The 2016 election season has put international trade in the spotlight – or, actually, under the heat lamp – like never before. But just as some of us in the trade policy community started getting big heads over the increasing prominence of our pet issues, the U.S. International Trade Commission released this report yesterday, which concludes that the Trans-Pacific Partnership Agreement, if implemented, would boost real annual GDP by 0.15 percent by the year 2032. In other words, the economic growth from TPP could be wiped out by a single new major EPA regulation. So much for the importance of trade, I guess.
Of course, some will downplay the magnitude of the issue and turn these modest gains into positive talking points to encourage TPP ratification. In addition to GDP, small gains are estimated for real income, employment, and trade, as well.
Others will suggest that the estimates overstate the benefits, as the ITC studies are wont to do. But as Dan Pearson explained a few months ago in this paper, the ITC’s assessments are not intended to be interpreted as projections into the future. They are static comparisons. The TPP study compares today’s economy without TPP to today’s economy with TPP. The results are just estimates of what the various outcome metrics would be ceteris paribus. Accordingly, the utility of the estimates is limited and the validity of the model cannot be tested by comparing real future outcomes to these estimates because in the real world there is no ceteris paribus. Things change.
For example, the model doesn’t take into account things like: supply shocks (such as another fracking-type boom) or demand shocks (such as mass adoption of hand-held devices); transitions from human labor to robots; changes in institutions; the policy reactions of other countries to the TPP; accessions to the agreement by other countries; the impact on the multilateral trading system, and so on. All of these factors matter at least as much as the terms of the TPP itself.
So the question is: Why even bother performing these studies? The real outcomes are determined primarily by information that is unknown and difficult to estimate with reasonable accuracy when the models are run. The results are politicized and misused by advocates and proponents of trade agreements alike.
As it stands now, the ITC is required under the terms of the Bipartisan Congressional Trade Priorities and Accountability Act of 2015 (the Trade Promotion Authority Bill) to conduct an economic impact assessment of a trade agreement within 105 days of the president entering into such an agreement. While there is some useful information to obtain from these assessments, it seems that their greatest utility is to provide political cover to members of Congress.
On Saturday, the president vetoed a decision of the U.S. International Trade Commission for the first time in over 25 years. As a result, the United States will not be imposing an import ban on older iPhones despite the ITC’s finding that Apple infringed certain patents owned by Samsung. This action by the Obama administration is undoubtedly a good development, not just because you will still be able to get a free iPhone 4 when signing a 2‑year contract, but because the veto simultaneously disciplines and discredits the ITC’s disruptive role in the U.S. patent system.
The president’s intervention corrects a bad decision by the ITC. The patents that Samsung accused Apple of infringing in the ITC investigation are standard technology required to run phones on a 3G wireless network. Owners of standard‐essential patents must agree to license the technology on fair, reasonable, and non‐discriminatory (FRAND) terms to anyone who asks. Samsung claimed at the ITC that Apple refused to pay any royalties at all, and Apple claimed that Samsung demanded an unreasonable royalty. The ITC sided with Samsung.
The ITC’s ruling has been controversial not because Samsung won the case, but because the ITC’s remedy — total exclusion of the infringing products from the U.S. market — is excessive.
If Samsung had brought its case in federal district court instead of the ITC, the judge would most likely have ordered Apple to pay the royalties it owed Samsung. An injunction against future sales would not be granted, because Samsung never had the right to keep Apple from using the technology in the first place, only to collect royalties.
As I wrote last month in anticipation of a potential presidential veto, this action by the president has a number of policy implications that go beyond the Apple – Samsung patent dispute. The Obama administration, leaders in Congress, and much of the tech industry have been converging lately on the idea that remedies for patent infringement at the ITC are too strict. The ITC should not be able to ban future sales in a situation where a district court would refuse to do the same thing. As it stands now, the ITC’s excessive remedies allow patent holders to wield more power than they should and exacerbate the ongoing struggle against patent trolls.
Korean press coverage of the issue has implied that the administration’s veto of Samsung’s patent victory against Apple amounts to “flagrant protectionism.” In a separate case, the ITC is set to decide later this week whether Samsung infringed patents owned by Apple. If the administration allows an import ban on Samsung products despite intervening to help Apple, many in Korea will surely cry foul.
A trade conflict would be a fitting consequence of mixing patent litigation with trade policy. It doesn’t make sense for President Obama to have the power to intervene in a patent case simply because he doesn’t approve of the outcome. Section 337 of the Tariff Act of 1930, the law that enables the ITC to litigate patents, was designed as a protectionist trade remedy. The president’s veto power is meant to ensure that the ITC’s decisions don’t impede U.S. foreign or economic policy. If the ITC were a legitimate patent court, its decision would not be subject to executive override. The ITC is simply the wrong place to litigate patents, standard‐essential or otherwise.
A Wall Street Journal editorial today shines a long overdue spotlight on an antidumping case that is emblematic of the dissonance within U.S. trade policy. I, too, wrote about this case last year as an example of how the U.S. antidumping regime undermines U.S. manufacturing, penalizes U.S. exporters, and diminishes chances for achieving the administration’s goal of doubling exports in five years.
In 2005, U.S. Magnesium Corporation, the sole producer of magnesium in the United States, succeeded in convincing the U.S. International Trade Commission and U.S. Commerce Department to impose duties on imports of magnesium from competitors in Russia and China. Before toasting this outcome with some clichéd or specious utterance about how the antidumping law ensures fair trade and a level playing field for U.S. producers, it is important to understand that downstream, consuming industries (those U.S. producers that require for their own production the raw materials and intermediate goods subject to the antidumping measures) have no legal standing in these cases. Statute forbids the U.S. International Trade Commission from considering their arguments or projections about the likely consequences of prospective duties. Statute requires that the ITC consider only the conditions of the petitioning industry. In other words, the analysis is slanted. The antidumping law codifies these evidentiary asymmetries, which makes it easier for U.S. suppliers to cut-off their U.S. customers’ access to alternative sources of supply. In our increasingly globalized economy, this is a recipe for propping up old industries and discouraging and crippling new ones. It is a recipe for economic decline.
In honor of World Trade Week—and for its decreed purpose of educating Americans about trade—this post is about U.S. trade policy working at cross-purposes with other policies or goals of the administration. So numerous are these examples of trade policy dissonance, that a committed wonk could devote an entire website to the task of documenting them.
If the administration were serious about making trade policy work—rather than just paying it lip service—it would compile its own exhaustive list of laws, regulations, policies, and practices that actually undermine its stated objectives of facilitating economic growth, investment, and job creation through expanded trade opportunities. Then, it would make the changes necessary to ensure that our policies are paddling in the same direction. But that is not happening—at least as far as I can see.
In the latest example of “We had to burn the village to save it” logic, Sen. Sherrod Brown (D‑OH) argues in a letter in the Washington Post this morning that the way to “support more trade” in the future is to raise barriers to trade today.
Brown criticizes Post columnist George Will for criticizing President Obama for imposing new tariffs on imported tires from China. Like President Obama himself, Brown claims that by invoking the Section 421 safeguard, the president was merely “enforcing” the trade laws that China agreed to but has failed to follow. He scolds advocates of trade for talking about the “rule of law” but failing to enforce it when it comes to trade agreements. Brown concludes, “If America is ever to support more trade, its people need to know that the rules will be enforced. And Mr. Obama did exactly that.”
Nothing in U.S. trade law required President Obama to impose tariffs on imported Chinese tires. As my colleague Dan Ikenson explained in a recent Free Trade Bulletin, Section 421 allows private parties to petition the U.S. government for protection if rising imports from China have caused or just threaten to cause “market disruption” to domestic producers. If the U.S. International Trade Commission recommends tariff relief, the president can decide to impose tariffs, or not.
The law allows the president to refrain from imposing tariffs if he finds they are “not in the national economic interest of the United States or … would cause serious harm to the national security of the United States.”
As I argue at length in my new Cato book Mad about Trade, trade barriers invariably damage our national economic interests and weaken our national security, and the tire tariffs are no exception. If the president had followed the letter and spirit of the law, he would have rejected the tariff.
And since when is causing “market disruption” something to be punished by law? Isn’t that what capitalism and market competition are all about? New competitors and new products are constantly disrupting markets, to the discomfort of entrenched producers but to the great benefit of the general public and the economy as a whole.
Human beings once widely practiced an economic system that minimized market disruption. It was called feudalism.
C/P Mad About Trade
Last week I recommended reading a new paper published by the Lowy Institute in Australia, which proposes an utterly sensible reform for the G-20, if curbing protectionism is a serious aim.
Using Australia’s own successful experience as an example, the authors recommend other countries adopt "domestic transparency" programs, which would essentially include analysis from an independent, apolitical board or agency that measures the real costs and benefits of proposed trade restrictions.
The findings of these independent reviews would be accessible to the public—and probably published in newspapers and other popular media—in advance of any decision to impose or reject the proposed trade restrictions. The findings wouldn’t legally bind the authorities to take any particular action, but would help chase from the shadows the real costs of protectionism, so that those ultimately making the decision know that the public at large is aware of the costs.
When a politician knows that he/she can benefit politically by imposing import duties, the costs of which are hidden in higher prices paid by consumers, who are unlikely to make the causal connection, there is a profound asymmetry of incentives and disincentives. The politician is much more likely to choose to secure the political benefit of imposing duties since the costs are hidden. But if light is shone on those costs, through domestic transparency initiatives, that asymmetry is reduced or eliminated. Politicians, under these circumstances, can go back to the special interests and say how much they’d like to help out with a tariff, but the costs don’t justify the measure. And the protection-seekers know the politician’s hands are tied because the public is aware of those costs.
Well, Alan Mitchell of the Australian Financial Review on Monday supposed how the presence of a domestic transparency regime would have affected President Obama’s tire tariff decision. It is very instructive:
Earlier this month, the Lowy Institute in Australia published a paper offering some very sound and, obviously, very timely advice about how to contain, and ultimately, eradicate protectionism. The paper is being circulated among the G20 delegations, who will undoubtedly discuss the topic of trade and protectionism in Pittsburgh next week. So for those of you interested in getting a sense of what will probably be the single best idea on (or at least near) the table at the G20 summit, I highly recommend this 20-pager.
The solution proposed by the authors boils down to a two-word phrase: "Domestic Transparency." What is meant by that phrase is that "defeating protectionism begins at home." And by that slogan, the authors mean that the key to reducing, and ultimately eliminating, protectionism is not external pressure from other countries, mercantilist trade negotiations, or filing trade complaints at the WTO, but rather greater awareness at home of the real costs of protectionism. I couldn’t agree more. (In fact better transparency is one of our recommendations in this paper).
When governments impose trade barriers at the behest of special interests, they usually justify that protectionism with diversionary rhetoric concerning some vague conception of the "national interest," and the imperative of shielding domestic business from unfair competition and other vagaries of the globalized economy. That the protectionist measure itself—the product of special interests diverting productive resources from economic to political ends—forces involuntary and usually unknowing subsidization of those protection-seekers by the same citizens at large who are expected to buy into the national interest canard is a detail about which most people remain in the dark.