Tag: imports

Why We Trade

Imagine life in isolation, waking every morning before sunrise to make your own clothes, build and repair your meager shelter, hunt and harvest your own food, concoct rudimentary salves for what physically ails you, and attend to the upkeep of your brutish existence engaging in other difficult and tedious tasks. Forget leisure or luxuries; all of your time would be consumed trying to produce basic necessities merely to subsist.

Fortunately, that’s no longer the way most of humanity organizes its economic activities. We don’t attempt to make everything we need or want to consume, but instead specialize in a few, or a couple, or just one value-added endeavor – one profession. This specialization is possible because we accept and embrace the concept of cooperation in the form of exchange. We realize that by specializing, we can focus our efforts on what we do best, and produce more value than would be possible if we had to attend to the production of all of our needs and wants. Because we can exchange our output (monetized in the forms of wages and salaries) for the output of others, we don’t even have to know the first thing about hammering a nail, mixing mortar, making thread, yarn, and cloth, threading a needle, whittling an arrow to kill a deer, or any of the details of the incredibly complex processes and supply chains that generate the products and services we consume daily.  Fortunately (but sadly, too), most of us never give it a second thought.  

If two people focusing their efforts on the tasks they do best and exchanging their daily surpluses enables both to consume more or better quality output, then it should readily follow that four people or eight or eighty or eight million participating in this cooperative economic relationship can lead to much higher volumes of output (wealth) and much greater consumption and savings (higher living standards).  This is the purpose of exchange. It enables us to specialize.  And when there are more participants in the market (more with whom to exchange) there is greater scope for more refined levels of specialization. That means greater opportunities to match individuals’ precise skills and faculties (or to cultivate then match those precise skills and faculties) with increasingly specialized tasks and professions created in response to the increasingly refined demands of societies as they produce even greater wealth and higher living standards. 

We’ve come a long way from exchanging cloth and wine.  No longer are people’s choices restricted to being sober and clothed or naked and drunk. Today, we can almost have it all. Whereas once there were witchdoctors serving as generalist medical practitioners, today (in Washington, DC, I am told) there is burgeoning demand for the services of psychiatrists who specialize in treating the emotional and psychological adjustment costs associated with being an expat spouse of a foreign diplomat from Western Europe.  It’s become that specialized. Imagine hearing: “Sorry, my specialty is in talking spouses of diplomats through their neuroses brought on by resettling in Washington from places like Stockholm, Amsterdam, Paris, or London.  Since you’re from Warsaw, let me recommend a different specialist who focuses on treating Polish ex-pats with similar conditions.”

The purpose of exchange is to enable each of us to focus our productive efforts on what we do best.  By specializing in an occupation — instead of allocating small portions of our time to the impossible task of producing each of the necessities and luxuries we wish to consume — and exchanging the monetized output we produce most efficiently for the goods and services we produce less efficiently, we are able to produce and consume more output than would be the case in the absence of specialization and trade. The larger the size of the market, the greater is the scope for specialization, exchange, and economic growth.

Free trade is the extension of free markets across political borders.  Enlarging markets in this manner – to integrate more buyers, sellers, investors and workers – enables more refined specialization and economies of scales, which lead to greater wealth and higher living standards. When goods, services, capital, and labor flow freely across borders, Americans can take full advantage of the opportunities of the international marketplace.

The purpose of trade is to enable us to specialize; the purpose of specialization is to enable us to produce more; the purpose of producing more is to enable us to consume more.  More and better consumption is the purpose of trade. Thus, the benefits of trade come from imports, which deliver more competition, greater variety, lower prices, better quality, and innovation. The real benefits of trade are measured by the value of imports that can be purchased with a unit of exports — the so-called terms of trade. When we transact at the local supermarket, we seek to maximize the value we obtain by getting the most for our dollars.

But when it comes to trading across borders or when our individual transactions are aggregated at the national level, we seem to forget these basic principles and assume the goal of exchange is to achieve a trade surplus. We forget that trade barriers at home raise the costs and reduce the amount of imports that can be purchased with a unit of exports.  U.S. trade barriers hurt U.S. citizens, as consumers, taxpayers, workers, producers, and investors. Americans would be better off if we simply undertook our own reforms – on tariffs, regulations, and other artificial impediments to commerce – without regard for what other government’s do. Yet we don’t.

Although tariffs and other trade barriers have been reduced considerably since the end of the Second World War, U.S. policy continues to accommodate egregious amounts of protectionism.  We have “Buy American” rules that restrict most government procurement spending to U.S. suppliers, ensuring that taxpayers get the smallest bang for their buck; heavily protected services industries, such as air transportation and shipping, that drive up the cost of everything; apparently interminable farm subsidies; quotas and high tariffs on imported sugar; high tariffs on basic consumer products, such as clothing and footwear; energy export restrictions; the market-distorting cronyism of the Export-Import bank; antidumping duties that strangle downstream industries and tax consumers; regulatory protectionism masquerading as public health and safety precautions; protectionist rules of origin and local content requirements that limit trade’s benefits; restrictions on foreign investment, and so on.

It is sad, but true, that Congress seems to have forgotten why we trade.

Topics:

Congress Fist Bumps Itself Over Tariff “Reform” Bill That Keeps 97% of Import Taxes in Place

This week congressional trade leaders introduced The American Manufacturing Competitiveness Act of 2016 (AMCA), a bill to reform and reinvigorate the stalled Miscellaneous Tariff Bill (MTB) process.  MTBs are legislative vehicles through which Congress temporarily suspends import duties on certain qualified products typically used as inputs in U.S. manufacturing operations. Soon followed the self-congratulatory triumphalism.

House Ways and Means Committee Chairman Kevin Brady (R-TX) said: “This bipartisan bill will empower American manufacturers to compete around the world, create new jobs at home, and grow our economy.”

Ranking Member Sander Levin (D-MI) added: “The MTB is a critical tool that supports American manufacturers and workers, and I’m pleased that we’re finally moving forward with this legislation.”

Senate Finance Committee Chairman Orrin Hatch (R-UT) boasted: “With this legislation, we offer a smart bicameral and bipartisan approach for MTBs — one that improves transparency and allows domestic firms to receive appropriate tariff relief on products that can only be found abroad so that those firms can produce American-made goods here at home.”

Ranking Member Ron Wyden (D-OR) moralized: “We need to do everything we can to make U.S. manufacturers more competitive — that includes passing a miscellaneous tariff bill that reduces costs of components we don’t make here in the U.S.”

Let’s unpack this. 

Topics:

Rethinking Currency Manipulation

Interest groups in the United States have focused on the possibility of including provisions in trade agreements with the intent of countering currency manipulation.  The concern is that another country may choose to reduce the value of its currency relative to the U.S. dollar in order to encourage its businesses to export more goods to the United States.   Such currency realignment also would tend to make it more expensive for the devaluing nation to import products from this country.

It’s true that an adjustment in currency exchange rates – regardless of the reason for the adjustment – can have an effect on trade flows.  U.S. industries that export to foreign customers, or compete with imported goods in the domestic marketplace, understandably would prefer that currency relationships not become skewed against their commercial interests.  Currency stability improves the business climate by making it easier to build long-term relationships with customers and suppliers. 

However, currency exchange rates have fluctuated throughout recorded history.  Sometimes those changes may be driven by a government’s conscious desire to devalue its currency.  More often the variability in exchange rates reflects fundamental economic realities.  Economies that experience growing productivity and rising prosperity should not be surprised to find that market pressures cause their currencies to strengthen.  The reverse is true for countries that are growing slowly or not at all. 

A shift in exchange rates changes a country’s “terms of trade,” which is a term  used by economists to describe the ratio of a country’s export prices to its import prices.  From a U.S. perspective, if another country sets its currency at an artificially low level relative to the dollar, the U.S. terms of trade will improve.  The United States will be able to obtain a greater value of imports for the same value of exports.  Exporting the same number of airplanes and soybeans as before will pay for the importation of larger quantities of shoes, coffee, and automobiles. 

Topics:

Frederic Bastiat Makes the Case for Trade Facilitation

Earlier this month in Bali, WTO ministers reached agreement on a set of negotiating issues known as “trade facilitation,” which deal mostly with customs reform and related measures to reduce the time and cost of transporting goods and services across borders. If removing tariffs is akin to turning on a water spigot full blast, trade facilitation is the act of untangling and straightening out the attached hose. A kinked hose impedes the flow as an administratively “thick” border impedes trade.
 
This paper, which I wrote a few years ago, describes the importance of trade facilitation reforms to economic growth, and explains why subjecting such self-help reforms to negotiation – instead of just undertaking them as a matter of surviving in a competitive global economy – would only delay the process of removing inefficiencies. Five years after the paper was written and 12 years after multilateral negotiations were launched in Doha, a deal was reached obligating governments to reform and streamline their customs procedures, with technical and financial assistance provided by the wealthy to the developing countries.
 
As I wrote yesterday, this is small relative to the overall Doha Round agenda and relative to what might have been accomplished over these past 12 years in the absence of Doha (i.e., without adhering to the pretensions that our own domestic barriers to foreign commerce are assets to be dispensed with only if foreigners dispense of theirs). 
 
But perhaps nobody has been more gifted at exposing the absurdity of administrative trade barriers with pithy wit and grace than the 19th century French classical liberal business and economics writer Frederic Bastiat. Around 1850, Bastiat made a case for trade facilitation that can scarcely be improved:
Between Paris and Brussels obstacles of many kinds exist. First of all, there is distance, which entails loss of time, and we must either submit to this ourselves, or pay another to submit to it. Then come rivers, marshes, accidents, bad roads, which are so many difficulties to be surmounted. We succeed in building bridges, in forming roads, and making them smoother by pavements, iron rails, etc. But all this is costly, and the commodity must be made to bear the cost. Then there are robbers who infest the roads, and a body of police must be kept up, etc.
 
Now, among these obstacles there is one which we have ourselves set up, and at no little cost, too, between Brussels and Paris. There are men who lie in ambuscade along the frontier, armed to the teeth, and whose business it is to throw difficulties in the way of transporting merchandise from the one country to the other. They are called Customhouse officers, and they act in precisely the same way as ruts and bad roads.
 Congratulations, negotiators, for agreeing to remove the kinks from your hoses. 
Topics:

Trade-Skeptical Harold Meyerson Makes One Valid Point

Harold Meyerson, with whom I’ve rarely found occasion to agree, makes one point in today’s column (“Go Slower on Free Trade”) that didn’t cause my eyes to roll: that the Obama administration has been relentlessly secretive about the goings-on in the Trans-Pacific Partnership trade negotiations.

I cannot corroborate Meyerson’s claim that the administration has granted access to the negotiators and the negotiating text to “roughly 600 trade ‘advisers’ from big businesses,” but has excluded everyone else, including Congress. It may be true, but then again… Certainly, Congress (by which I mean Congress, and not just a few Senate Democrats) is very much in the dark about the details of these negotiations, and that presents an enormous logistical problem.

Article I, Section 8 of the Constitution vests power in the Congress “To regulate Commerce with foreign Nations,” which covers trade agreements. Traditionally, Congress has temporarily extended that authority to the executive branch, given the impracticability of having 535 trade representatives with 535 different agendas negotiating with foreign governments. That temporary grant of “fast track” or “trade promotion” authority is not a blank check. It comes with a list of congressional demands – items that can, cannot, must, and must not be included in the agreement. It is like doing the legislative process in reverse in the sense that amendments are articulated as conditions BEFORE the agreement is reached. Ideally, those congressional demands would be formalized before the negotiations BEGIN so that there are no false starts.

But with the administration still aiming to conclude negotiations in October, no fast track legislation in sight, and anti-trade legislation metastasizing in a Congress that has largely been excluded from shaping the deal’s terms, there are long battles ahead.  Meyerson’s counsel that we “go slower on free trade” is probably already a done deal.

As to the rest of Meyerson’s claims that trade is a boon for big business, which comes at the expense of workers and consumers, we have harvested countless forests here at Cato explaining why that is just false. The most persistent U.S. trade barriers are imposed on food (tariffs and tariff-rate quotas), clothing (tariffs), and shelter (trade remedies restrictions on lumber, steel, cement, paint, nails, appliances, flooring, furniture, etc.), making them the most regressive taxes in the U.S. system.  Lower-income Americans (those for whom Meyerson claims to speak) devote larger shares of their budgets to these basic necessities than do white-collar fat cats.

I’ll leave you with these three charts, which demonstrate positive relationships between import and jobs, price decreases over time for heavily traded items, and price increases over time for less frequently traded services, all exposing the errors of Meyerson’s claims.

Topics:

Newsflash: Politicians Pander to Agriculture!

The American Soybean Association (ASA) recently asked each of the presidential candidates to respond to a series of questions about agricultural policy issues. The questions covered farm bill and crop insurance, estate tax, biodiesel, biotechnology, trade, research, regulations, and transportation and infrastructure. The candidates’ responses (full text here) were not exactly models of courageous and principled policymaking.

I won’t parse the entire thing, as it is just too depressing and some of the issues (e.g., the estate tax) fall outside my area of research. But I will comment on a couple of the topics.

On subsidies and crop insurance, both candidates pledged to support passage of the farm bill, and the crop insurance and disaster provisions it contains. Mr Romney—no Senator John McCain in this area, at least—went on to make a broader statement about his philosophy on farm supports:

On the broader question of farm programs, we must be cognizant that our agricultural producers are competing with other nations around the world. Other nations subsidize their farmers, so we must be careful not to unilaterally change our policies in a way that would disadvantage agriculture here in our country. In addition, we want to make sure that we don’t ever find ourselves in a circumstance where we depend on foreign nations for our food the way we do with energy. Ultimately, it is in everyone’s interest is achieve [sic] a level playing field on which American farmers can compete.

Ugh. That is a monumentally awful statement. First, not all nations subsidize their farmers. New Zealand and (not to brag) Australia, for example, subsidize their farmers very little, and in very minimally distorting ways, and yet their agricultural  exports generally are thriving. They compete with other agricultural exporters because they try to be the best they can be given their natural resource endowments, research, experience, and human capital.  Second, the caution against unilaterally changing policies is, of course, ubiquitous in many trade policy statements (see, e.g., Ex-Im Bank, manufacturing, reducing tariffs generally). It is also economically insane to enact bad policies because other countries do so. Especially when it is becoming clear that other large agricultural subsidizers (e.g., Japan and the EU) are not exactly thriving, many and varied though their problems may be.

Third, as for the importance of farm supports in maintaining food independence, that’s also nonsense. As I’ve argued ad nauseum, (e.g., here), subsidies aren’t keeping us well-fed: if food abundance depended on government support, we’d see nothing but so-called program crops (soybeans, wheat, corn, cotton, and rice) on supermarket shelves. Judging by the size of my fellow Australians on my last visit home, no-one is starving there despite very little government support for agriculture. By the way, if you want to read some comments from a president who actually knows what he is talking about, read Indonesia’s President Susilo Bambang Yudhoyono’s comments in this article, where he calls for lower trade barriers around the world, particularly for food security reasons.

Mr. Romney’s support for the Senate-passed farm bill also is at odds with his statement to the ASA about the importance of open trade. Even putting aside Mr Romney’s typical mercantilist obsession with exports, I wonder if he realizes that the changes proposed in the Senate farm bill would increase the amount of subsidies deemed trade-distorting by the World Trade Organization, putting trade liberalization at risk? U.S. government spending on trade-distorting support, the “worst” kind, is at record lows right now, mainly thanks to higher commodity prices. But even a senior United States Department of Agriculture official admits (paywall) that the proposed changes to farm policy—including a move towards revenue insurance—would likely see that progress eroded:

But Joseph Glauber, chief economist at the U.S. Department of Agriculture (USDA), said in an interview with Inside U.S. Trade that if either the Senate-passed farm bill or the version approved by the House Agriculture Committee were enacted, that would likely increase the level of U.S. trade-distorting payments.

While stressing that his assessment is preliminary in light of the fact that no legislation has been finalized, Glauber said it is fairly apparent that cutting direct payments and replacing them with either a revenue guarantee program or a price-loss program, as the two legislative proposals envision, would lead to an increase in amber box payments.

In fact, Glauber argued that changing U.S. farm policy along the lines of either of the farm bill proposals could make it more likely that the U.S. exceeds the $7.6 billion cap to which the U.S. informally agreed in the Doha round, especially in those years where commodity prices dip down and subsidy payouts increase.

Pass the farm bill, in other words, and multilateral liberalization efforts get more difficult.

Finally, I note that Mr. Romney also couldn’t resist adding his standard, wrongheaded, and increasingly prominent talking point about “vigorously enforcing” U.S. trade law, and catching cheaters (plenty of blog posts by my colleagues on this topic can be viewed on this blog). I wonder if he realizes that the United States itself has been caught breaking the rules of agricultural trade, and how hypocritical his statements about farm subsidies and trade are in that context? Plenty of damage, and retaliation, has been unleashed because of various ways the U.S. government conducts its affairs in agriculture.

So, in short, there is not much to like in either candidate’s statements, with Mr. Romney deserving special opprobrium because of his professed free-market, limited government principles. But we knew that.

21st Century U.S. Trade Policy Should be Pro-Market, not Pro-Business, Pro-Labor, or Pro-Lobbyist

The difference between the trade policy we have today and the trade policy we should have is like the difference between crony capitalism and free-market capitalism. The sausage grinder that is U.S. trade policy serves politicians and rewards lobbyists and gate-keeper bureaucrats, who have the gall to presume entitlement to limiting Americans’ options and picking winners and losers.

In a country that exalts freedom, the default trade policy should be free trade. But it’s not. Why?

The public has been trained to accept that special interests—companies seeking exemptions from competition; unions demanding that citizens ”Buy American”; investors and intellectual property holders demanding the U.S. public assume part of its business risks; enviros insisting on measures that punish developing countries for being poor—are rightly entitled to negotiate, abridge, impair, or sacrifice those freedoms in the name of Team USA.

So how are we free if decisions about how, with whom, and how much we transact with foreigners are decided by parties in Washington, who profit from denying us that freedom?

Trade policy should be about maximizing the freedom of Americans to choose, and distinctly not about bestowing certain advantages on particular companies, industries, or special interests. Trade policy should be about maximizing opportunities for Americans as consumers, workers, and investors, and not about impeding those opportunities.

In a globalized world where businesses are mobile and, ultimately, untethered to a homeland, what is the point of policymakers going to bat for U.S. producers? Usually, policies adopted to assist particular companies or industries handicap or subvert companies and industries upstream or downstream in the supply chain, or in other sectors. What even defines a U.S. producer anymore? GM builds more vehicles in China than it does in the United States.  Should Washington and Beijing both claim GM as national treasures and craft policy to serve its needs?

No. Policy should be neutral with respect to the goals of particular companies and industries, and designed to attract investment and human capital, and to maximize opportunities for Americans to partake of the global economy. Trade policy should be about ensuring certainty and eliminating policy-induced frictions in supply chains. As I wrote in this article (21st Century Economy Deserves Better Than 16th Century Trade Policies), which expounds upon the thoughts in this post:

This 21st century economic reality demands better than trade policies rooted in 16th century mercantilist dogma. It demands policies that are welcoming of imports and foreign investment, and that minimise regulations or administrative frictions that are based on misconceptions about some vague or ill-defined “national interest”.

Topics:

Pages