Archives: 04/2018

How To Deal with China’s Trade Practices

In a recent Washington Post op-ed on China’s trade practices, Fareed Zakaria concludes by saying: “Getting tough on China is a case where I am willing to give Trump’s unconventional methods a try. Nothing else has worked.” In my view, he gets a number of things wrong in this piece, but he does raise some important issues, and it’s a good jumping off point for a discussion of how China actually behaves in its trade policy, and what the possible responses are.

Zakaria’s main claim is that, “on one big, fundamental point, President Trump is right: China is a trade cheat.” Many people say this, or some variation of it. But what exactly does it mean to be a “trade cheat”?

What Zakaria seems to have in mind is that China is breaking some World Trade Organization (WTO) rules or taking actions that undermine them. Zakaria refers to the recent Section 301 report by USTR, which he says finds evidence that China “uses formal and informal means to block foreign firms from competing in China’s market.” According to this report, he explains, “the Chinese government has increased its intervention in the economy, particularly taking aim at foreign companies,” and he notes that “[a]ll of this directly contradicts Beijing’s commitments when it joined the World Trade Organization in 2001.” Later, he elaborates on the Chinese behavior at issue:

Look at the Chinese economy today. It has managed to block or curb the world’s most advanced and successful technology companies, from Google to Facebook to Amazon. Foreign banks often have to operate with local partners who add zero value — essentially a tax on foreign companies. Foreign manufacturers are forced to share their technology with local partners who then systematically reverse engineer some of the same products and compete against their partners. And then there is cybertheft. The most extensive cyberwarfare waged by a foreign power against the United States is done not by Russia but by China. The targets are American companies, whose secrets and intellectual property are then shared with Chinese competitors.

The difficulty here is that some of this behavior violates WTO rules, while some may not, as WTO rules don’t cover everything. There’s a good case to be made that the forced technology transfer imposed on foreign investors does violate the rules; but some of the cybertheft issues may not be covered.

For the behavior that is covered by WTO rules, the answer is easy: File more WTO complaints. As my colleague Huan Zhu and I have argued, WTO complaints against China are pretty effective. The system is far from perfect, and sometimes governments do not comply immediately and fully, but overall it works and China complies as well as other governments do.

But what about areas that are not covered by the rules? Can China be “cheating” in a more general sense, even if it is not breaking any specific rules, by not behaving “fairly”? One key area, which Zakaria does not mention, is state-owned enterprises (SOEs), which China has a lot of and which often don’t behave in a market-oriented way. Unfortunately, the WTO does not have extensive rules on SOEs. The best approach here is to add new trade rules on SOEs, so as to require these entities to behave in a manner consistent with commercial principles. The Trans Pacific Partnership has some detailed rules on this, and although China was not a member of the TPP, there was the possibility that it would join, or that the SOE rules in there could be used as a model for applying such rules to China in a different trade agreement. But the Trump administration pulled out of the TPP, and the opportunity for the administration to push this in relation to China may have been lost for now.

A similar issue is that China’s tariffs are higher than U.S. tariffs, which is something the Trump administration has complained about. This is true, but it’s within WTO rules. The reason China’s tariffs are higher is that China was fairly poor during the period (1986-1999) when it was negotiating to join the WTO, and therefore it was allowed to take on fewer commitments in some areas. As part of its WTO commitments, China did agree to lower its tariffs from existing levels, but not by as much as wealthier countries had done over the years in a series of trade negotiating rounds.

Since then, of course, China has become wealthier, although it is not nearly as wealthy as the United States. There is a case for China lowering its tariffs further now, but the way to pursue that would be another negotiation. Keep in mind that although China had fewer commitments on tariff reduction, it did take on additional commitments in other areas (so-called “WTO-plus” commitments), so a negotiation of this sort might involve a mix of adding new obligations on China and removing some of the existing ones. That’s probably the most politically viable approach to this issue.

Putting all this together, there should be two components to efforts to address China’s behavior in trade policy: (1) File more WTO complaints, and (2) sit down with China to negotiate new rules (on issues not yet covered, and so that China takes on more liberalization commitments in the areas that are covered). Both of these will work better if the U.S. joins with its trading partners in a coordinated effort. 

I don’t mean to make this sound easy. It would be a lot of work. But Zakaria is missing the mark when he says, “Previous administrations exerted pressure privately, worked within the system and tried to get allies on board, with limited results.” When previous administrations brought WTO complaints, the results were usually pretty good. But there were a lot of possible complaints that were not filed, and the negotiating efforts were fairly limited. Perhaps there were reasons for this, such as a reluctance to press China on trade because the U.S. wanted China’s help on foreign policy issues. But it sounds like now the Trump administration is elevating trade concerns to the fore. If so, there are plenty of opportunities to press China within the system, or to expand and improve that system. 

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Jeff Bezos and the Big Chill

Some government actions can discourage or “chill” speech. Donald Trump’s tweet storm this week criticizing Amazon head Jeff Bezos may be seeking to chill speech.

Trump argues that the U.S. Post office is subsidizing Amazon’s deliveries. We need not decide whether Trump or Amazon is right about this matter.  The subsidy may not be the issue according to the Wall Street Journal:

Fueling Mr. Trump’s ire is not so much Amazon, the online giant that is revamping the retail industry, but the company’s Chief Executive Officer Jeff Bezos, who also owns The Washington Post, people close to the White House say. Mr. Trump sees Mr. Bezos’s hand in newspaper coverage he dislikes and is lashing out at Amazon as a proxy, these people said.

 The Journal notes that the criticism arose from specific Post stories: 

The president’s most recent flurry of tweets targeting Amazon has coincided with publication of Washington Post stories he dislikes. Over the past week, Mr. Trump has privately complained about two particular Post stories, White House aides and others said: a March 30 article that documented problems at a White House office that vets political appointees and another the following day that depicted Mr. Trump acting more independently of chief of staff John Kelly and other “moderating forces.”

So what, you might think. The president has a right to free speech too, and Bezos is not in jail. If Bezos can’t stand the heat, as the saying goes, he should stay out of the DC kitchen.

But therein lies the free speech problem. Bezos could get out of Trump’s kitchen by telling the editors and reporters at his newspaper to shut up about the President. That would be a classic case of the “chilling effect” of government threats on political speech.

Why would Bezos do that in response to mere criticism by Trump? It’s not as if Trump is an authoritative public figure whose views garner widespread respect. Trumpian attacks might even increase Bezos’ public standing.

But investors might well believe that Trump will follow his criticism with actions to harm Amazon. For example, the administration might reward a $10 billion defense contract to one of Amazon’s rivals. (To be fair, Trump apparently told one of those rivals that the decision was not his to make). The president also appoints the Postal Service governing board that sets postal rates. Any president will have many other ways to harm a critic, especially one whose successful business interacts often with government policies. For these reasons investors might think Amazon had become less valuable after Trump’s tweeting. Indeed Amazon fell 7% and lost close to $60 billion in market value in the week after the public learned that Trump wanted to “go after” the company. 

This whole sorry affair suggests two points, one libertarian, one not so much. The U.S. president stands at the top of a powerful federal government. He has wide discretion over that federal power. Some believe that a benevolent president can use such power to instill “energy to the executive” and improve the world. But a vindictive man overly sensitive to criticism can also use presidential power to harass his critics.

Libertarians focus rightly on the rule of law, but not all restraints on power are written in formal rules. Informal norms can also constrain public officials. We might expect, for example, that an elected official would not directly threaten the value of a business to silence a critic. That expectation appears rather naïve. We may be entering a time when free speech is less free both because it is more threatened and because more sacrifices will be necessary to protect it.

Jeff Bezos is not in jail, but he is lighter in the wallet, at least for now. Will his speech be chilled by this illiberal president? There are reasons for hope. Post officials deny that Bezos intervenes in their coverage of the White House. Amazon is a popular company. Attacking him may not be popular beyond Trump’s base. Bezos built Amazon. He cannot be a weak man given to giving in to bullies. Much depends on what he does next.

From “Opioid Epidemic” to “Stimulant Epidemic”

Speaking at the National Rx Abuse and Heroin Summit in Atlanta, John Eadie, coordinator for the National Threat Initiative, warned, “We’re now facing a very significant stimulant epidemic.” Abuse of prescription stimulants such as Adderal and Ritalin (used to treat Attention Deficit Disorders) as well as illicit stimulants, like cocaine and methamphetamine, are surging. “No one is paying attention to this,” Eadie said, because the focus has been on opioids.

Law enforcement has seized 15 kilograms of stimulants for every kilogram of heroin it has seized during the last 5 years. The Centers for Disease Control and Prevention reports that psychostimulant overdose deaths rose 30 percent in the past year. There is evidence to suggest stimulant abuse is now outpacing opioid abuse. And the Drug Enforcement Administration reports that cocaine use and availability are at their highest level in a decade.

I wrote here about the resurgence of methamphetamine abuse once meth labs, especially in Mexico, found a substitute for Sudafed after the federal and state governments made it more difficult to obtain. And Oregon health authorities reported overdose deaths from heroin dropped in 2016 to 107 while overdose deaths from methamphetamine rose to 141.

There are lessons to be learned from this news if anyone chooses to learn them. The obvious one is that the “War on Drugs,” America’s longest war, is unwinnable. This lesson was apparently not learned when the nation experimented with alcohol prohibition in the early 20thcentury. When a market exists for willing buyers and sellers, prohibition just drives that market underground. Waging a war on drugs is like playing a game of “Whac-a-mole.”

But the other lesson relates to current opioid policy. Policymakers seem stuck in what should, by now, be an obviously false narrative: that the opioid overdose crisis is a product of doctors prescribing opioids to their patients. And even after considerable reductions in the prescribing and manufacturing of opioids for patients has shifted non-medical users over to heroin and fentanyl—now the dominant causes of opioid deaths—policymakers can’t disabuse themselves of this false narrative. They continue to double down on restricting prescriptions of opioids and make many patients suffer in the process. 

The opioid overdose crisis has always primarily been the result of non-medical users seeking opioids in the illicit market—where the dose, purity, and even the actual identity of a substance can never be known with confidence. 

The resurgence of stimulant abuse and overdose should not be viewed in isolation. It should be integrated with the opioid issue. Both should be viewed in the broader context of substance abuse in the presence of drug prohibition. Sociocultural and psychosocial factors may ultimately explain why the use and abuse of mind altering drugs is on the rise across much of the developed world

As long as policymakers continue using supply-side interventions, hoping to win an unwinnable war, the problem will continue to grow.

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Time to Retire a Speech Ban from the Prohibition Era

The watering holes in Virginia, where I live, don’t seem to show much variety when it comes to advertising happy hour specials. Nor should you blame a lack of creativity on the part of saloon owners. Entrepreneurs like Chef Geoff Tracy have plenty of clever promotions they want to run, from “half priced bottles of wine” on “Wine Down Wednesdays” to “$5 drafts” on “Turn Down For What Tuesdays.” There’s just one problem: in the Old Dominion, it’s literally illegal to talk about happy hour outside of the restaurant.

In Virginia, any happy hour advertisement placed outside of a bar – whether it be a newspaper ad or tweet – is prohibited from including the most important piece of information: the promotion or discount. Businesses are limited to using the generic terms “Happy Hour” or “Drink Special” to describe their offerings. Fun and creativity are forbidden.

Of course, across the Potomac from my home state is a drinking town with a politics problem. Yet nobody seriously suggests that telling customers that appletinis are $2 off between 4pm and 6pm has led to rampant hooliganism in the swamp (not literal hooliganism, at least). The only thing Virginia has accomplished with its crackdown on creativity is to harm consumers, who are kept in the dark on what the market has to offer and prevented from making informed choices about how to spend their time or money. 

These laws aren’t just outdated, or paternalistic, or absurd; they have a real effect on business owners who have to increase their compliance costs and forfeit foot traffic in order to comply. Chef Geoff, for example, has locations not only in Virginia but also in DC and Maryland, where colorful advertising and truthful prices are perfectly legal. So he has to change his ads in Virginia to avoid saying what is perfectly legal (and equally innocuous) elsewhere.

Now, I’ve got a toddler and infant at home, so I’ve left the happy hour game behind. That’s why it’s appropriate that two millennial lawyers – double-shudder – at the Pacific Legal Foundation, Anastasia Boden and Tommy Berry, are the ones representing Chef Geoff in his new lawsuit to strike down Virginia’s ban on truthful speech on tippling. (Full disclosure: Both of these legal eagles are former Cato legal associates, proving once again that we instill only the highest priorities in my shop.)

As a legal matter, the First Amendment doctrine here isn’t mixed or watered-down, but straight-up and neat. The Supreme Court struck down a very similar law in a 1996 case called 44 Liquormart v. Rhode Island. There, Rhode Island had completely banned telling anyone the price of alcohol except for signs attached to the product itself, which could not be visible from outside the building. As the plurality opinion explained, “a State’s paternalistic assumption that the public will use truthful, nonmisleading commercial information unwisely cannot justify a decision to suppress it,” even if the product pertains to a “vice.” As a chaser, the opinion added that “it is perfectly obvious that alternative forms of regulation that would not involve any restriction on speech would be more likely to achieve the State’s goal of promoting temperance.” Both observations are equally true here.

Virginia’s alcohol laws are an outdated and ineffective relic of the Prohibition Era. The days of the inconspicuous speakeasy are long since past – save a few places where hipsters go to pay $16 a cocktail. No one should have to fear being rounded up by the booze police for daring to whisper “two-for-one Ketel One” outside her own bar. The courts should put the Beverage Code’s speech ban on the rocks and serve Virginians a First Amendment win right from the tap.

Increased Civilian Casualties and a Disturbing Question from President Trump

Back in 2015, candidate Donald Trump caused a stir when he publicly advocated murdering the families of terrorists. At the time, this was widely condemned for its immoral cruelty and as a violation of the laws of war. Richard D. Rosen, director of the Center for Military Law and Policy at the Texas Tech University School of Law, described  “a policy of intentionally and directly targeting the families of terrorists” as “a war crime.” 

To the relief of many, the New York Times  reported  in March 2016 that Trump had “reversed course on his vow to kill the families of terrorists…saying he now recognized that such actions would violate international law.”

A disturbing report published yesterday in the Washington Post suggests President Trump may not have really changed his mind. The Post’s Greg Jaffe reports:

[W]hen the [CIA’s] head of drone operations explained that the CIA had developed special munitions to limit civilian casualties, the president seemed unimpressed. Watching a previously recorded strike in which the agency held off on firing until the target had wandered away from a house with his family inside, Trump asked, “Why did you wait?” one participant in the meeting recalled.

The article is vague about when this incident occurred, but it seems to strongly imply that Trump, as president, discouraged the CIA from taking precautions to limit civilian casualties. If the reporting is accurate, and the implication behind Trump’s question accurately portrayed, it may indicate presidential advocacy of war crimes.

Trump has directed the military to loosen the rules of engagement in its bombing of multiple countries, including Iraq, Syria, Yemen, Afghanistan, and Somalia. Numerous recent  reports  point to a signficant rise in overall deaths as well as confirmed civilian casualties from U.S. bombs over the past fifteen months. According to a Washington Post article last month, in 2017, the number of “people killed in strikes conducted by the U.S.-led coalition” increased by “more than 200 percent over the previous year.” Quoting the watchdog group Airwars, an Associated Press report from October cited the “frequent killing of entire families in likely coalition airstrikes.” 

This should be a major concern to Americans, but as the Washington Post’s media columnist Margaret Sullivan rightly pointed out last month, “the subject, considered a stain on President Barack Obama’s legacy even by many of his supporters, has almost dropped off the map…the American media is paying even less attention now to a topic it never focused on with much zeal.”

To state the obvious, calling for the deliberate killing of civilians should be beyond the pale in American politics. Trump’s alarming question to the CIA, together with the widely reported increase in bombing and civilian casualties during his presidency, should prompt a Congressional inquiry into U.S. combat operations across several countries. Congress has an obligation to check and balance indications of possible executive branch abuse of this kind. 

Marijuana Liberalization Reduces the Opioid Crisis

Two new studies released this week find that medical marijuana laws are associated with lower levels of opioid prescribing for Medicare and Medicaid patients. The authors find that:

 “Medical cannabis policies may be one mechanism that can encourage lower prescription opioid use and serve as a harm abatement tool in the opioid crisis.”

 and:

 “Medical and adult-use marijuana laws have the potential to lower opioid prescribing for Medicaid enrollees, a high-risk population for chronic pain, opioid use disorder, and opioid overdose, and marijuana liberalization may serve as a component of a comprehensive package to tackle the opioid epidemic.” 

These studies add to a growing literature suggesting that marijuana legalization, not stronger prohibition, will help address the current opioid crisis.

Businesses Don’t Comply with E-Verify Mandates

E-Verify is an electronic eligibility for employment verification system run by the federal government. It is supposed to check the identity information of new hires against government databases to see if they are legally eligible to work. The government created E-Verify to deny employment to illegal immigrants as a means of turning off the wage magnet that attracts so many here in the first place, but it has serious and unsolvable problems. Four states have mandated E-Verify for all new hires: Arizona, Alabama, South Carolina, and Mississippi. Barely a majority of new hires in those four states are run through E-Verify currently.  A federal mandate would probably have even lower compliance rates.  

E-Verify compliance rates are very low. In the second quarter of 2017, only about 56 percent of all new hires in states with E-Verify mandates were actually run through the program even though the law in those states mandates that 100 percent of them should have been checked against E-Verify (Figure 1).  It doesn’t get much better when looking at the individual states although I only have data going back to the fourth quarter of 2009 (Table 1).  Over the course of E-Verify’s mandate on the state level, compliance with the program has not improved (Figure 2).  The peak compliance rate for each state was 67 percent in Arizona in the third quarter of 2015, 66 percent in Alabama in the first quarter of 2016, 62 percent in the first quarter of 2015, and 53 percent in the third quarter of 2013.  That is a low level of compliance for a program that is supposed to stop the hiring of illegal immigrants. 

This blog shows lower compliance rates for E-Verify than in previous publications of mine.  That is because the most recent FOIAs actually exclude the number of E-Verify self-checks and are guaranteed to be tied to the location of the hire rather than the location of the E-Verify check.  In previous FOIAs, the government did not specify that hires in some states were run through E-Verify in other states.  This most recent data corrects for that confusion and allows for a more accurate comparison. 

It is time that policymakers in Washington, DC look at the states where E-Verify is mandatory to judge how it works in reality rather than relying on Pollyanish odes about its intended effects. The low E-Verify compliance rates in states where the program is mandated point to serious problems that its cheerleaders must directly address.

Figure 1

E-Verify Compliance Rates in States with Mandated E-Verify

Sources: Department of Homeland Security and Longitudinal Employer-Household Dynamics Survey

 

Figure 2

E-Verify Compliance Rates by State, Fourth Quarter of 2009 through Second Quarter of 2017

 

Sources: Department of Homeland Security and Longitudinal Employer-Household Dynamics Survey

 

 

Table 1

E-Verify Checks as a Percent of All New Hires

Year.Quarter Arizona Alabama South Carolina Mississippi
2009.4 38% NM NM NM
2010.1 59% NM NM NM
2010.2 61% NM NM NM
2010.3 65% NM NM NM
2010.4 46% NM NM NM
2011.1 61% NM NM NM
2011.2 56% NM NM NM
2011.3 61% NM NM 45%
2011.4 44% NM NM 41%
2012.1 59% 40% 52% 44%
2012.2 62% 54% 50% 45%
2012.3 63% 60% 57% 51%
2012.4 49% 48% 46% 45%
2013.1 61% 58% 58% 50%
2013.2 61% 57% 54% 48%
2013.3 65% 60% 60% 53%
2013.4 45% 47% 46% 37%
2014.1 61% 61% 57% 47%
2014.2 62% 58% 54% 43%
2014.3 66% 62% 59% 48%
2014.4 50% 51% 49% 40%
2015.1 62% 64% 62% 47%
2015.2 60% 59% 57% 43%
2015.3 67% 65% 60% 47%
2015.4 45% 53% 46% 36%
2016.1 59% 66% 60% 48%
2016.2 60% 60% 53% 45%
2016.3 59% 62% 55% 45%
2016.4 49% 53% 45% 42%
2017.1 61% 63% 56% 47%
2017.2 59% 61% 55% 46%

Sources: Department of Homeland Security and Longitudinal Employer-Household Dynamics Survey

Note: NM means “no E-Verify mandate.”

Note: The Author made some corrections to statistics and figures on April 26, 2018 based on new federal government information.