November 19, 2019 3:22PM

Needed: Straight Talk on the Jones Act and LNG

Last week Aaron Smith, president and CEO of the Offshore Marine Service Association, testified before the House Subcommittee on the Coast Guard and Maritime Transportation. As the head of a group which ardently backs the Jones Act it was no surprise that Smith used his opening statement to press for an even more restrictive interpretation of the law's provisions. Shortly after that statement he then had this exchange with Rep. Bob Gibbs (R-OH), the subcommittee's Ranking Member:

Gibbs: "We're exporting LNG now—largest producer in the world of natural gas and oil. And my understanding is...we pick up LNG shipments in the Gulf area and then they export to other countries but to get LNG in needed areas of the country, like in New England area for example, they have to get it from foreign. What can we do to adjust, fix it? How can we handle it so we can, Americans can burn LNG, natural gas, domestically-produced LNG and natural gas?"

Smith: "Sure. Thank you for the question, Ranking Member Gibbs. The American maritime industry is willing to meet any challenge. And in fact, what we're best at is overbuilding the market. If you give us the signals that a market will be protected, we're probably going to build too many ships for it. And if you, with these signals now that LNG is going to be protected by this administration, what we're seeing is even the European trade magazines are already saying that there's going to be U.S. LNG capacity. One of my members just launched an ATB, an articulated tug and barge, to transport LNG. And I know that they can take that design, and are taking that design, to produce more of those so we can have that. It is my understanding, although this isn't necessarily exactly what we do on a day-to-day basis, but it's my understanding that we are right now basically at the export...there is no extra capacity in the export terminals. Once there is, we will have the vessels capable to carry that."

Let’s review what happened here: Congressman Gibbs, perhaps mindful of New England’s need to import Russian liquefied natural gas (LNG) last year—and Puerto Rico’s complete dependence on foreign LNG—asked how U.S. LNG can be transported to these places. Smith responded with talk of excessive shipbuilding, LNG bunkering barges, and a lack of export capacity.

It was an astonishing display of misdirection.

Beyond the bizarre notion that market “protection” (i.e. reduced competition) leads to oversupply—surely news to economics professors everywhere—Smith’s citing of barges as evidence of the Jones Act fleet's ability to transport LNG is preposterous. There are a total of two such Jones Act-compliant vessels, the Clean Jacksonville and the recently-launched Q-LNG-4000. Both are primarily used for the refueling of other vessels.

What they are not used for, nor even capable of, is transporting bulk quantities of LNG for use in large-scale electricity generation. Neither vessel, in other words, will allow either New England or Puerto Rico to replace foreign imports with U.S. LNG.

The Clean Jacksonville, for example, has an LNG capacity of 2,200 m3 while the Q-LNG-4000’s capacity is—as its name implies—4,000 m3. In comparison, the Gaselys, an LNG carrier that delivered Russian gas to New England in 2018, has a carrying capacity of 154,500m³.

LNG barges and LNG carriers both transport LNG in the same sense that bicycles and buses both transport people. But one is not a substitute for the other.

The claim, meanwhile, that there is a lack of LNG export capacity to meet domestic needs doesn’t pass the smell test. Consider the following:

  • The International Gas Union’s 2019 World LNG Report shows 29 of 37 LNG-importing countries meeting at least some of their needs with U.S. LNG (and one of the importers listed that didn’t purchase U.S. LNG, Puerto Rico, is subject to the Jones Act). The idea that the United States has sufficient LNG to export it all over the world, yet none available for domestic maritime transport, seems suspect.
  • An August 2018 McKinsey & Co. analysis noted that foreign LNG purchased to meet New England’s needs the previous winter was “$1.6/mmbtu above the cost of loaded spot LNG” at the LNG export facility at Sabine Pass, Louisiana. “The core restriction preventing traders from capitalizing on this arbitrage” according to McKinsey, was not a lack of export capacity, but rather the Jones Act.
  • A July 2019 Wall Street Journal article about the U.S. natural gas boom noted that “These days, it’s a hassle getting gas from drilling fields like the Marcellus and Utica shales in Appalachia, and the Permian Basin in West Texas, to customers in northern cities,” citing a lack of domestic LNG tankers and a “99-year-old law [that] prevents foreign tankers from shipping gas within the U.S.”
  • A July 2019 report from S&P Global Platts states that “Platts Analytics estimates that as much as 60%-80% of US LNG was either swapped or sold on spot/short-term tender in 2018.” The existence of such a vibrant spot market speaks to the availability of U.S. LNG for those willing to meet the market price.

Smith’s unwillingness to paint an accurate picture of the situation is understandable. Admitting that the Jones Act and the vessels that serve under its restrictions are incapable of meeting the U.S. economy’s needs would be a bitter pill to swallow. Indeed, it would call the law’s entire logic into question.

So here’s the straight talk that Smith is unwilling to provide: the “fix” for allowing Americans to burn domestically-produced LNG is repeal or significant reform of the Jones Act.

As long as the Jones Act exists in its current form, the ships needed to transport U.S. LNG to domestic customers will not. The math simply doesn't add up. No LNG carrier meeting the Jones Act's restrictions, particularly its costly U.S.-build requirement, will be competitive in the international transport market. And with purely domestic business insufficient to keep such a ship employed on a full-time basis, there is no economic case for its construction.

It's good to see members of Congress asking questions about the inability of Americans to consume U.S. LNG. But as long as the Jones Act lobby is tasked with responding, needed facts will remain elusive. 

November 19, 2019 2:26PM

Government Tries to Regulate Drug Prices by Violating the First Amendment

Pharmaceutical companies rely on direct-to-consumer advertisements to reach potential customers and extol the benefits of their medications. This type of “commercial speech” enjoys protection under the First Amendment, though not to the same degree as other forms of expression. Merck v. HHS tests the limits of the federal government’s ability to control and compel commercial speech.

Several drug manufacturers and a professional organization of advertisers, whose businesses are affected by a Department of Health and Human Services rule requiring direct-to-consumer television ads to include a disclosure of the wholesale price of the advertised drugs, sued to block the rule. This rule was promulgated through the Centers for Medicare and Medicaid Services and justified under the power given HHS by the Social Security Act to issue rules “necessary to the efficient administration” of those programs—on the theory that the disclosures would result in lower prices for Medicare and Medicaid recipients. This regulation requires the wholesale acquisition cost of a 30-day supply of any advertised drug to be featured on any TV ad.

Part of the freedom of speech, however, is the right not to speak against one’s will. In particular the notion of being forced to read from a state-drafted script against one’s beliefs or interests is anathema to the founding conception of discourse in a free society. In the field of commercial speech, there is only a narrow allowance for compelled speech to ensure that consumers are not misinformed or mislead in their purchasing decisions—in other words, to prevent the fraud that isn’t protected by the First Amendment. The price-disclosure regulation threatens to widen this exception so far as to allow the government to use compelled speech as a substitute for regulation, in this case regulating drug prices themselves.

The district court held that mandating disclosure of wholesale drug prices exceeds the agency’s rulemaking authority under the Social Security Act. Now on appeal, the government is again attempting to defend its regulation as not violating the First Amendment.

Cato has filed an amicus brief supporting the challengers in the U.S. Court of Appeals for the D.C. Circuit. We argue that accepting the government’s First Amendment arguments would stretch the jurisprudence allowing greater regulation of commercial speech farther than ever before and encourage compelled speech as a convenient alternative to normal regulation. If HHS prevails, agencies may decide it’s better to force private parties to act as government mouthpieces, instead of expending their own resources and political capital to further regulatory aims.

November 19, 2019 9:25AM

Does China Comply with Its WTO Obligations?

Over on twitter and elsewhere, I often hear vague allegations along the lines of "China cheats on its WTO obligations" (here's something from Senator Tammy Baldwin: “China has refused to play by the international trade rules they agreed to and they should be held accountable”).

There are two aspects to the issue of China's compliance with WTO obligations. First, when governments file WTO complaints against China, how does it respond in general and, more specifically, does it comply with WTO rulings against it? And second, does China comply with its WTO obligations more broadly?

Along with my Cato colleagues Jim Bacchus and Huan Zhu, I tried to answer the first question in a policy paper last year. Now law professor Weihuan Zhou has written an entire book on the subject. Our conclusions are similar: China may not be perfect, but it does a reasonably good job of responding positively to WTO complaints and complying with rulings against it. This conclusion becomes even more apparent when you compare China's behavior to that of other Members, including the United States and the European Union, who have ignored rulings in several WTO cases.

The more difficult question is whether China complies with its WTO obligations more broadly. That's a hard question to answer without the development of facts and the discussion of law that comes about as part of WTO litigation on a particular case. You will see many allegations that China is not complying with the rules as a general matter, but without a detailed elaboration of the particular government actions at issue and the legal obligations that apply, it's hard to evaluate these claims.

If these issues interest you, I encourage you to come to our Cato book forum for Weihuan's book at noon on December 4, where I will be moderating and Jim will be offering comments. You can register here: https://www.cato.org/events/chinas-implementation-rulings-world-trade-organization

We will discuss both of the issues noted above, as well as China's participation in the WTO and U.S.-China trade relations generally. Some additional questions we will try to tackle are: Are the current terms of China's WTO participation "fair"? What changes, if any, need to be made? Are there WTO rules that can be used to bring cases against China, but have been overlooked? What is the best way for the U.S. government to address China's state intervention in its economy? How do the efforts of past administrations compare to those of the Trump administration? What should the next administration do?

November 18, 2019 4:07PM

Trump Administration Shows that DACA Applicants Have a Comparatively Low Arrest Rate

Over the weekend, the U.S. Citizenship and Immigration Services (USCIS) updated an earlier report on arrests and apprehensions of illegal immigrants who requested Deferred Action for Childhood Arrivals (DACA). The updated report shows that of the 888,818 people who applied for DACA, 118,371 had been arrested at one time or another.

Many of those arrested were not approved for DACA, but some were because many arrests don’t lead to convictions. Those 118,371 people had been arrested a total of 202,025 times for all crimes and civil infractions, including violations of immigration law. Subtracting the number arrested for immigration infractions lowers the number to 95,343 DACA applicants being arrested. The DACA applicant arrest rate was 80 percent below the non-DACA applicant (all others) arrest rate.

The USCIS report does not provide arrest rates for DACA applicants or other populations in the United States. As a result, there is no standard of comparison for the number of arrests mentioned in the USCIS report. However, some data released in the report do allow for a back of the envelope comparison between the arrest rate for DACA applicants and the arrest rate for the population of all others.

Below, I will describe the comparative arrest rates and how I calculated them.

Comparing arrest rates requires making two simple assumptions. First, I assume that the youngest person arrested who was a DACA applicant was 13 years old and that arrest occurred in 1993 (DACA is only available to those born in 1981 or later). This is based on Table 6 of the USCIS report that breaks down arrests by age. Only 5,076 of the arrests were of DACA applicants age 14 or younger. Changing the year does not affect the direction of the outcomes.

Second, I compare the number of arrests and not the number of individual people arrested. This is because FBI crime data record the number of arrests, not the number of people arrested. Third, I don’t exclude any of the arrests counted in the USCIS document even though the FBI’s crime data doesn’t include immigration arrests in its national figures. That second choice biases the results against me because it increases the number of arrests of DACA applicants relative to the citizen population who cannot be arrested for immigration offenses.

From 1993 to 2018, about 344.9 million total criminal arrests were made in the United States. Of those arrests, 202,025 arrests were of DACA applicants. The arrest rate for DACA applicants was 874 per 100,000 DACA applicants per year from 1993 through 2018 (Figure 1). The arrest rate for all others was 4,491 per every 100,000 per year. In other words, the arrest rate for all others was about 5.1 times as great as it was for DACA applicants. DACA applicants had an arrest rate 80 percent below that of all others.

Table 1

Annual Arrest Rates of DACA Applicants and All Others per 100,000, 1993-2018

USCIS Crime 2018_0

Sources: FBI, USCIS, and Author’s Calculations.

Note: Arrests per 100,000 for each subpopulation.

Even if all those arrests of DACA applicants took place from 2012-2018 (DACA was announced in 2012), their arrest rate would be 3,247 per every 100,000 DACA applicants per year. That is still below the arrest rate for all others of 3,429 per year during the same time. Excluding immigration arrests lower the relative arrest rates even more. For instance, excluding immigration arrests from the 1993-2018 period diminishes the DACA applicant arrest rate from 874 per 100,000 DACA applicants per year to 775 per 100,000.

No matter how you compare the arrest rate for DACA applicants to all others, the former group has a lower arrest rate. Since the USCIS report and this post just measure arrest rates, the criminal conviction rate is necessarily lower as there are more arrests than convictions – as I show in Texas. The USCIS report is just further evidence that illegal immigrants have a lower crime rate than native-born Americans.

November 17, 2019 7:23PM

Negotiating Trade Deals with China

In the midst of the big U.S.-China trade talks/tariff wars that are ongoing, it is worth noting some much smaller trade talks that have been taking place between New Zealand and China. The basic story is that New Zealand and China signed a trade deal in 2008, and have just now completed an "upgrade" to that deal. There are some differences in the nature of the U.S.-China talks and the New Zealand-China talks, but nevertheless, there may be some lessons to draw from the New Zealand-China situation.

The first thing to mention is that both sides consider the original deal to be a success. Here's how New Zealand described it:

The New Zealand-China Free Trade Agreement (FTA) has been a success story. Since the FTA came into force in 2008, two-way trade (exports and imports of goods and services) has more than tripled from $9 billion to over $32 billion, and the FTA has been a catalyst for trade and economic cooperation between our countries.

Like most economists, I am skeptical that we can learn much from bilateral trade balances, but nevertheless, take a look at the evolution of the New Zealand-China trade balance after the agreement was signed, after which New Zealand's deficit turned into a surplus:

Trade Balance with China

So what are New Zealand and China selling to each other?

In the March 2019 year, the top exports to China were milk powder, butter, and cheese, reaching $4.5 billion and accounting for one-quarter of New Zealand’s exports to China.

Logs and wood were the second-largest export, worth $3.1 billion.

Travel was also a significant contributor to New Zealand’s overall surplus with China, worth $3.0 billion. Spending by holidaymakers and international students made up most of this.

...

In the March 2019 year, imports from China were valued at $13.1 billion. Top imports were electrical machinery and equipment (such as mobile phones), mechanical machinery and equipment (such as portable computers), and textiles and textile articles (such as clothing).

The upgrade to the FTA is not revolutionary, but rather just adds a bit of liberalization and updates a few provisions:

Trade rules and business practices have evolved significantly over the past decade. It is against this backdrop that New Zealand and China agreed in November 2016 to launch negotiations to upgrade the New Zealand-China FTA; to ensure the Agreement continues to reflect the modern realities of our dynamic trading relationship. Nine rounds of negotiations were held over three years in both New Zealand and Beijing. New Zealand and China announced the conclusion of the FTA upgrade negotiations on 4 November 2019 on the sidelines of the East Asia Summit.

The upgrade will make the New Zealand-China FTA China’s most modern and highest quality FTA.

Here are a few examples of the new additions:

New Zealand has secured tariff elimination, over a 10 year implementation period, on 12 wood and paper products.

...

Further operational improvements cover procedures for handling ’perishable goods’ (introducing expedited six-hour clearance times, release of such goods outside normal business hours and appropriate storage) as well as an extension of the scope of advance rulings in the existing free trade agreement.

...

new chapters have been added on competition policy, e-commerce, government procurement and environment and trade.

...

The improvements include new market access in several service sectors, including:

  • Environmental services
  • Airport operation services
  • Speciality air services
  • Ground handling services
  • Audio visual services.

The New Zealand-China FTA was a much simpler negotiation than the one the United States is currently conducting. New Zealand was mainly pushing for basic liberalization, rather than the wholesale changes to the structure of the Chinese economy that the Trump administration is said to be asking for (although the "phase one" deal being talked about now is pretty limited). This made the negotiation much easier. New Zealand had a handful of products and services it wanted to sell more of to the Chinese, and it was able to achieve that.

Despite these differences, I'm struck by the fact that an industrialized country was able to make a trade deal with China and was happy with the outcome, and then—without the use of tariffs!—was able to open up the text and negotiate further liberalization. In my view, some key lessons here are that it is important to be realistic about what can be achieved, and to be willing to give something in return.

November 15, 2019 2:46PM

New Policy Banning H‑2A Sheepherders Shows Need for Congress to Act

Yesterday, the Trump administration announced it would end a decades-old practice of allowing sheep and goat herders to enter the United States as guest workers under the H-2A program. U.S. Citizenship and Immigration Services (USCIS) published a policy memo that overturn its historical practice of allowing sheepherders to receive three consecutive, back-to-back grants of H-2A status for 364-days (or similarly lengthy periods).

Congress should protect the herding industry. The bipartisan Farm Workforce Modernization Act, which I have previously reviewed here and is currently moving in the House, would address this issue in multiple ways, but other options exist to stop this assault on an important legal immigration program from occurring.

The H-2A statute requires that H-2A status be granted only to those workers performing services of a “temporary or seasonal” nature. The H-2A approval process starts with the Department of Labor (DOL), which assesses whether a job meets this requirement and whether U.S. workers are available to fill the job. If DOL approves the application, only then do employers petition USCIS to admit the workers. During this second application, USCIS again reviews whether the job is “temporary or seasonal.”

The policies of every administration at least since Eisenhower has been to treat the sheep herding industry under unique procedures that allow them to hire workers for 364 days—consistent with the requirement that it be “temporary”—but then to extend their status three times back-to-back.

In response to a D.C. Circuit decision last year allowing a lawsuit challenging these special procedures to proceed, USCIS announced that it would now require that sheep and goat herders be subject to the same evidentiary requirements as all other H-2A employers, demonstrating their needs are truly temporary or seasonal—even if DOL already determined that it was. The rule will take effect in June 2020.

This decision is devastating for sheep and goat herders—both workers and employers—who have operated under these procedures for their entire lives. USCIS admits that its action to stop fighting the lawsuit and make this change “may have an impact on the long-standing business practices” of goat and sheep herders. It could be worse than that. The industry warned the agency in 2015 that making H-2A workers much more difficult to hire would “jeopardize the entire herding industry," causing "many employers to either go out of business entirely or to downsize and greatly reduce the number of workers employed."

The Farm Workforce Modernization Act would solve this problem in two ways. First, it would create a single, unified application process so that DHS wouldn’t review determinations that DOL already made. DHS couldn't override DOL's determination that a job was seasonal or temporary (though, in this case, DOL has also announced plans to change its regulations for sheep and goat herders). Second, the bill would create a new H-2A program for year-round workers, effectively authorizing the existing practice for sheep and goat herders but for other industries as well.

Even if Congress can’t agree to pass the entire bill, it could rely on the appropriations process instead to preserve the status quo for herders. Hopefully, senators in the states affected—mainly California, Idaho, Utah, Colorado, Nevada, and Wyoming—will take notice and push appropriators to consider how they can deal with the issue before the implementation date next year.

November 15, 2019 1:21PM

Illegal Immigrants in Europe

Pew Research Center recently released a wonderful new report that estimates the illegal immigrant resident population in European Union and European Free Trade Association (EU-EFTA) countries. This is the first systematic report to estimate Europe’s illegal immigrant population along the lines that Pew and others use to estimate the U.S. illegal immigrant population. Illegal immigrants are a much larger population in the United States than in Europe.

Pew estimates that there are 3.9 million to 4.8 million illegal immigrants in EU-EFTA as of 2017. Those illegal immigrants come from countries outside of the EU-EFTA area. About 1 million illegal immigrants in EU-EFTA have pending asylum claims, so many will eventually earn legal status. As a percentage of the 525 million people living in the EU-EFTA, only about 0.74 to 0.91 percent are illegal immigrants. Of the roughly 20 million non-EU-EFTA residents who are non-citizens in any of those countries, only 19 to 24.5 percent are illegal immigrants.

Compared to the United States, illegal immigration is a minor concern in Europe. According to Pew, there are roughly 10.5 million illegal immigrants in the United States as of 2017. Other groups come to similar numbers despite some controversy regarding estimation methods. Illegal immigrants were roughly 3.2 percent of the approximately 326 million people living in the United States in 2017. Of the 22.6 million non-citizens currently living in the United States, about 47 percent are illegal immigrants. No matter how you look at it, EU-EFTA countries have a smaller illegal immigrant population than the United States.

There are many reasons why many fewer illegal immigrants live in the EU-EFTA than the United States. The first is geography. It’s more difficult for illegal immigrants to travel from poor countries to Europe illegally. Crossing the Mediterranean Sea is expensive, difficult, and deadly. Historically, crossing the border from Mexico into the United States was easier. That is why about 23 percent of the illegal immigrants in Europe are from other European countries outside of the EU-EFTA like Russia, Turkey, Ukraine, and Kosovo. The cost for them to travel to Europe is a lot lower than the cost for an Afghan, Iraqi, or Nigerian.

Another reason is that the EU allows workers from poorer countries to work in wealthier EU countries legally. A larger supply of legal immigrant workers crowds out illegal immigrant workers. For instance, Luxembourg was the wealthiest EU country in 2017 with a per capita GDP, PPP of $107,641 in current international dollars. Workers from Bulgaria, which is the poorest EU country, have a crudely-estimates place premium of 5.1 if working in Luxembourg. That’s much higher than the 3.1 place premium multiple (same crude estimation method) for Mexicans working in the United States. If the United States had a free movement agreement with a few countries as poor as Mexico then the illegal immigrant population here would also be a lot smaller too.

The third major reason Europe has fewer illegal immigrants than the United States is that they have had more amnesties in recent years. From 1996 to 2011, more than 5 million illegal immigrants were legalized in Europe. The last major U.S. amnesty was in 1986 for illegal immigrants who arrived before 1982 (DACA is merely a temporary reprieve with work authorization). By decreasing the stock of illegal immigrants substantially in recent years, EU-EFTA countries have kept the number of illegal immigrants low.

Some European countries have a revolving amnesty program that isn’t tied to the illegal immigrant's date of entry. For instance, the United Kingdom has a revolving amnesty policy that grants “limited leave to remain” (i.e., temporary residence) to illegal immigrants under certain conditions that can lead to “indefinite leave to remain” (i.e., permanent residence). The United Kingdom grants limited leave to remain to any adult non-UK citizen who would have “very significant obstacles” to “integration into the country to which he would have to go,” children who have lived continuously for at least seven years in the United Kingdom and for whom it would not be “reasonable” to expect them to leave, non-UK citizens ages 18–25 if they have lived continuously for at least half their life in the country, and any non-UK citizen who has lived continuously for at least 20 years in the country. Limited leave to remain provides for two and a half years of temporary residence without access to public benefits, but immigrants may renew it. Following 10 years with limited leave to remain, legalized immigrants may apply for indefinite leave remain.

Another reason why there are fewer illegal immigrants in Europe is that the generally more intrusive labor market regulations and identity systems in EU_EFTA countries make it more difficult to work, rent a dwelling, open a bank account, or otherwise live in Europe as an illegal immigrant than the comparatively less-regulated United States. A Danish libertarian told me that the Personal Identity Number issued to legal immigrants and Danish citizens is essential to get a job, receive payment, rent an apartment, and open a bank account. There’s likely a black market for Personal Identity Numbers, some fraud on the margins, and other ways to circumvent the system, but only at a cost. Meanwhile, American attempts to create similar systems fail miserably.

Costly labor market regulations that discourage the hiring of low-skilled workers means that employers of illegal immigrants in Europe would have to break both labor market laws and immigration laws. In the United States, by comparison, employers only break the comparatively less-well enforced immigration laws to employ illegal immigrants. This is why many American intellectuals who want harsher immigration enforcement push for a higher minimum wage – it will price out some illegal immigrants and conscript labor bureaucrats into immigration enforcement. The comparatively less-regulated United Kingdom, Germany (after the Hartz Reforms), and Italy’s large labor black market help explain why most illegal immigrants are in those countries.

The United States has one big lesson to learn from Europe’s experience with illegal immigration: A free movement zone with comparatively poorer countries can reduce illegal immigration. An increased supply of legal immigrant workers can crowd out illegal immigrant workers.