Topic: Trade and Immigration

Counting the Wrong Winners and Losers

Debates about trade liberalization often focus on identifying the winners and losers of increased openness to foreign competition.  Protectionists regale us with sad stories of closed factories, and free traders point to lower prices for consumers and the broad benefits of economic growth.  But this whole exercise is completely backwards.  We should instead be talking about the winners and losers of protectionism.

Free trade is not a trade policy.  Trade policies—such as tariffs, quotas, restrictions on foreign service providers, and protectionist regulations—exist to divert the benefits of free exchange toward politically powerful special interests.  Free trade is merely the absence of those policies. 

By demanding an explanation for increased openness, the trade debate implicitly legitimizes the protectionist status quo.  As a consequence, the news media often accept the argument that opening the U.S. market to foreign competition should be accompanied by programs that alleviate the suffering of the losers of increased trade.  But why is anyone entitled to the current arrangement?  Perhaps the winners of protectionism owe reparations to those of us who had to suffer the consequences of their rent-seeking. 

Who wins and who loses from policies that increase the price of food?  Who wins and who loses from regressive taxes on shoes and clothes?  Who wins and who loses from shipping restrictions?  Who wins and who loses from protectionist overregulation?  I could go on.

Last Sunday’s New York Times included an editorial calling on the Obama administration to “Get Global Trade Right” by adding a handful of protectionists’ pet issues to the Trans-Pacific Partnership. Threatening our trade partners with sanctions if they don’t adopt specific labor, environment, or monetary policies is not going help the United States get trade right, but it will make us a bully and reduce our ability to make real progress tearing down genuine barriers. 

After (wrongly) blaming increased economic openness for the loss of millions of manufacturing jobs and growing income inequality, the Times—without a hint of irony—says that President Obama needs “to make a strong case for why these new agreements will be good for the American economy and workers.”  Well, that is certainly true.

Let me offer some humble advice to the president then on how he might take on that task: Stop selling trade agreements as a way to grow export markets for goods produced in the United States, and start extolling the virtues of agreements as a way to fight cronyism and to tear down bad policies. Thinking about trade agreements this way will not only help you sell the agreement, it could actually make the agreements better.

Liberalizing Investment in Cuba

I’m no Cuba expert, but I have followed the events of recent years with interest. It seems that there have been tentative steps towards liberalizing the Cuban economy, as well as slightly better economic relations between the United States and Cuba. I’m hopeful the long-term trend is towards Cuba becoming a free market democracy, with normal relations with the United States.

In the short-term, though, I’m frustrated by how the “liberalization” of foreign investment is being carried out there. Here’s the Economist:

But on March 29th Cuba’s parliament approved a new foreign-investment law that for the first time allows Cubans living abroad to invest in some enterprises (provided, according to Rodrigo Malmierca, the foreign-trade minister, they are not part of the “Miami terrorist mafia”). The aim is to raise foreign investment in Cuba to about $2.5 billion a year; currently Cuban economists say the stock is $5 billion at most.

The law, which updates a faulty 1995 one, is still patchy, says Pavel Vidal, a Cuban economist living in Colombia. It offers generous tax breaks of eight years for new investments. However, it requires employers to hire workers via state employment agencies that charge (and keep) hard currency, vastly inflating the cost of labour.

Welcoming new foreign investment is great. Here’s the problem, though: In order to liberalize investment, a government really doesn’t need to do anything fancy. It can just say, “foreign investment is permitted, and will be treated like domestic investment.” Very simple. Furthermore, lower tax rates and reduced regulatory burdens can help encourage such investment. Again, very simple.

In practice, though, governments make this process difficult and less liberalizing. Here, what Cuba seems to have done is offered special tax breaks for new foreign investments, and then subjected receipt of these tax advantages to certain hiring conditions. In effect, it introduces two distortions as part of the liberalization process: favoring new foreign investors over other investors through the tax code and then subjecting the favored investors to additional regulation.

To be clear, Cuba is not the only country who does this; this is what many countries do. But there’s just no reason to approach it this way. The simpler way, with low tax rates for all investors, is the more economically beneficial way. Unfortunately, it seems as though “liberalization” is often just a catchword, and governments insist on using their power to intervene in private economic transactions, even when ostensibly moving away from interventionist policies.

Gas Prices Are Pinching Again, and You Can Thank U.S. Trade Policy For Some of the Pain

The summer driving season is still weeks away, but rising U.S. gas prices are already back in the news.  Last week, the average price for regular gasoline at U.S. gas stations hit $3.6918 a gallon – the highest since March 22, 2013 and up 43 cents this year.  Much of this price depends on global supply and demand, but certainly not all of it.  In fact, two archaic, little-known U.S. policies – vigorously defended by the well-connected interest groups who benefit from them – restrict free trade in petroleum products and, as a result, force American consumers to pay considerably more at the pump.

First, the Jones Act - a 94-year-old law that requires all domestic seaborne trade to be shipped on U.S.-crewed, -owned, flagged and manufactured vessels – prevents cost-effective intrastate shipping of crude oil or refined products.  According to Bloomberg, there are only 13 ships that can legally move oil between U.S. ports, and these ships are “booked solid.”  As a result, abundant oil supplies in the Gulf Coast region cannot be shipped to other U.S. states with spare refinery capacity.  And, even when such vessels are available, the Jones Act makes intrastate crude shipping artificially expensive.  According to a 2012 report by the Financial Times, shipping U.S. crude from Texas to Philadelphia cost more than three times as much as shipping the same product on a foreign-flagged vessel to a Canadian refinery, even though the latter route is longer.

It doesn’t take an energy economist to see how the Jones Act’s byzantine protectionism leads to higher prices at the pump for American drivers.  According to one recent estimate, revoking the Jones Act would reduce U.S. gasoline prices by as much as 15 cents per gallon “by increasing the supply of ships able to shuttle the fuel between U.S. ports.”

International Regulatory Conflict

My colleague Peter Van Doren posted here yesterday about a new National Highway Traffic Safety Administration (NHTSA) rule which mandates that “all cars and light trucks sold in the United States in 2018 have rearview cameras installed.” I’m going to leave the analysis of the domestic regulatory aspects of this issue to experts like Peter. I just wanted to comment briefly on some of the international aspects.

In particular, what if other governments decide to regulate in this area as well and they all do it differently?  That would mean significant costs for car makers, as they would have to tailor their cars to meet the requirements of different governments. Note that the U.S. regulation doesn’t just say, “cars must have a rear-view camera.”  Rather, it gets very detailed:

The final rule amends a current standard by expanding the area behind a vehicle that must be visible to the driver when the vehicle is shifted into reverse. That field of view must include a 10-foot by 20-foot zone directly behind the vehicle. The system used must meet other requirements as well, including the size of the image displayed for the driver. 

In contrast to a market solution, which provides flexibility as to what will be offered, the regulatory approach has very specific requirements.

As far as I have been able to find out, the United States is the first to regulate here, but others are likely to follow. When the EU or Japan turn to the issue, for example, will they develop regulations that are incompatible with the U.S. approach? Will there be a proliferation of conflicting regulations?

In theory, it’s easy to avoid these problems. Smart regulators would recognize that their foreign counterparts’ regulations are equally effective. But in other areas of automobile regulation, we haven’t seen enough of this cooperation. The rear-view camera issue provides an opportunity for regulators from different countries to work together to avoid making regulation even more costly than it already is.

WTO Indictment of Chinese Export Restrictions Unearths U.S. Hypocrisy

Last week a WTO dispute settlement panel ruled that certain Chinese restrictions on exports of “rare earth” minerals are inconsistent with China’s WTO obligations and recommended that the PRC government bring its policies into compliance with the rules. The decision was hardly surprising, as export restrictions are prohibited under the WTO agreements – except under certain limited circumstances, which were not demonstrated to exist.

Formal complaints about these export restrictions were lodged in the WTO by the United States, the European Union, and Japan, whose manufacturers require rare earth minerals for production of a variety of high tech products, including flat-screen televisions, smart phones, and hybrid automobile batteries. By restricting exports, the complainants alleged, China’s actions reduce supply and raise prices abroad, putting foreign downstream manufacturers at a disadvantage vis-à-vis China’s domestic rare earth-using companies, who enjoy the effective subsidies of greater supply and lower input prices.

The WTO decision was lauded across Washington, but more for its dig on China than for its basis in principle or sound economics. Emblematic of official sentiment was the following statement from arch-import-foe-temporarily-turned-globalization-advocate, House Ways and Means Committee Ranking Member Sander Levin (D-MI):

Through the aggressive efforts of the Obama Administration, the WTO has struck down China’s efforts to block our companies from having access to key inputs.  Our high-tech industries, from smartphones to medical equipment to wind turbines, depend on access to these rare earths and other chemicals. Holding China accountable, and enforcing the rules of international trade are vital to U.S. businesses and workers and key to trade expansion efforts (emphasis added).

Obama’s Deportation Numbers: Border and Interior Immigration Enforcement Are Substitutes, Not Complements

It’s become clear over the last few months that something very funny is going on with immigration enforcement statistics (here, here, and here).  The data generally show that interior enforcement, what most people commonly think of as “deportations” (but also includes I-9, Secure Communities, and E-Verify), has declined as a percentage of total removals.  Many of the removals appear to be unlawful immigrants apprehended by Customs and Border Protection (CBP) and then turned over to Immigration and Customs Enforcement (ICE) for removal – a trend that began in 2012 and accelerated in 2013.  That transfer makes it appear as if there was more internal enforcement than there really was.  The administration is therefore deporting an increasing number of recent border crossers and a decreasing number of unlawful immigrants apprehended in the interior. 

It appears, then, that President Obama’s reputation for severe interior enforcement was earned for 2009, 2010, and 2011 but is somewhat unjustified in 2012 and 2013.  The Bipartisan Policy Center has an excellent report on the enormous court backlogs and other issues that have arisen due to interior immigration enforcement.  I’m waiting for additional information from a FOIA request before wading into the data surrounding the interior versus border removals controversy because we do not have data on internal enforcement numbers prior to 2008.    

Interior enforcement is only part of the government’s immigration enforcement strategy and must also be looked at as a component of broader immigration enforcement that includes border enforcement.

Could Vice President Biden Help Save the Administration’s Trade Agenda?

Francisco Sanchez, former undersecretary of Commerce for international trade in President Obama’s first term, commented on the administration’s trade efforts in a March 21 article in Politico.  His view is that the president will need to get directly involved in making the case for liberalization if he wants his trade agenda to succeed.  Presidential leadership no doubt will be essential.  Certainly few congressional Democrats would be eager to stick their necks out on behalf of freer trade, if they think the president might leave them high and dry by backing away from his commitment to Trade Promotion Authority (TPA or “fast track”), the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP).

But as I noted in a recent paper, it seems unlikely that the president is sufficiently committed to his trade agenda.  It also is unclear whether developments elsewhere in the world would permit him to devote the time and energy to trade issues that Mr. Sanchez correctly argues is needed.  That raises the question of whether other senior officials in the administration might be able to augment the president’s efforts. 

Would it be feasible for Vice President Joe Biden to play a useful role in achieving the administration’s trade objectives?  Biden knows Congress well and cast many trade votes during his career in the Senate.  He consistently voted in favor of trade liberalization in his early years, starting with the Trade Act of 1974.  Perhaps the Senate was a happier place then, with both parties placing relatively greater emphasis on keeping the United States actively engaged in strengthening the global economy.  Biden’s pro-trade voting record continued throughout the 1990s on behalf of trade policy initiatives – including NAFTA and the Uruguay Round – supported by President Clinton.  However, his approach appears to have changed rather abruptly when George W. Bush became president.  Since then Biden’s only pro-trade votes on major issues were to support the FTAs with Australia and Morocco in 2004.  He wrapped up his Senate career by voting against DR-CAFTA, Oman and Peru.

This background may position Biden to provide helpful outreach to members of Congress who have doubts about the administration’s trade agenda.  Since he has found himself voting both for and against market-opening initiatives, perhaps he would have credibility in explaining why liberalization is the right choice now.