August 2019

August 30, 2019 3:22PM

How a Footnote in the USMCA Undermines Economic Liberty

House Democrats are holding up ratification of the U.S.-Mexico-Canada Agreement (USMCA) until U.S. Trade Representative Robert Lighthizer agrees to make some changes. While a number of the big concerns about the new NAFTA, such as enforcement, biologic drugs, and the implementation of Mexico’s labor laws have received a lot of attention, there is another issue that has flown under the radar, perhaps in part because it’s buried in a footnote.


Chapter 7 of the USMCA, “Customs Administration and Trade Facilitation,” includes a section on “Express Shipments.” These are goods of low or negligible value that are shipped by courier or express mail services in large volume. Think about that pair of shoes you just ordered from France. That’s an express shipment.


Because there are so many of these packages coming through customs facilities, and it’s such a burden to process them, most countries have what is called a de minimis threshold, that is a set value below which imported goods are both sales tax and duty free. The United States has the highest de minimis threshold in the world, allowing individuals and businesses to make purchases from abroad up to $800 with no duty or tax collected by customs. As Gary Hufbauer, Euijin Jung, and Lucy Lu explain, high de minimis thresholds are not only good for consumers, who do not have to deal with the complexity and time delays in processing customs duties and sales tax on the things they buy, but also for small businesses, because of the importance of intermediate inputs, as well as cross‐​border sales for their profits.


As part of the USMCA, Canada and Mexico both raised their de minimis thresholds, which not only helps small businesses in the United States but also consumers in both countries as well. Canada raised its de minimis threshold to $150 CAD from its original $20 CAD limit, and sales tax cannot be collected until the value of the product reaches at least $40 CAD. Mexico increased its de minimis from $50 USD to $100 USD, with tax free de minimis on $50 USD.


While the U.S. did not alter its de minimis threshold in USMCA, there is a curious footnote in Chapter 7 that should be cause for concern. It reads:

Notwithstanding the amounts set out under this subparagraph, a Party may impose a reciprocal amount that is lower for shipments from another Party if the amount provided for under that other Party’s law is lower than that of the Party.

Now we are all well aware of this administration’s distorted concept of reciprocity, and they seem to be applying it here as well. What this footnote suggests is that the U.S. could potentially lower its de minimis threshold to match what Canada or Mexico have agreed to. To put this in perspective, in 2016, the United States increased its de minimis level to $800 from $200. This footnote would allow the de minimis to drop even below the 2016 limit. This is not only an attack on economic liberty for American citizens, but it would be an enormous step backward on a policy where the United States has been a leader for liberalization.


Back in June, Robert Lighthizer was directly asked about this footnote by multiple members of the House Ways and Means Committee during a hearing on the 2019 trade policy agenda. While a number of excellent questions were raised, I highlight two below. First, Rep. David Schweikert (R‑AZ), noting bipartisan support for the current de minimis threshold, stated:

In 2016, Congress raised the U.S. de minimis threshold to $800 in the bipartisan Trade Facilitation and Trade Enforcement Act. This change enjoys wide bipartisan support in Congress and throughout the e‑commerce landscape. The current threshold benefits millions of American small businesses, across all sectors, including manufacturers, who rely on low‐​value inputs for the production of U.S. exports. As a result, American small businesses now enjoy more rapid border clearance, reduced complexities and red tape, and lower logistics costs, while American consumers benefit through faster, less expensive access to a wider range of goods.


Given the benefits of the current de minimis threshold to American small businesses and the U.S. economy as a whole, and that Congress legislated on the U.S. de minimis level only a few years ago, I remain extremely concerned over the Draft Statement of Administrative Action (SAA) on the U.S.- Mexico‐​Canada Agreement (USMCA) transmitted to Congress on May 30. This draft SAA includes language suggesting that you may seek changes to the U.S. de minimis threshold through the USMCA implementing bill. As you know, last December, Rep. Kind and I led a bipartisan letter urging you not to seek to lower the U.S. de minimis threshold. My position has not changed. I strongly oppose including any language in the USMCA implementing bill that would lower the U.S. de minimis level or that would delegate this authority to the Executive Branch. As you work with Congress to finalize the USMCA implementing legislation, will you commit to not seeking authority to lower the U.S. de minimis threshold?

Rep. Daniel Kildee (D‑MI) also emphasized how this change would undermine Congress’s authority to regulate commerce:

In 2016, Congress raised the U.S. de minimis threshold to $800 in the bipartisan Trade Facilitation and Trade Enforcement Act. The current threshold benefits millions of American small businesses, across all sectors, including manufacturers, who rely on low‐​value inputs for the production of U.S. exports. As a result, American small businesses now enjoy more rapid border clearance, reduced complexities and red tape, and lower logistics costs, while American consumers benefit through faster, less expensive access to a wider range of goods.


Given the benefits of the current de minimis threshold to American small businesses and the U.S. economy as a whole, I was curious to see the Draft Statement of Administrative Action on the U.S. Mexico Canada (USMCA) includes language that you may seek authority for the Executive Branch to set U.S. de minimis thresholds. Congress must maintain its Constitutional authority to set tariffs – including de minimis thresholds.


As you work with Congress to finalize the USMCA implementing legislation, can you commit not to seek the derogation or authority to derogate from the current U.S. de minimis threshold?

Amb. Lighthizer’s comments to all questions on the de minimis threshold remained the same:

As noted in the Administration’s submission to Congress on changes to existing law and the draft Statement of Administrative Action, we identified this as an issue for consultation with the Committee on Ways and Means of the House and the Committee on Finance of the Senate. These consultations are underway. I look forward to continuing those conversations with you and other Members on this important issue.

Congress should continue to press the administration for the removal of this footnote from the USMCA. It may seem like a small part of the broader USMCA debate, but Congress should not be fooled. This is representative of the broader attempts by the executive branch under this administration to expand its power into areas where the Constitution gives Congress express authority. Congress should not give up its authority to regulate foreign commerce, and should actively push to rein in the abuses of the executive in trade policy. By pushing for this on de minimis, we can get one step closer to ensuring that the Trump administration’s trade policy remains as its own small footnote in the history of U.S. trade policy.

August 30, 2019 10:30AM

What’s the Point of the Overtime Pay Regulation?

The Trump administration will reportedly raise the overtime pay salary threshold from $23,660 to $36,000 in the coming weeks. Anyone below the current threshold is eligible to be paid at least one‐​and‐​a‐​half times their regular wage for any hours worked above 40 per week. The proposed change would make approximately 1.3 million extra people eligible for overtime pay.


Economically, such a regulatory change is a great big nothing burger. It will do nothing to affect long‐​term overall compensation, but will bring mild labor market dysfunction and adjustment costs along the way.


Yes, in the short‐​run, employers have business practices and contracts with their employees that take time to change. Some workers will therefore benefit from higher total compensation in the immediate aftermath of the rule change, as employers are now legally obliged to pay them extra for overtime. This, no doubt, will be the outcome the Trump team trumpets.


But as time goes by, employers will adjust.


That might come initially through managing their workforce to minimize the likelihood of paying overtime rates — changing shifts patterns, recategorizing workers into exempt categories, outsourcing tasks, or trimming the workforce. Basic economics tells us, though, that what employers ultimately care about are the total costs of employment. In time, the overwhelming response will be employers cutting base pay rates or other perks and benefits (relative to where they would have gone) such that overall employment costs remain unchanged. This is exactly the response that empirical research has found.


So the broadened scope of the rule will do little for workers beyond the short‐​term. But we’d expect it to modestly reduce the efficiency of the economy in other ways. For example, more employers might decide to spend time tracking their employees’ hours closely, disallow “working from home,” or adjust contracts towards hourly wages that are less appropriate for the nature of their industries.

August 29, 2019 12:00PM

Puerto Rico Financial Oversight Board Was Unconstitutionally Appointed

By 2016, Puerto Rico’s government was in dire financial straits. To avoid bankruptcy, Congress enacted the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”), creating a board responsible for restructuring the island territory’s substantial public debts. But there are serious questions regarding the constitutionality of this Financial Oversight and Management Board for Puerto Rico (the “Board”).


Under PROMESA, the president chooses six of the seven members of the Board from “secret lists submitted to [him] by the House and Senate leaders.” But in view of the Board members’ selection process and responsibilities, the U.S. Court of Appeals for the First Circuit held that they are “principal federal officers” who must be nominated by the president and confirmed by the Senate, rather than “inferior officers” whose appointment does not go through the same constitutional rigmarole.


Under the Constitution’s Appointments Clause, the president “shall nominate” principal federal officers, “and by and with the Advice and Consent of the Senate, shall appoint” them. But that is not what happened here. PROMESA’s appointment scheme raises serious separation‐​of‐​powers concerns because it positions the legislative branch to assume a role the Constitution exclusively reserves to the executive.


The First Circuit did not see it this way. Although it deemed the Board members “principal federal officers,” it applied an archaic doctrine to uphold their appointments. Under the “de facto officer” doctrine, acts performed by an officer that has assumed official duties without having been properly appointed to an office are valid even though it is later discovered that the officer’s appointment is legally deficient.


But this ancient doctrine is inapplicable to this case. Here, it is not the appointment of individual Board members against a valid appointment process that is in question. By all accounts, the appointment of each Board member did not violate any of PROMESA’s express prescriptions. Instead, it is PROMESA’s appointment process itself that is constitutionally suspect. In such case, the “de facto officer” doctrine has no real bearing, because no officer can be validly appointed in the first place.


Supreme Court precedent confirms, again and again, that the Board members are indeed “principal federal officers” who must be nominated by the president, and only then Senate‐​confirmed for appointment. That’s because they (1) occupy a “continuing” position established by federal law, and (2) “exercise significant authority pursuant to the laws of the United States.” While (1) is obvious, perhaps (2) is less so. And so it bears emphasizing that the Board, under PROMESA, has ultimate authority over the fiscal future of a U.S. territory of more than three million inhabitants. If that authority is not “significant,” we don’t know what is.


Cato has thus filed an amicus brief supporting several of Puerto Rico’s creditors before the Supreme Court, in their argument to overturn the decisions of the Board and invalidate its statutory authority. If PROMESA is allowed to stand, and the Board’s decisions are upheld, this will signal to the executive and legislative branches—both complicit in this perilous scheme—that anything goes, that they are free to strike at the heart of our constitutional structure without any pushback from the one branch left to preserve the ever‐​fragile separation of powers.


The Supreme Court will hear argument in Financial Oversight & Management Board for Puerto Rico v. Aurelius Investment, LLC on October 15.

August 29, 2019 10:06AM

On Targeting the Price of Gold

Thanks to President's Trump's picks for prospective Fed Board nominees, the subject of gold price targeting (or a gold "price rule") is getting attention once again.

The idea, which got a lot of attention back in the 1980s, after Arthur Laffer  and other supply-siders, including Alan Reynolds, first began promoting it, is that the Fed could mimic a gold standard, keeping inflation in check and otherwise making the dollar "sound," by employing open-market operations to stabilize the price of gold. The topic has come up again because three of Trump's prospective nominees have at one time or another suggested that the U.S. should revive the gold standard, and two of them, Herman Cain and Stephen Moore, are full-fledged supply-siders. Although Cain and Moore are no longer in the running, Judy Shelton, the third gold standard fan, is still in the race (along with Chris Waller of the St. Louis Fed), and she also has strong supply-side leanings.

These facts prompted Representative Jennifer Wexton (D-Va.) to ask Jerome  Powell, following his July 10th testimony, whether the U.S. should "go back to the gold standard." In response Powell, whether because he had a Laffer-style gold price-rule in mind or for some other reason, interpreted the question as one asking whether the Fed should "stabilize the dollar price of gold." That, he said, wouldn't be a good idea:

There have been plenty of times in fairly recent history where the price of gold has sent signals that would be quite negative for either [maximum employment or stable prices]. …If you assigned us [to] stabilize the dollar price of gold, monetary policy could do that, but the other things would fluctuate, and we wouldn’t care. We wouldn’t care if unemployment went up or down. That wouldn’t be our job anymore.

Powell's statement raises three questions. One is whether it's proper to equate reviving the gold standard with having the Fed target the price of gold, as Powell did. The second is whether Judy Shelton has herself endorsed a gold price rule. The third is whether such a rule would be as disastrous as Powell claims.

This post is devoted to answering, or trying to answer, these questions.

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August 28, 2019 2:16PM

Requiring the Pentagon to be Transparent about US Overseas Bases

The Overseas Base Realignment and Closure Coalition, "a group of military base experts from across the political spectrum," is calling on Congress to mandate a reporting requirement on overseas bases. In a letter to the Senate and House Armed Services Committees, the group of experts says the information that the Department of Defense currently provides on the cost and location of overseas bases is very "limited" and the "data is frequently incomplete." This lack of transparency, they write, has allowed the Pentagon to erroneously claim America's empire of overseas military bases - some 800 installations in 70 or 80 countries around the world - only costs taxpayers $20 billion per year, even while more inclusive independent estimates go as high as $150 billion per year. Below is an excerpt of the letter:

Research has long shown that overseas bases are particularly difficult to close once established. Often, bases abroad remain open due to bureaucratic inertia alone. Military officials and others frequently assume that if an overseas base exists, it must be beneficial; Congress rarely forces the military to analyze or demonstrate the national security benefits of bases abroad.

The Navy’s “Fat Leonard” corruption scandal, which resulted in tens of millions of dollars in overcharges and widespread corruption among high-ranking naval officers, is one of many examples of the lack of proper civilian oversight overseas. The military’s growing presence in Africa is another: When four soldiers died in combat in Niger in 2017, most members of Congress were shocked to learn that there were approximately 1,000 military personnel in that country. Although the Pentagon has long claimed it has only one base in Africa—in Djibouti— research shows that there are now around 40 installations of varying sizes (one military official acknowledged 46 installations in 2017). You are likely among a relatively small group in Congress who know that U.S. troops have been involved in combat in at least 22 countries since 2001, with frequently disastrous results.

Current oversight mechanisms are inadequate for the Congress and the public to exercise proper civilian control over the military’s installations and activities overseas. The Pentagon’s annual “Base Structure Report” provides some information about the number and size of base sites overseas, however, it fails to report on dozens of well-known installations in countries worldwide and frequently provides incomplete or inaccurate data. Many suspect the Pentagon does not know the true number of installations abroad.

A proposed provision in the 2020 National Defense Authorization Act (NDAA) called “Report on Financial Costs of Overseas United States Military Posture and Operations,” could, "if implemented rigorously," the letter writers say, "increase transparency and enable better oversight over Pentagon spending, contribute to critical efforts to eliminate wasteful military expenditures, and enhance military readiness and national security."

For background on this issue, see my Cato Policy Analysis from 2017 entitled, "Withdrawing from Overseas Bases: Why a Forward-Deployed Military Posture Is Unnecessary, Outdated, and Dangerous."

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August 28, 2019 11:37AM

Arizona Levies Unconstitutional Tax to Pay for New Sports Facilities

Arizona needed to raise money to update its sports facilities, but polling indicated that a new tax for this purpose was politically unpalatable. The state legislature had an idea: it would tax the tourism industry through hotel and rental car surcharges. The initial draft of the tax exempted Arizonans from the surcharge, but a smart legislative counsel observed that this just might be unconstitutional because it treated in‐​staters differently than out‐​of‐​staters. Instead, when Arizona levied a new tax on rental vehicles, it exempted long‐​term rentals, replacement rentals, bus rentals, and a whole slew of other vehicle rentals that are used primarily by locals, leaving the tax in effect on the short‐​term rentals favored by visitors. This tax would be voted into place by individual counties.


On the day Maricopa County (Phoenix) voted to enact the surcharge, pamphlets circulated claiming, “it will cost Arizona residents next to nothing. As much as 95% of the new … taxes will be borne by visitors.” These predictions have borne true; businesses reported that 72–87 percent of surcharge tax revenue has come from out‐​of‐​staters.


Saban Rent‐​A‐​Car, a Maricopa County business, paid the surcharges and sued for a refund in Arizona Tax Court. It made arguments based on the Commerce Clause of the U.S. Constitution—that the law interfered with interstate commerce—as well as state constitutional claims. The Tax court rejected both grounds. Arizona’s intermediate appellate court affirmed the tax court decision on Commerce Clause grounds. A divided Arizona Supreme Court also affirmed. Saban now seeks review in the U.S. Supreme Court.


This case raises two issues. First: the power of the states to regulate within their borders. The history of the Commerce Clause shows that it was written specifically to address discriminatory state legislation targeting out‐​of‐​state commerce. A necessary corollary to Congress’s power to regulate interstate commerce is the Dormant Commerce Clause, which prohibits states and their political sub‐​units from discriminating against out‐​of‐​state commerce. Over the years, the Supreme Court has invalidated taxes on trains carrying freight out of state, laws allowing additional harbor fees on ships carrying out‐​of‐​state goods, and taxes on out‐​of‐​staters shipping liquor into a state.


The second issue, to quote a Revolutionary War slogan, is “no taxation without representation!” Arizona has passed a tax that disparately impacts visitors from out‐​of‐​state who are not represented in the Arizona legislature. This ordinarily is not a problem. When a tax applies equally to all, visitors’ objections will be readily voiced by residents, who are equally effected. But when the tax is designed to fall on visitors, their lack of representation becomes a problem because their interests are opposed to the citizens of the state. For out‐​of‐​staters, this amounts to taxation without representation.


Cato has thus filed an amicus brief supporting Saban Rent-A-Car’s petition. The Arizona rental‐​car surcharge violates the Commerce Clause and impermissibly taxes out‐​of‐​staters without adequate representation of their interests in the state legislature.


The Supreme Court will decide whether to take up Saban Rent‐​A‐​Car v. Arizona Department of Revenue when it returns from its summer recess.


Thanks to Cato legal associate Michael Collins for his assistance with this post.

August 27, 2019 4:14PM

Trump’s Emergency Economic Powers: “Case Closed”?

On the campaign trail a few years back, Hillary Clinton declaimed: “We need a president who is ready on Day 1 to be commander in chief of our economy.” We got a good laugh out of that here at Cato—what a megalomaniacal misconception of the job! When President Trump embraced the role last Friday, it somehow seemed less amusing. “Our great American companies are hereby ordered to immediately start looking for an alternative to China,” he brayed, sending the markets into a Twitter‐​driven tailspin

Media Name: hereby_ordered.png

Where does Trump derive the authority for that “order”? On Saturday, he followed up with a statutory citation for the haters: “try looking at the Emergency Economic Powers Act of 1977. Case closed!” 


True, President Trump makes a lot of crazy threats he never carries out: from revoking birthright citizenship, to closing the border, to using the same 1977 Act to hammer Mexico with across‐​the‐​board tariffs, as Trump threatened to do in May. There’s a pattern here: the president sounds his barbaric yawp over the roofs of the world, but before long, backs it down to an ineffectual grumble. In this case, the cycle took all of two days: “I have the right to, if I want,” Trump insisted Sunday, but “I have no plan right now. Actually, we’re getting along very well with China.” OK, then: never mind! 


But we’d be fools to shrug this episode off as another unsettling, but ultimately meaningless Trumpian brainspasm, like nuking hurricanes or buying Greenland. For decades now, Congress has defined national emergencies downwards, investing the executive branch with dangerous new powers the president can trigger by saying the magic words. Trump has only begun to explore the possibilities, and there may be more competent would‐​be authoritarians waiting in the wings.


The statute Trump specified, the International Emergency Economic Powers Act of 1977 (IEEPA), gives the president an imposing array of unilateral powers to deploy against “any unusual and extraordinary threat, which has its source in whole or substantial part outside the United States” if he “declares a national emergency with respect to such threat.” Granted, Trump’s definition of “emergency” may differ from yours, mine, and the dictionary’s. “For many years, this has been going on,” he explained Sunday, “in many ways, that’s an emergency.” But if history is any guide, federal judges will be extremely reluctant to second‐​guess “the wisdom of the President’s judgment concerning the nature and extent of [the] threat.”


So, “case closed”? Could Trump order U.S. companies to pack up and come home? Not quite; but he could make it extremely difficult for them to do business in and with China. The IEEPA gives the president staggeringly broad powers to block transactions and freeze assets in which any foreign government or foreign national has an interest. And Trump’s not wrong to think he might get away with using the law as a trade‐​war bludgeon. A Congressional Research Service report published two months before Trump first started threatening to use IEEPA to hike tariffs, opined that such a use was unlikely, but probably permissible


The National Emergencies Act of 1976, the framework statute that was supposed to rein in presidential emergency powers, won’t be much help either. It originally allowed Congress to terminate presidential emergencies by majority vote, but thanks to a 1983 Supreme Court decision, the law now requires termination via joint resolution, subject to the president’s veto. Under the current emergency‐​powers regime, then, the president gets to do what he wants unless a congressional supermajority can be assembled to stop him. 

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