the South Carolina textile firm Milliken & Co. for more than 50 years, was one of the most important benefactors of modern conservatism. He was active in the Goldwater campaign, and was a founder and funder of National Review and the Heritage Foundation. He dabbled in libertarianism, too. He was a board member of the Foundation for Economic Education and supported the legendary anarchist-libertarian speaker Robert LeFevre, sending his executives to LeFevre’s classes.

But he parted company with his free-market friends on one issue: free trade. Starting in the 1980s, when Americans started buying a lot of textile imports, he hated it. As the Wall Street Journal reports today,

Milliken & Co., one of the largest U.S. textile makers, has been on the front lines of nearly every recent battle to defeat free-trade legislation. It has financed activists, backed like-minded lawmakers and helped build a coalition of right and left-wing opponents of free trade….

“Roger Milliken was likely the largest single investor in the anti-trade movement for many years—as though no amount of money was too much,” said former Clinton administration U.S. Trade Representative Charlene Barshefsky, who battled with him and his allies….

Mr. Milliken, a Republican, invited anti-free-trade activists of all stripes to dinners on Capitol Hill. The coalition was secretive about their meetings, dubbing themselves the No-Name Coalition.

Several people who attended the dinners, which continued through the mid-2000s, recall how International Ladies’ Garment Workers Union lobbyist Evelyn Dubrow, a firebrand four years younger than the elderly Mr. Milliken, would greet the textile boss, who fought to keep unions out of his factories, with a kiss on the cheek.

“He had this uncanny convening power,” says Lori Wallach, an anti-free-trade activist who works for Public Citizen, a group that lobbies on consumer issues. “He could assemble people who would otherwise turn into salt if they were in the same room.”…

“He was just about the only genuinely big money that was active in funding trade-policy critics,” says Alan Tonelson, a former senior researcher at the educational arm of the U.S. Business and Industry Council, a group that opposed trade pacts.

But the world has changed, and so has Milliken & Co. Roger Milliken died in 2010, at age 95 still the chairman of the company his grandfather founded. His chosen successor, Joseph Salley, wants Milliken to be part of the global economy. He has ended the company’s support for protectionism and slashed its lobbying budget. And as the Journal reports, Milliken’s executives are urging Congress to support fast-track authority for President Obama.

E-Verify in the States

Many state legislatures are proposing to expand E-Verify – a federal government-run electronic system that allows or forces employers to check the identity of new hires against a government database.  In a perfect world, E-Verify tells employers whether the new employee can legally be hired.  In our world, E-Verify is a notoriously error-prone and unreliable system.

E-Verify mandates vary considerably across states.  Currently, Alabama, Arizona, Mississippi and South Carolina have across the board mandates for all employers.  The state governments of Georgia, Utah, and North Carolina force all businesses with at least 10, 15, and 25 employees, respectively, to use E-Verify.  Florida, Indiana, Missouri, Nebraska, Oklahoma, Pennsylvania and Texas mandate-Verify for public employees and state contractors, while Idaho and Virginia mandate E-Verify for public employees. The remaining states either have no state-wide mandates or, in the case of California, limit how E-Verify can be used by employers.

Despite E-Verify’s wide use in the states and problems, some state legislatures are considering forcing it on every employer within their respective states. 

In late April, the North Carolina’s House of Representatives passed a bill (HB 318) 80-39 to lower the threshold for mandated E-Verify to businesses with five or more employees.  HB 318 is now moving on to the North Carolina Senate where it could pass.  Nevada’s AB 172 originally included an E-Verify mandate that the bill’s author removed during the amendment process. Nebraska’s LB611 would have mandated E-Verify for all employers in the state.  LB611 has since stalled since a hostile hearing over in February.

E-Verify imposes a large economic cost on American workers and employers, does little to halt unlawful immigration because it fails to turn off the “jobs magnet,” and is an expansionary threat to American liberties.  Those harms are great while the benefits are uncertain – at best.  At a minimum, state legislatures should thoroughly examine the costs and supposed benefits of E-Verify before expanding or enacting mandates.

Scott Platton helped to write this blog post.

The Ex-Im Bank and Globalization

This is from a Wall Street Journal article about President Obama’s push for the Trans Pacific Partnership (TPP):  
Mr. Obama also warned of rising anti-globalization sentiment in Washington, reflected in Democratic opposition to the trade agreement [TPP], Republican efforts to kill the Export-Import Bank, and congressional unwillingness to approve new rules for operation of the International Monetary Fund.
I agree that opposition to the TPP often, although not always, reflects anti-globalization sentiment; I’m not familiar with the IMF issue here.  But on the Ex-Im Bank issue, I think the President has it backwards. His logic, I assume, is that subsidies from the Ex-Im Bank promote exports, and are therefore pro-globalization.  But this logic is flawed.  The reality is that all export subsidies are a form of economic nationalism, in the sense that they try to give an advantage to domestic products over their foreign competition.  This leads to escalating trade wars and international economic tension.  The pro-globalization approach would be negotiate an end to the subsidies provided by export credit agencies, and let all products compete in the global marketplace without government support for domestic industry.