Tag: NAFTA

Ambiguities in U.S. Trade Laws Imperil Our Economy and Constitutional Order

In yesterday’s Investor’s Business Daily, Club for Growth President David McIntosh and I had a short piece on the perilous implications of President-elect Trump’s threats to unilaterally withdraw the United States from our trade agreements or impose punitive and wide-ranging tariffs on imports. The economic effects of Trump’s promises have been explored at length (see, e.g., this new one on NAFTA and Texas), but most trade law experts are just now digesting the legal issues. What we’re finding is, to use the technical term, a big mess that could have unforeseen economic and constitutional implications in the Age of Trump. As we note:

For almost a century, American trade policy has been formed and implemented by a successful “gentlemen’s agreement” between Congress and the president. Congress delegated to the president some of its Article I, Section 8 powers to “regulate Commerce with foreign nations” so that the president may efficiently execute our domestic trade laws. The president negotiates and signs FTAs with foreign countries, while Congress retains the ultimate constitutional authority over international trade, for example by approving or rejecting agreements or by amending US trade laws.

As a result of this compromise, the United States has entered into 14 Free Trade Agreements with 20 different countries and imposed targeted unilateral trade relief measures — all without significant conflict between Congress and the President.

The question now is whether Mr. Trump, as president, could and should single-handedly implement his trade agenda on Jan. 20, 2017 without any congressional action.

The IBD op-ed scratches the surface of these legal issues, but below are more details on just a few of the many ambiguities lurking in U.S. trade law—ambiguities that, if not properly clarified, could be exploited by a protectionist U.S. president against the original intent of the Congress that delegated their constitutional authority over trade policy under the (incorrect!) assumption that the president would always be the U.S. government’s biggest proponent of free trade.

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Reality Will Curb Trump’s Protectionist Fantasies

I said there was no way Trump would last through the early primaries.  I belittled the prospect of Trump even attending the convention, much less accepting the Republican nomination.  And I was cavalier in my certainty that Trump would be making a concession speech early Tuesday night.  In other words, by Washington’s standards, I have established credibility on the subject. 

So you should feel reassured that I am less bearish about the direction of President Trump’s trade policy than I probably should be given candidate Trump’s bellicose campaign rhetoric.

The trade policies Trump outlined in broad strokes on the campaign trail would – to put it mildly – devastate the economy.  For example, Trump has said he would:

  • impose duties on 35 percent on imports from Mexico and 45 percent on imports from China;
  • impose special taxes on U.S. companies that incorporate foreign components or labor into their production or assembly operations;
  • tear up the North American Free Trade Agreement – or at least renegotiate what he calls “the worst trade deal ever negotiated,” and abandon the Trans-Pacific Partnership, which he calls a “rape of our country”; 
  • declare China a currency manipulator and impose countervailing duties to mitigate the export price advantages that practice allegedly bestows;
  • use tax policy, protectionism, and the threat of more protectionism to compel China, Mexico, and all of the other countries with whom the United States runs bilateral trade deficits to buy more from U.S. producers and sell less to U.S. consumers in order to achieve a state of balanced trade;
  • tax manufacturing companies that lay off workers.

The list of angry, knee-jerk, foolish ideas goes on and on. If you take candidate Trump at his word, U.S. trade policy is going to be an unmitigated disaster.

100 Days of Trump Trade Policy

Donald Trump is well known for his vociferous complaints about foreign trade.  Trump has also gained notoriety for offering very vague policy proposals, and trade is no exception.  This has left observers knowing that Trump wants to do something big on trade but without much sense of what, specifically, that will be.  Now that Trump is president-elect of the United States, that uncertainty is bound to vanish as Trump’s plans and intentions necessarily become more concrete.

For the moment, however, we are left to speculate based on Trump’s vague and bellicose announcements.  The most reliable indicator of Trump’s plans is probably Trump’s “100-day action plan to Make America Great Again” he produced in the closing weeks of his campaign.  That plan has reportedly been fleshed out a bit by his transition team.  The plan includes numerous executive actions and a list of legislative proposals. 

In one section, Trump lists “Seven actions to protect American workers,” four of which directly involve trade.  Let’s go through them one by one.

Renegotiate of Withdraw from NAFTA

It’s no secret Donald Trump really doesn’t like NAFTA.  He has said that NAFTA “destroyed our country.”  It’s safe to assume Trump means to act on this.  According to Politico, the longer version of Trump’s 100-day plan specifies that Trump will start renegotiating NAFTA on day one and withdraw from NAFTA “by day 200” if he hasn’t gotten what he wants yet.

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Have Trade Agreements Killed the Manufacturing Sector?

An interesting 80-second video by Johan Norberg, executive director of Free To Choose Media and senior fellow at the Cato Institute, makes the case that trade agreements have not led to the deindustrialization of America.  He notes that the share of U.S. workers employed in manufacturing has been falling at an average of 0.4 percent per year from 2000 to 2010, but it also fell at that same rate between 1960 and 2000.  Thus, NAFTA and other trade agreements don’t seem to have had a great deal of influence on the gradual evolution of the economy away from employment in manufacturing and toward employment in services.

If he had more time, Norberg also might have pointed out that the U.S. manufacturing sector has never been larger.  Value added by the U.S. factories reached an all-time high of $2.4 trillion in 2015.  Manufacturing accounts for about 13 percent of GDP.

Yes, it’s true – fewer people work in manufacturing today than in the past.  Peak U.S. manufacturing employment was 19.4 million workers in 1979, but has generally trended downward since then.  Today only around 12 million people work for manufacturers, a decline of roughly one third over the past 35 years.  Productivity has risen so much that many fewer workers now produce many more manufactured products.

A recent study by the Center for Business and Economic Research at Ball State University found that trade has had some effect on manufacturing employment.  Researchers estimate that approximately 13 percent of manufacturing job losses have been due to trade.  But the dominant factor has been productivity growth, which accounted for 85 percent of the employment decline.  (Robots and computers ate the jobs.)  So imports bear a relatively small degree of responsibility for the reduction in manufacturing employment, but take a large share of the blame from politicians.

There are a lot of good things that can be said about U.S. manufacturing.  Workers are better educated, better paid, use more sophisticated equipment, and produce more high-value goods.  Our country may produce fewer shirts and tennis shoes than before, but we produce more valuable items such as airplanes, motor vehicles, and industrial equipment.  So even though there is an abundance of good news for manufacturers, don’t expect to hear much about it in this particularly anti-trade political season.

(A more detailed review of the economic effects of trade agreements can be found in this study by the U.S. International Trade Commission.)

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The Economics of Trade: Wilbur Ross Is Mistaken

Billionaire investor Wilbur Ross, a supporter of Donald Trump, made the following comment in a letter to the Wall Street Journal (Aug 15): “It’s Econ 101 that GDP equals the sum of domestic economic activity plus “net exports,” i.e., exports minus imports.  Therefore, when we run massive and chronic trade deficits, it weakens our economy.”

In reality, the last sentence –beginning with “Therefore”– does not follow from the first.

Mr. Ross is alluding to the demand side of National Income Accounts, wherein Y=C+I+G+ (N-X). That is, National Income (Y) equals spending on Consumption (C) plus Investment (I) plus Government (G) plus Net Exports (Imports N minus Exports X).  

Taking such accounting too literally, a reduction in imports may appear to be mathematically equal to an increase in overall real GDP.  But that is dangerously incorrect, as the 1930s should have taught us.

The accounting is true by definition (a tautology). But economics is about behavior, not accounting identities.

If trade deficits “weaken our economy,” as Mr. Ross asserts, then we should expect to see real GDP slow down when trade deficits get larger and see real GDP speed up when trade deficits get smaller or become surpluses.  What the data show is much different – the exact opposite in fact.  

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Trump Is Wrong: America Makes Tons of Stuff

Americans “don’t make anything anymore,” said Donald Trump on Fox on Sunday with Chris Wallace, lamenting what he sees as the death of U.S. manufacturing. “I just ordered 4,000 television sets. You know where they come from? South Korea … I don’t think anybody makes television sets in the United States anymore.” Actually, America still makes televisions. More importantly, Trump’s insinuation that trade has destroyed U.S. manufacturing is fundamentally mistaken.

The truth is that U.S. manufacturing is thriving, although the industry employs fewer people, mainly because of automation—not trade. Would Trump undo technological progress and massive savings to bring back manufacturing jobs?

The rumors of American manufacturing’s death have been greatly exaggerated. Sales revenues and output are rising. In 2014, value-added by the industry set a new record. While it’s true that manufacturing is a smaller share of the U.S. economy than it once was, that’s not because it isn’t growing—other sectors of the economy are simply growing faster.

The reason that so many goods found in a U.S. convenience store say, “Made in China,” is because U.S. manufacturing has shifted towards high value-added products like aerospace equipment, not because the U.S. has stopped “making things.”

Despite growing revenues and output, manufacturing employs fewer Americans than it once did. Technological advancement has led to gains in efficiency, and it is primarily automation, not trade, that has reduced demand for workers in manufacturing.

In fact, the U.S. manufacturing industry added jobs in the years immediately after the North American Free Trade Agreement was passed. Trade restrictions sometimes even inflict harm on domestic manufacturing. Tariffs on manufacturing inputs (e.g., hot-rolled steel) may protect U.S. workers making that specific product, but harm all the U.S. manufacturers who need those inputs to create other products (e.g., airplane parts) further down the production line. On the whole, trade enriches us.

While manufacturing employs fewer Americans than it did in Donald Trump’s youth, total U.S. employment has risen, as more Americans find work in other sectors of the economy. If Trump would give up gains in efficiency solely to boost employment in manufacturing, then he may want to consider this famous piece of advice attributed to Milton Friedman: 

Milton recalled traveling to an Asian country in the 1960s and visiting a worksite where a new canal was being built. He was shocked to see that, instead of modern tractors and earth movers, the workers had shovels. He asked why there were so few machines. The government bureaucrat explained: “You don’t understand. This is a jobs program.” To which Milton replied: “Oh, I thought you were trying to build a canal. If it’s jobs you want, then you should give these workers spoons, not shovels.”

Does the Donald want America to build things, or does he want us digging with spoons?

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The Trade Negotiation Proliferation

It’s getting hard to keep track of all the various trade negotiations going on right now.

As this blog’s readers may recall, in his State of the Union speech, President Obama announced that the United States would begin trade negotiations with the EU. And no doubt you know that the United States, Canada, and Mexico are part of NAFTA.

But less prominently, the United States, Canada, and Mexico are also part of trade talks among various nations in the Pacific region, called the Trans Pacific Partnership (TPP). And now Japan has announced that it would like to join these talks.

In addition, Canada and the EU have been negotiating their own trade agreement for several years now.

And just the other day, Japan and the EU started trade talks.

Oh, and Mexico has suggested a broader NAFTA-EU trade deal.

Got all that? It’s OK if you don’t—I’m not sure I do either.

There are some good reasons to use international trade agreements to promote free trade. The world trading system has been very successful in bringing down tariffs and other protectionist barriers over the past few decades. But the recent proliferation of agreements, with sometimes conflicting rules (going beyond just protectionism), may be steering us away from real free trade. Real free trade would lower trade barriers for all countries, not just for some. Hopefully some day trade negotiations can get back to that principle.

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