201812

December 18, 2018 1:19PM

Should the Government Manufacture Generic Drugs?

Senator Elizabeth Warren says yes, because patent protection gives drug companies monopoly power that they exploit. Her suggestion raises several issues.

First, Warren is right that while patents might incentivize innovation, they also keep prices elevated while new drugs are under patent, thereby reducing utilization. Patent policy should seek to balance these two effects, and current policy might not be the right balance.

Second, Warren's suggested policy - more government, rather than reduction or elimination of existing patent protection - fits the standard progressive approach: assume the fix to imperfect government is more government, rather than less. 

Third, libertarians are divided over government patent protection. On the one hand, libertarians endorse a government role in defining and enforcing property rights generally, so why should intellectual property be any different? (And as a bonus, intellectual property protection is an enumerated power). Further, standard economics suggests that private investment in new ideas might be insufficient without patents.

On the other hand, the current patent system generates a non-trivial frictions: patent trolls try to "hold up" firms that might use patents for new products. This causes no ineffiiciency if Coasian bargaining costs are zero, but that seems unlikely. 

Existing research, moreover, provides little evidence that patent protection spurs innovation (although pharma may be an exception).

So, Warren raises a valid concern over patents. But rather than having government manufacture generic drugs (what could possibly go wrong?), why not just scale back existing patent protections?

December 18, 2018 11:48AM

Who Should Moderate Content at Facebook?

By the end of 2019, Facebook promises to establish an independent body to handle appeals of its content moderation decisions. That intention follows an earlier suggestion by Mark Zuckerberg that Facebook might establish a “Supreme Court” of content moderation. Like the real Supreme Court, Facebook’s board will presumably review the meaning and application of its Community Standards, which might be considered the basic law of the platform.

There are many questions about this new institution. This post looks at how its members might be selected.

To fix ideas, let’s begin with how members of the U.S. Supreme Court are selected. Appointments to the highest court are procedurally simple and normatively complex. Article II of the Constitution says the president “shall nominate, and by and with the Advice and Consent of the Senate, shall appoint...Judges of the Supreme Court...” Advice and Consent can mean a simple majority or a supermajority of senators. Whatever the rule, senators vote only once on a nominee. Thereafter justices "hold their Offices during good Behavior.” (Article III) In practice that means justices continue serving however unpopular their decisions. Of course, justices may be impeached and removed from the Supreme Court. However, Congress has not removed justices or judges because of their decisions. It really does require bad behavior.

Clearly the framers of the U.S. Constitution valued judicial independence, especially a certain distance from the unfiltered will of the majority. A candidate for the presidency may promise voters to nominate a favored judge to the Court; he lacks power to seat anyone. Candidates for the Senate may promise to support or oppose a nominee to the Court, but no senator or group of senators can decide whom to nominate. Once seated, the “good Behavior” standard means a justice serves until retirement, death, or impeachment and removal. The first two are by far the most likely means of departing the Court. The justices need not fear their peers in the executive or the legislative branches or indeed, the people themselves, since they may not be recalled by an angry electorate.

But justices are not free to exercise the judicial power of the United States as they wish. Presumably they are obligated to interpret and apply the words of the Constitution which both empowers and limits the government. The courts are not independent of “We, the People” understood over time as the will of majorities and supermajorities expressed as the text of and amendments to the Constitution. The presidents and senators who nominate and appoint justices also depend directly or indirectly on voters. In these ways, the selection of Supreme Court justices balances independence and representation, thereby fostering the legitimacy of the Court and its decisions.

Following legal and constitutional values might enhance the legitimacy of Facebook’s “appeals court.” Facebook clearly values independence in this new review board: Zuckerberg describes the board as “an independent body, whose decisions would be transparent and binding.” But he also says, the board would “uphold the principle of giving people a voice.”

You might think Facebook’s Community Standards cannot support its review board the way the Constitution supports the Supreme Court. The Constitution gained consent through a deliberative process that led to approval of the document eventually in all states. Nothing like that happened at Facebook. Yet every user consents to abide by Facebook’s Community Standards when joining the platform. We might question the quality of that consent, but it seems similar to the consent given to the Constitution by those of us who joined the “platform” after 1789.

What about applying the Community Standards? Zuckerberg says the board should be independent of Facebook for three reasons:

First, it will prevent the concentration of too much decision-making within our teams. Second, it will create accountability and oversight. Third, it will provide assurance that these decisions are made in the best interests of our community and not for commercial reasons.

Members of the board might serve during “good behavior” like justices. This would create space for its members to interpret and apply Facebook’s Community Standards as they saw fit.  Perhaps extended terms for members of the board could attain the same end. But remember: even Supreme Court justices can be removed for bad behavior.

Facebook’s board also needs to be independent in the sense of being free of both politics and commerce. Many people fear that Facebook’s content governance reflects the political commitments of its managers and employees. The interpretation of Facebook’s Community Standards also could become the plaything national political forces.  In both instances, concerns about independence reflect worries about misrepresentation. What should be for all turns out to reflect the will of a few. How might the selection of review board members better represent Facebook’s users?

Let’s begin with a straightforward idea of representation. Imagine Mark Zuckerberg appoints the members of the board. Zuckerberg is accountable to Facebook’s users because they can exit the platform and thereby harm or destroy his business. That constraint would mean his appointments represent the concerns of users, along with other matters important to the business. Zuckerberg is a faithful agent of his customers not because he wishes to be so but because he must be.

Facebook wants its content moderation to be accepted as legitimate by its users (and by others). Would users accept this market theory of representation for the board? Many people doubt that markets constrain business managers. Others will think of representation as direct voting rather than indirect responses to consumer desires. Partial acceptance of the market theory may not be adequate to legitimize the new body.

So instead of one person, maybe every adult should elect the members of the board. But direct election seems impossible. The institutions to make that happen do not exist and would take a long time to create. If created, the elections would likely have low turnout with dire implications for the legitimacy of the board.

Any decisionmaker faced with a similar situation tends to act on what might be called the stakeholder theory of representation. Facebook could determine which groups have a strong interest in content moderation by the company. They could then consult with these organized interests about who should serve on the board and then appoint them. The stakeholders would nominate while Facebook managers appoint the “justices” of the review board. Facebook might well see these appointments as representative of its users. The appointees would not work for Facebook and hence be independent in a sense. More realistically, if these selections were done correctly, Facebook would give its critics (and supporters) a seat at the appeals court.  Its critics might become more constructive or even supporters of Facebook’s content moderation.

But who would these appointed stakeholders represent? They would be suggested by groups with intense interests in Facebook’s content moderation. For them, the benefits of organizing to influence content moderation would outweigh its costs as noted in a famous book.  For most Facebook users, the opposite would be true; the costs of organizing would outweigh its benefits. As a result, the appointees would likely have atypical views about the meaning and application of Facebook’s Community Standards. In other words, representatives of stakeholders are unlikely to be representative of Facebook’s users.

Turning to stakeholders to help with a political challenge is natural. Above all, they are there, and you know them. Stakeholders do indeed offer a measure of representation, and perhaps also some independence from forces outside any organization. Indeed conflict among stakeholding members might enhance the board’s independence.  But the representation they offer is flawed. And perhaps, at this stage of institutional design, Facebook might look for alternatives that offer more in the way of both independence and representation.

December 18, 2018 11:44AM

Your Constitution Is in the Mail

Return Mail, Inc. is a small technological company that developed a and patented a system for processing returned mail after a failed delivery attempt, using optical scanners, computer databases, and other mechanisms. When it sought to enforce its patent against the United States Post Service (USPS), it knew that in the wake of the 2011 America Invents Act (AIA), the U.S. Patent and Trademark Office (PTO) could change its mind and conclude that the patent was granted in error and should have no further force. It also knew, however—or so it thought—that once the government made a decision regarding a patent, the government would be expected to speak with one voice. Instead, two different governmental agencies came to different conclusions and attempted to argue amongst themselves over Return Mail’s rights.

Article II of the Constitution vests the executive power in the president alone because the president is uniquely accountable to the entire American public.  Yet the USPS, although part of the government, operates independently of direct presidential control and is able to take legal positions that conflict with presidential directives and priorities. The Supreme Court has permitted the creation of such agencies, but it has never sanctioned these agencies to directly contradict presidential decisions and to seek the resolution of such disputes in the judiciary branch.

Such a system creates significant problems for the public in general, because it can never know who is actually speaking for the government and which directives it must comply with. It’s particularly problematic in the world of patents—which Congress from very early on determined must have uniform application throughout the country and charging a single agency with reviewing applications and a single court with hearing all appeals. Allowing myriad government agencies to reach their own conclusions on the meaning and scope of patents would undermine the system that Congress has taken pains to construct over more than 200 years (regardless of the proper scope of patents and other legislative reforms that may be worth pursuing).

Further, allowing the government to disperse the executive power between the president and independent agencies has a risk of undermining the due process protections that must be afforded to patentees before their patent rights are taken away. The Supreme Court has always maintained that patentees’ rights are protected by the essential guarantees of the Due Process Clause. Under the current system for administrative patent cancellation proceedings, the director of the PTO (who is responsible to the president and terminable at will) has the power to select administrative patent judges and assign them to particular cases. In cases where an executive agency seeks review of a patent issued by the PTO, the government—through that agency—has an interest in the outcome of the proceedings, but it is also the one sitting in judgment of the case. Our system of government has rejected procedures where one can be a judge in his own case. Allowing one government agency to challenge a patent while another government agency sits in judgment of that challenge would undermine more than 400 years of Anglo-American jurisprudence.

The Cato Institute, joined by Professor Gregory Dolin of the University of Baltimore, have filed an amicus brief urging the Supreme Court to hold that fidelity to our constitutional structure requires construing the AIA to apply solely to the resolution of disputes between private parties where the PTO remains a neutral and disinterested adjudicator and where politically accountable branches remain responsible to the citizens for the decisions that they have reached.

The case of Return Mail, Inc. v. U.S. Postal Service will be argued at the Supreme Court in the new year.

December 18, 2018 8:56AM

Ruling Striking Down Obamacare Comes Six Years Late and a Dollar Short

Late Friday afternoon, a federal judge in Fort Worth ruled that, because the individual mandate could no longer be upheld as a tax (because Congress in 2017 eliminated the monetary assessment for noncompliance), it was unconstitutional -- and that it couldn't be severed from the rest of the Affordable Care Act, so all of Obamacare is invalid. Fantastic, right? This is what I and many others have been working for since the law was signed in March 2010 and, while it took a while, we finally reached to the mountaintop -- a second bite at the apple to undo John Roberts's betrayal, right?

Well, not quite. Much as Judge Reed O'Connor's ruling seemed to parallel the ruling by Judge Roger Vinson nearly eight years ago, in the litigation that culminated NFIB v. Sebelius in 2012 -- Josh Blackman even evoked that early decision in a clever allusion to Groundhog Day -- this time around there are different statutory facts being evaluated and so a different legal posture. 

Mind you, it's absolutely correct that a "shared responsibility payment" that is $0 can no longer be justified as a tax, even under Chief Justice Roberts's twistification. That is, a bare command to buy insurance is unconstitutional because it goes beyond federal power under the Commerce Clause and Necessary and Proper Clause (so ruled a majority of the Supreme Court, including Roberts).

But that's not the end of the ball game because the question of whether the individual mandate can be severed from some or all of the rest of the ACA is a different one than whether the mandate itself is constitutionally kosher. Judicial doctrines of severability are somewhat complicated and call for judgment rather than bright lines, but they boil down to two questions: (1) Is the remainder of the statute “fully operative as a law”? and (2) Would Congress have passed the remainder? In Cato's severability brief in NFIB, we argued that (1) "The individual mandate was essential to the Act’s scheme for achieving near-universal health care coverage at an acceptable cost" and (2) "Severing the individual mandate from its related provisions in Titles I and II will produce new comprehensive health care legislation that Congress did not enact and would never have enacted."

But this time around, the Tax Cuts and Jobs Act of 2017 reduced the tax-penalty to $0 without eliminating so much as the guaranteed-issue and community-rating provisions (the parts most closely tied to the mandate), so (1) either the rest of the law would seem to be working (or not) irrespective of the individual mandate, and (2) we now have the scheme that Congress actually passed. In other words, Congress had the opportunity to sever as much of Obamacare as it wanted -- legally speaking; there was only so much Republicans could do practically through "reconciliation" given the Democrats' ability to filibuster more substantive legislation -- and it effectively ratified the entirety of Obamacare with a $0 mandate.

So I'm quite skeptical that the severability ruling will be upheld on appeal, even by the conservative-friendly Fifth Circuit. There are also potential issues of standing, given that it's based on compulsion to follow a law that has a $0 enforcement mechanism and no other legal consequences.

The case might not even get to the Supreme Court. And if it does, remember that the five justices who ultimately upheld the ACA are still on the Court. Plus Justice Brett Kavanaugh twice rejected challenges to the law when he was on the D.C. Circuit -- albeit on technical grounds, and without engaging in severability analysis -- which is why attacks on him from the left for wanting to gut Obamacare were so misguided.

In short, Friday's ruling gave me a wistful thought about what might have been, but this case just isn't the silver bullet that will finally kill the monster that has so damaged our health care system, economy, and rule of law. Indeed, I imagine that at a certain point we'll stop talking about Obamacare -- that point may have come when Senator John McCain voted against its "skinny repeal" last year -- and just debate how best to reform "the health care system."

For more analysis of Friday's ruling in Texas v. United States, see Volokh Conspirators Jon AdlerIlya Somin, and special guest star Josh Blackman in two posts (with more to follow). It's telling that I haven't yet seen Randy Barnett, the intellectual godfather of the original individual-mandate challenge, opine on the ruling. I think he knows, as well as the rest of us, that this case isn't the blockbuster some have made it out to be.

December 17, 2018 5:09PM

45,000 “Special Interest Aliens” Caught Since 2007, But No U.S. Terrorist Attacks from Illegal Border Crossers

President Trump claimed last week that “people are pouring into our country, including terrorists.” This came after his unsubstantiated claim that Middle Easterners are traveling in the caravan. Center for Immigration Studies (CIS) fellow Todd Bensman has repeatedly defended these types of claims by equating immigrants from “countries of interest” with “terrorists.” This conflation is common and rarely challenged as Homeland Security officials and members of Congress frequently describe immigrants from these countries as a terrorist threat. Despite Border Patrol apprehending tens of thousands of foreign nationals from these countries of interest and many thousands more who have undoubtedly entered illegally, not a single person has been killed by a terrorist who entered as an illegal border crosser from any of the countries of interest.

Special Interest Alien Apprehensions

The terminology used to describe these immigrants varies considerably between sources. In 2011, the Department of Homeland Security (DHS) Inspector General defined the term “specially designated countries” to mean countries “that have shown a tendency to promote, produce, or protect terrorist organizations or their members.” Border Patrol Chief David Aguilar described “Special interest countries” as “basically countries designated by our intelligence community as countries that could export individuals that could bring harm to our country in the way of terrorism.”

These definitions could apply to nearly every country in the world, as just about every major country has “produced” or “exported” at least one terrorist. With several exceptions, the lists have consisted primarily of countries with large Muslim populations. The designated countries have changed repeatedly over the years:

In 2003, DHS released a list of 52 countries. In 2004, the list included 35 countries, two of which were new. In 2007, the list was referenced in a news article, and though the full list was not quoted, it included another country (Tanzania) that was not on either of the prior two lists. In 2018, DHS released yet another list of countries where CBP “had Enforcement Actions against aliens from the following ‘Special Interest Aliens’ countries for FY18.” This partial list included yet five more countries that were not on the prior lists. Altogether, these lists have contained 63 countries. Only 14 have shown up on all the lists.

From 2007 to 2017, Border Patrol apprehended 45,006 immigrants from any of the countries ever designated as a “country of interest” (See Table 1). During the same period, it apprehended 4,109 from countries that made it onto all three lists. Given the inconsistency in these lists and for sake of completeness, Figure 1 shows the annual number of special interest aliens apprehended by Border Patrol separated by the different lists and those apprehended from countries that appeared at least once on a single list.  Fiscal Year 2007 is the earliest year that Border Patrol has made the number of apprehensions by citizenship publicly available.

Figure 2 shows that only 0.85 percent of all Border Patrol apprehensions from 2007-2017 were special interest aliens.  This includes aliens from any country that ever appeared on any special interest countries list.  The other 99.15 percent, 5.25 million apprehensions, were for illegal immigrants from countries other than those that have ever appeared on a special interest countries list.

With 16,979 apprehensions, Indians were the most common “special interest aliens” apprehended from 2007 to 2017, followed by Brazilians with 12,925 apprehensions. Both countries were on the 2003 list, but not listed in 2004 or 2018. Bangladeshis were the most commonly apprehended “special interest aliens” who were on all three lists with 2,469 apprehensions.

No Terror Attacks on U.S. Soil

Zero people were murdered or injured in terror attacks committed on U.S. soil by special interest aliens who entered illegally from 1975 through the end of 2017.  However, seven special interest aliens who initially entered illegally have been convicted of planning a terrorist attack on U.S. soil.  They all entered illegally from Canada or jumped ship in American ports before the list of special interest countries even existed.  None of them successfully carried out their attacks and none illegally crossed the Mexican border.

Five of those seven illegal border crossers resided as illegal immigrants in the United States.  Walid Kabbani, a native of Lebanon, walked across the Canadian border illegally in 1987 to deliver a bomb to his co-conspirators in the United States.  He was discovered by a local police chief and arrested before he could carry out his attack.  Algerian-born Ahmed Ressam attempted to enter with false documents in 1999 on his way to attack Los Angeles International Airport as part of the so-called Millennium Plot.  U.S. border inspectors apprehended him, discovered his bomb in the spare tire well of his car, and then arrested him.  In the scuffle to detain Ressam, he broke free of U.S. law enforcement officers and ran into the United States before being apprehended a short time later.  Since Ressam technically entered the country unlawfully when crossing the Canadian border, we included him on this list. 

Algerian-born Abdelghani Meskini aided Ressam in his plot after he entered the United States illegally as a stowaway on a ship.  Palestinian Gazi Ibrahim Abu Mezer, who was born in Israel and traveled on Israeli papers, was apprehended at a bus stop after illegally entering the United States in 1997.  Somali-born Nuradin M. Abdi originally entered the U.S. unlawfully in 1995 on a fake passport.  While he did not cross the border unlawfully, he did so on a false passport and would have been blocked like Ressam was if his subterfuge was discovered by Customs agents.  In order to include the maximum number of possible terrorists so that we bias the results against ourselves, we included Abdi.    

From 1975 through 2017, a total of nine terrorists entered the United States illegally and only three did so along the Mexican border: Shain Duka, Britan Duka, and Eljvir Duka.*  They crossed as children with their parents in 1984 and were arrested as part of the planned Fort Dix terror attack that the FBI foiled in 2007.  The Dukas are ethnic Albanians from Macedonia – neither country has appeared on any special interest countries list.  The only terrorists who crossed the border with Mexico illegally did so as children, decades before becoming terrorists, and were not even from the special interest countries.

In addition to the five illegal immigrant border crossers from the special interest countries, two people from those countries entered illegally and applied for asylum.  We typically count these people as asylum seekers, but Bensman and others might include them as illegal border crossers.  As a result, we decided to include them here.  Although data is a little sketchy on these instances, Pakistan-born Majid Shoukat Khan and Shahawar Matin Siraj are two of the eleven asylum-seekers who probably initially entered illegally before asking for asylum.  They entered in 1996 and 1998, respectively.  They are both from a special interest country, neither of them committed an attack, neither injured or murdered anyone, and they both crossed the Canadian border.

Although there have been zero attacks committed by illegal border crossers from any of the special interest countries, foreign-born people who entered legally from those countries were responsible for 99.5 percent of all murders and 94.7 percent of all injuries committed by foreign-born terrorists on U.S. soil from 1975 through the end of 2017.  This isn’t surprising as the 9/11 terrorists are responsible for over 98 percent of all the murders and 87 percent of all of the injuries committed by foreign-born terrorists over this time.  Of the small number of foreign-born terrorists who committed attacks or were convicted of planning to do so on U.S. soil from 1975 through the end of 2017, the most successful strategy was to first enter legally.  There is no evidence that that pattern of activity has changed.     

Conclusion

So far, there have been zero people murdered or injured in terror attacks committed by illegal border crossers on U.S. soil.  This includes those who entered as illegal immigrants and those who entered illegally and then applied for asylum.  Only seven terrorists from special interest countries, all of whom entered prior to the government putting those countries on a list, even entered the U.S. illegally by crossing a land border.  Two of them were arrested within hours of doing so, two other received asylum, and none of them crossed the Mexican border. 

Our above evidence is based on past events.  The future could be different, but those who think that special interest aliens from these countries will enter illegally across the Mexican border and commit terrorist attacks here should present some compelling evidence before policymakers take them seriously.   

*Numbers based on a forthcoming updated Cato Institute policy analysis.

December 17, 2018 4:57PM

Is Greenland Melt “Off the Chart?”

That’s what the second author said about a new paper on Greenland’s ice, which arrived just in time for the annual meeting of the signatories of the UN’s 1992 treaty on climate change, this time in Katowice, Poland. Appearing in Nature, Rowan University Geologist Luke Trusel and several coauthors claimed ice-core data from Central-Western Greenland revealed melting in the recent two decades that has been “exceptional over at least the last 350 years.” The paper appeared in the December 6 issue of Nature.

How exceptional?

“Our results show a pronounced 250% to 575% increase in melt intensity over the last 20 years” as measured in four ice cores in west-central Greenland. Three of the cores were in the Jakobshavn Glacier, the largest-discharging glacier in the entire Northern Hemisphere. The Ilulissat icefjord, created by the glacier, some 25 miles in length, has historically calved nearly 50 cubic kilometers of ice per year into Disko Bay, near the town of Ilulissat. 

They then correlated their ice-core data with a model for ice behavior in all of Greenland. The correlations, while significant, were modest, with the explained variance of the island-wide melting maxing at around 36%. The melt reached its maximum in the very strange summer of 2012, where the amount at the Summit site, near Greenland’s highest elevation, was the largest since the summer of 1889—worth noting because that was well over 100 years ago.

There’s a long-standing quality weather station at Ilulissat, and it certainly shows summer warming of about 2⁰C from its beginning around 1850 to the 1920s.

For a broader comparison, we looked at the summer temperature anomalies for the 5 X 5 degree gridcell that includes Disko Bay and the icefjord. Because it is relatively hospitable and settled, there are a number of stations within the cell so the data is quite reliable. The data we show is from the Climate Research Unit at the University of East Anglia, version HadCRUT4.

There’s very little to see in this temperature record. The authors are well-aware of this and offer a rather unsatisfactory explanation:

The non-linear melt-temperature sensitivity also helps explain why episodes of mid-twentieth-century warmth resulted in less intense and less sustained melting compared to the last two decades, despite being only marginally cooler…Additional factors, such as recent sea-ice losses, as well as regional and teleconnected general circulation changes may also play a part in amplifying the melt response.

“Teleconnected” means things that happen in different locations but occur at the same time, without the reason for the connection being necessarily known.

What is known is that the correlation between summer temperature and melt in the cores on the glacier is relatively low (but statistically significant) with local summer temperatures only explaining 11% of interannual variance in melt. The melt data is noisy, but shows a spectacular increase in the last two decades for the area around Disko Bay.

Figure 1.  Regional temperature history for Disko Bay, which includes the Ilulissat icefjord.

Figure 1.  Regional temperature history for Disko Bay, which includes the Ilulissat icefjord. 

The “250% to 525%” increase actually refers to the two somewhat separated locations, one on the Jakobshavn Glacier and the other on the peninsula that forms the northern boundary of Disko Bay

The actual data show the baseline summer melt is very close to zero (and in some cases is below zero, i.e. a gain), for the vast majority of years back into the 18th century. Five times a number that is very close to zero is still a small number. It’s “off the chart” if the chart stops at very near zero and ends at number five times very near zero, as it does in the paper.

The sudden change in melt is nonetheless impressive. And it was certainly published at a time that would have maximum impact on the partygoers in Katowice.

It has some competition, though, in the other direction. In 2013, the Danish “NEEM” team successfully drilled a core through the previous (penultimate) interglacial and found that summer temperatures were 6-8⁰C warmer than the 20th century average for 6000 years. They estimated Greenland only lost 30% of its ice. That anomaly is known as the Eemian period and was around 118,000 years ago.

Humans can’t induce a summer warming of that magnitude and length simply because there’s not enough fossil fuel handy. And the math there is somewhat reassuring.  If all the ice came off Greenland, sea level would ultimately rise 23 feet. So 30% of that is 6.9 feet, spread out over 6000 years. That works out to a Greenland-induced sea level rise of 1.1 feet per millennium when it was much warmer.

Thanks to Ryan Maue for the Disko Bay analysis

December 17, 2018 2:23PM

Is The Trump Administration Willing To Make A Deal With China?

By Simon Lester and Huan Zhu

The escalating tariffs imposed by the United States and China in recent months are making people and markets nervous, and just about everyone would like to see a deal of some sort. Over this period, prospects for a deal have gone up and down with the latest Trump tweet, but some reports suggest that the prospects now look promising. The current negotiating timetable is based on a 90-day period that Presidents Trump and Xi agreed to at their dinner in Buenos Aires on December 1 during the G20 talks. But what exactly would a deal look like? The Trump administration talks a lot about what it wants China to do, and the media mostly focuses on that. But what, if anything, will the administration give as part of this deal? Mike Santoli of CNBC Closing Bell asked  White House trade adviser Peter Navarro this question recently:

MIKE SANTOLI: Peter, you started out by saying how President Xi in 45 minutes gave a presentation showing a willingness to address all the United States' concerns and then you say but everything else they have done essentially means that you're very skeptical, I assume, of the likelihood of them delivering that. In exchange for what was the President suggesting that they would perhaps promise these reforms? In exchange for what from the United States?

PETER NAVARRO: …In terms of what we give back, I mean therein lies the rub. President Trump has been eloquent in stating that we are the piggy bank of the world. We're in all these sorts of one sided bad trade deals and the problem that we have whenever we negotiate with whoever we negotiate is they are getting such a great deal they really don't want to give us anything. So we are not prepared to give them anything in terms of a deal quid pro quo because we are so much behind the eight ball. We are not stealing their technology. We are not forcing the technology transfer. We are not manipulating our currency. We are not counterfeiting and pirating Chinese goods and flooding their markets. We are not having state owned enterprises run rampant around the world, basically exploiting the rest of the world. So what is there for us to give? What we have to give is access to our markets, period. The largest market in the world. Access to our financial markets, our capital markets. This is a great gift that we give to other nations. But we're not going to do it anymore – President Trump's made it clear – we're not just going to give that away and be exploited.

In short, Navarro says that the administration will not be giving anything. Of course, even if he knew otherwise, he probably feels like he has to say this as part of the administration's negotiating strategy. But regardless of what he or the administration says about this, the reality is likely to be different. Generally speaking, trade deals involve concessions by both sides. And with China in particular, given its "century long humiliation" of being pushed around by foreign powers, one-sided deals are going to be very difficult politically. And that seems to be how China is thinking about these negotiations, as a spokesperson for China's Ministry of Commerce recently suggested: "In the next 90 days, China and the U.S. will negotiate on major issues of bilateral concern based on the principle of ‘mutual respect, equality, mutual benefit, and being mindful of each other's concerns,’ aiming at the ultimate goal of removing all additional tariffs, and striving to reach consensus."

So what might China want or expect to get out of a deal? In a Free Trade Bulletin we wrote last year, we suggested some possibilities:

... if this is to be a negotiation, China will have demands, too. One of these is likely to be that the United States begins treating China as a market economy in its antidumping calculations. This will be difficult for the United States to accept. However, if the United States can get enough concessions in other areas (such as SOEs and overcapacity in steel production) and can impose some additional disciplines on China’s own abuses of antidumping measures, perhaps it could go along with this demand.

Similarly, there has been talk of revising the review of foreign investment carried out by the Committee on Foreign Investment in the United States (CFIUS) so as to broaden its scope. Chinese companies have previously challenged CFIUS decisions blocking their investment, and expanding the scope of this review is likely to be of concern. As part of a negotiation on trade and investment, the United States could commit to maintaining the existing focus for reviewing Chinese investments and keeping the review process from being abused.

Since we wrote that piece, the enactment of the Foreign Investment Risk Review Modernization Act (FIRRMA) has provided a legal framework to expand, rather than limit, the scope of CFIUS review. However, some of the details are still to be determined, and the U.S. could apply the law in a narrow way so that the process will not impede investment unreasonably. Relatedly, the U.S. could relax some of its restrictions on selling high-tech products to Chinese companies, in areas where national security is not at issue. These are just a couple ideas, and there are many other possibilities.

We are more skeptical of a significant deal than some commentators seem to be, but we do think there is a chance, although it will almost certainly take longer than 90 days. But the Trump administration needs to offer something in exchange for any concessions by China. If the administration is not anticipating giving something to make a U.S.-China deal look balanced, the prospects for a deal do not look very good at all.