It isn’t very often that free traders at the Cato Institute and the anti‐corporate left agree on matters of trade policy. We free traders oppose barriers and subsidies and seek straightforward, nonintrusive rules to ensure an equality of opportunity for businesses, workers, investors, and consumers. The left tends to see those rules as asymmetrically beneficial to business and seeks to leverage trade barriers and subsidies to achieve what it defines as a greater equality of outcome. Those fundamental differences explain why you would see very little overlap in a Venn diagram depicting the policy objectives of Cato’s trade center and, say, Joseph Stiglitz or Public Citizen’s Global Trade Watch.
But a shaded intersection does exist. It exists because free traders are not “pro‐business” to the left’s “anti‐business.” We are “pro‐market.” Accordingly, we are skeptical of rules or policies that tip the scales in favor of one interest group over another. That’s called protectionism.
Investor‐State Dispute Settlement (ISDS) is one such example. ISDS provisions are intended to ensure that foreign investors — usually companies that have acquired or established operations abroad — are protected from actions or policies of the home government that fail to meet certain standards of treatment and that cause the investor economic harm. ISDS confers special legal privileges on foreign‐invested companies, including the right to sue host governments in third‐party arbitration tribunals and win damages for failing to meet those standards.
One might immediately understand why the left would take issue with special provisions that enable multinational corporations to challenge governments’ efforts to regulate them, but there are many problems with ISDS from a free‐market perspective, as well.
Join us tomorrow on the Hill for a discussion. Panelists include:
- Joseph Stiglitz, Nobel Prize‐winning economist and professor at Columbia University
- Dan Ikenson, director of Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies
- Bruce Fein, Fein & DelValle, PLLC constitutional law expert and associate deputy attorney general under President Ronald Reagan
- Lori Wallach, director of Public Citizen’s Global Trade Watch
- Moderator: Adam Behsudi, trade reporter for Politico
This afternoon, the U.S. Department of Commerce announced the preliminary results of its antidumping investigation in large civil aircraft from Canada, launched at the request of the Boeing Company in May. Commerce “calculated” dumping margins of 79.82 percent for Bombardier—the only Canadian aircraft producer in this market—which becomes the rate of duty that any U.S. purchaser would have to post with U.S. customs upon importation. This penalty comes on top of last week’s assessment of 219.63 percent subsidy margins in the companion countervailing duty case.
It goes without saying that neither Delta Airlines (the intended customer) nor any other U.S. carrier is going to pay a 300 percent tax to purchase these aircraft. Unless the U.S. International Trade Commission rules in February 2018 that Boeing is not threatened with material injury by these proposed Bombardier sales, the orders will go into effect (requiring approximately 300 percent duties, although those figures will change—but probably only slightly—between the Commerce preliminary and final), putting the U.S. market out of reach to Bombardier, and Bombardier aircraft out of reach to the U.S. carriers, who need these smaller planes (which Boeing doesn’t even produce) to serve less-travelled routes efficiently.
In a previous post, I described some of the methodological shenanigans that Commerce was likely to perform in this case. Confirmation of those and other capricious decisions will be possible after the official analysis memo is released. But, if the ITC finds “threat of material injury” to Boeing by reason of these “unfair” prospective Bombardier sales, and AD and/or CVD orders are imposed, in all likelihood, there will be some major issues that Bombardier or Delta will want the U.S. Court of International Trade (or a NAFTA Chapter 19 panel) to review and determine whether Commerce acted beyond its authority.
Even if the ITC goes negative in February—finds no threat of injury—the market for the next 5 months will be in a state of suspended animation. Uncertainty will rule. Bombardier will not know how to proceed. Should it build the aircraft in anticipation of exoneration? Should it seek other markets? Will it be able to service its debt and keep its workforce? Delta and the other airlines will have to put off plans to modernize their fleets, while remaining unable to perform reliable cost-benefit analyses. The specter of a long adjudicative process offers only distant relief, with plenty of distortions and inefficiencies to endure in the interim.
The U.S. trade laws are a form of economic terrorism. They are deployed unexpectedly and with stealth; they cripple their intended targets, while generating enormous amounts of collateral damage to other companies, industries and jobs; and they cast a long shadow of uncertainty over the costs and conditions of operating in the market prospectively.
Maybe the political and economic fallout from this case will bring scrutiny of these laws to the level they have long deserved.
The other shoe is about to drop in the Boeing-Bombardier trade row. But first, some background...
Last week, smack dab in the middle of the third round of the NAFTA renegotiations taking place in Ottawa, the U.S. Department of Commerce issued a preliminary determination in a countervailing duty case brought by the Boeing Company in May. The Countervailing Duty Law provides “relief” (usually in the form of import duties) to domestic industries that can demonstrate that they are “materially injured” or threatened with material injury by reason of sales of subsidized imports.
In early summer, the U.S. International Trade Commission ruled, preliminarily, that there was a reasonable indication that U.S. manufacturers of large civil aircraft (i.e., Boeing) may be threatened with material injury by reason of prospective sales of aircraft from Bombardier to Delta Airlines, which may be offered at artificially low prices made possible by various government subsidies to the Canadian producer.
Subsequently, Commerce’s investigation turned up 16 different subsidy programs—equity infusions, launch aid, “provision of land for less than adequate remuneration,” various tax credits and incentives, and federal and provincial grants—constituting specific benefits to Bombardier by the governments of Canada, the United Kingdom, and the province of Quebec, which amounted to an aggregate subsidy rate of 219.6 percent ad valorem.
By historical standards, that is a very large number. If finalized at that rate, the duty would put the U.S. market out of reach to Bombardier and—of greater significance to the U.S. economy—put Bombardier airplanes out of reach to U.S. carriers, reinforcing Boeing’s monopoly power, and ensuring higher costs of air travel and air shipping in perpetuity.
Round two of the NAFTA negotiations wrapped up early this week, without any major new developments. Of course, it is still very early in the process, and until the parties propose actual text for particular chapters, it is difficult to assess how bargaining will unfold. However, there are some issues where the positions of Canada, Mexico and the United States are fairly well known. One such issue, which Canada raised in the second round, is the inclusion of provisions on regulatory cooperation. As I’ve written with my colleagues in a recent working paper, a chapter on regulatory cooperation would be beneficial to an upgraded NAFTA.
First, as traditional tariff barriers have decreased over time, many of the remaining trade frictions take the form of so-called non-tariff barriers. Among these are the various regulations and standards that different countries utilize to regulate their product markets. There are a wide range of reasons these rules may differ—protectionism, consumer preferences, or divergence resulting from regulating in silos. The first of these is already addressed at the World Trade Organization (WTO). The second can entail things like consumer attitudes towards genetically modified foods (GMOs). The third is the range of issues that make up the bulk of what would be addressed in any type of regulatory cooperation forum. Examples include differences in the dimming technology for headlights used in vehicles, or the size of soup cans.
In 2011, there were two bilateral initiatives between the U.S. and Canada and between the U.S. and Mexico to address this type of regulatory divergence (outside of the NAFTA framework). The initiative with Mexico, the High-Level Regulatory Cooperation Council, did not achieve much progress, though Mexico has remained a supporter of regulatory cooperation initiatives. However, the U.S.-Canada Regulatory Cooperation Council had some notable successes, though progress has been very slow. For example, Health Canada and the Federal Drug Administration created a common electronic submission process that allows for a single application to both agencies for pharmaceutical and biological products; progress was also made in establishing mutual recognition of foreign animal disease zoning, as well as a joint review process for crop protection products. Given that this initiative has been in place for six years, however, criticism of the limited number of outcomes is not misplaced.
The North American Free Trade Agreement has been a source of controversy since well before its implementation in 1994. It was the first trade agreement involving the United States and a “developing” country, so it raised concerns that a giant sucking sound from south of the border would hoover up U.S. investment and jobs. Ross Perot, Pat Buchanan, and most Democratic presidential candidates beginning with John Kerry all lamented the imminent or unfolding devastation wrought by NAFTA.
Even though the U.S. manufacturing sector has continued to attract more investment than every other countries’ manufacturing sectors ever since NAFTA was implemented, and even though that implementation did not accelerate the trend of U.S. manufacturing job decline, which had been underway for 14 years since employment peaked at 19.4 million in 1979 (2.6 million decline between 1979 and 1993; 2.7 million decline between 1993 and 2007; 600,000 increase between 1993 and 1999), NAFTA became a symbol of corporate excess and a rallying cry for organized labor, environmental organizations, and other anti-business groups over the years. It also made it nearly impossible for Democrats in Congress to support trade liberalization in the ensuing decades.
During the 2008 presidential election campaign, Democratic candidates John Edwards, Hillary Clinton, and Barack Obama all vowed to re-open NAFTA to make it less unfair for U.S. workers. Within a few weeks of assuming office, President Obama let the president of Mexico and the prime minister of Canada know that he wasn’t about to follow through on his NAFTA pledges and risk disrupting North American production and supply chains that have enabled regional producers to compete more effectively against Asian and European rivals, while delivering better goods and services at more affordable prices to consumers.
Probably owing to the anti-trade agreement fervor that brewed during the debates over Trade Promotion Authority and the Trans-Pacific Partnership over the last few years, killing NAFTA (and the TPP) became a central plank in Donald Trump’s presidential campaign. Although, regrettably, he withdrew the United States from the TPP, Trump seems to have been talked off the ledge about jettisoning NAFTA , which (as of this morning) is being renegotiated.
As a guide to better understanding what’s on the table and what’s at stake, my colleagues Simon Lester, Inu Manak, and I produced this working paper: Negotiating NAFTA in the Era of Trump: Keeping the Trade Liberalization In and the Protectionism Out.
There is likely to be confusion over many issues in the upcoming NAFTA renegotiation, but one particular area where I already see some misunderstandings is the NAFTA dispute process. To illustrate this, here’s a recent statement by Canadian Prime Minister Justin Trudeau:
as our ambassador said just last week to the Americans, a fair dispute resolution system is essential for any trade deal that Canada signs on to and we expect that to continue to be the case in any renegotiated NAFTA.
In context, it is clear he was talking about a particular type of NAFTA dispute, rather than the more general proposition that there must be a dispute system in place. But there are actually several dispute provisions in NAFTA, and I’ve seen a number of people get them mixed up. As a result, I thought it was worth explaining the key distinctions in a blog post, which I can then link to whenever the issue comes up in the future.
There are three main types of NAFTA disputes, set out in separate chapters: Chapter 11 (litigation over the treatment of foreign investment), Chapter 19 (appeals of anti‐dumping/countervailing duty decisions), and Chapter 20 (government complaints about compliance with NAFTA obligations).
Chapter 11 is part of the investor state dispute settlement (ISDS) debate. Under Chapter 11, a foreign investor of one NAFTA party can sue the government of another party (e.g., a Canadian company who has invested in the U.S. can sue the U.S. government) on the basis that it has been treated worse than its American competitors, or that it has been treated badly in general (e.g., it did not receive treatment that was “fair and equitable”). I have questioned the value of such procedures, but they are strongly supported by business groups. As far as I know, the Canadian and Mexican governments favor their inclusion in NAFTA, and the Trump administration’s NAFTA negotiating objectives seem to envision including them (although I can imagine some members of the Trump administration who worry about sovereignty will be pushing to take them out).
Next up is Chapter 19, which sets out a special appeals process related to the imposition of anti‐dumping and countervailing duties. This is the dispute procedure Trudeau had in mind. Anti‐dumping and countervailing duties are imposed on the basis of decisions by domestic agencies (in the U.S., it is the Department of Commerce and the International Trade Commission), and the decisions of these agencies can be appealed to domestic courts (in the U.S., appeals go to the Court of International Trade, then the Court of Appeals for the Federal Circuit, and then the Supreme Court). NAFTA Chapter 19, however, sets up a special appeals process which allows Canadian and Mexican respondents in U.S. proceedings to appeal the agency decision to an ad hoc NAFTA panel (i.e., private lawyers who act as judges in a particular case) instead of to domestic courts. (The process is also available in relation to Mexican and Canadian anti‐dumping and countervailing duty cases, taking appeals out of their domestic courts). When reviewing U.S. agency decisions, a NAFTA Chapter 19 panel acts like the Court of International Trade, in the sense of reviewing the agency’s interpretation and application of U.S. law, and remanding to the agency if necessary. Unlike the Court of International Trade, NAFTA Chapter 19 panel rulings cannot be appealed.
It’s not clear to me that this process is constitutional (a law review article discussing the predecessor provision in the Canada‑U.S. FTA is here), and I’m not sure at this point how different the results are as between U.S. courts and the NAFTA process (this is something I plan to look into further). The Canadians insist they want to keep Chapter 19, while the Trump administration says it wants to take it out, which means this could be a major hurdle in the negotiations.
Finally, there is NAFTA Chapter 20. This is the core state‐to‐state NAFTA dispute process, where one government can allege that another is not complying with its obligations. Chapter 20 has not worked that well in practice, in part due to problems with getting panelists in place. I am working on an article that proposes some fixes.
My hope is that these basic explanations can cut through some of the confusion. All of these provisions set out NAFTA dispute procedures, but the policy implications and the politics of each are very different.
President-elect Donald Trump has claimed victory in his effort to preserve employment for Carrier workers in Indiana. Assisted by $7 million in tax incentives provided by the State of Indiana, Mr. Trump persuaded the company not to move 800 furnace manufacturing jobs to Monterrey, Mexico. This works out to a taxpayer-funded subsidy of $8750 per job.
Another 1300 Carrier jobs still will move to Mexico between now and 2019. Published reports have indicated that the company anticipated cost savings of some $65 million per year from moving all 2100 positions to Monterrey. So Carrier is taking at least a partial step toward maintaining its global competiveness, while at least partially appeasing the incoming president.
I wrote an op-ed in Forbes on August 22, 2016, in which I argued that Carrier no doubt had quite good business reasons for planning the move to Mexico. Carrier’s February 2016 announcement of the decision said that it was due to “ongoing cost and pricing pressures driven, in part, by new regulatory requirements.”
Carrier has been manufacturing products in Monterrey for some years. The company certainly has a clear understanding of why moving production of some air conditioning units makes business sense. It would not be wise for them to explain their reasoning in public because such proprietary knowledge would be of great interest to their competitors.
Some commentators have opined that the decision was driven largely by lower labor costs. Carrier’s expenses for employee salary and benefits average about $34 per hour in Indiana, while those costs in Mexico are only around $6 per hour. It’s possible the move was prompted primarily by labor cost savings, although my analysis of data compiled by The Conference Board suggests otherwise. The value generated by an hour worked in the United States has risen by 40 percent over the past 22 years of NAFTA. In Mexico, the gain has been only 10.5 percent. Productivity has grown faster in the United States, so the incentive to shift production to Mexico today ought to be weaker than it was 10 or 20 years ago. (Note: Those figures apply to the productivity of all workers. If it was possible to analyze just the manufacturing sector, perhaps the findings would change.)