Tag: protectionism

Bad Policy Begets Insecurity

The New York Times is reporting a major spike in aggressive cyber attacks by Iran and China against businesses and government agencies in the United States. “[S]ecurity experts believe,” the Times reports, that the renewed cyber attacks “have been energized by President Trump’s withdrawal from the Iran nuclear deal last year and his trade conflicts with China.”

Chinese cyberespionage cooled four years ago after President Barack Obama and President Xi Jinping of China reached a landmark deal to stop hacks meant to steal trade secrets.

But the 2015 agreement appears to have been unofficially canceled amid the continuing trade tension between the United States and China, the intelligence officials and private security researchers said. Chinese hacks have returned to earlier levels, although they are now stealthier and more sophisticated.

…Threats from China and Iran never stopped entirely, but Iranian hackers became much less active after the nuclear deal was signed in 2015. And for about 18 months, intelligence officials concluded, Beijing backed off its 10-year online effort to steal trade secrets.

But Chinese hackers have resumed carrying out commercially motivated attacks…

In other words, the United States has been the target of major cyber attacks from both Iran and China as a direct consequence of two Trump administration policies, neither of which were justified.

Last year, against the advice of his own top national security officials and the US intelligence community, as well as US allies, President Trump withdrew from the 2015 Iran nuclear deal (JCPOA). That deal rolled back Iran’s nuclear program and imposed strict limits on it for the foreseeable future. To this day, it remains one of the most robust non-proliferation agreements ever negotiated and Iran continues to comply with its stringent controls and invasive inspections regime. Trump’s withdrawal, which lacked a national security rationale (at least one that had any relation to reality) resulted in the automatic re-imposition of harsh economic sanctions against Iran. Although the sanctions have hurt the Iranian economy, the regime in Tehran has kept to its obligations anyway, even amid threatening and overtly hostile rhetoric from the Trump administration that strongly suggests it is seeking regime change.

Many predicted withdrawal from the JCPOA would pressure Iran to unburden itself from the deal’s restrictions and restart its nuclear enrichment program in earnest, the exact opposite of the White House’s stated aim. Thankfully, this has not happened (yet). But what has happened is that Iran has ramped up aggressive cyber attacks against us.

Likewise, Trump’s determination to initiate a trade war with China, arguably America’s most important trade partner, cannot be justified on either economic or national security grounds. China’s immediate response was to retaliate with its own tariffs against US imports. Both the US and Chinese economies have consequently suffered an economic hit worth billions of dollars. We can add to these costs the apparent revocation of the arrangement Obama and Xi secured in 2015 not to engage in commercial cyber espionage. 

As I see it, we can draw two lessons from this. First, countries are likely to retaliate if we punish them for engaging in cooperative diplomacy with us. Second, Trump’s policies have made America less safe.

For those who think the proper response to intensified Iranian and Chinese cyber attacks is to adopt a more aggressive, offensive cyber posture (in retaliation for the retaliation), I recommend reading this Cato Policy Analysis we published last month which demonstrates the dangers, and low utility, of such a path.

“Where Do We Have Tariffs?” the President Asked. On Clothing and Footwear, For a Start

“Where do we have tariffs?” President Trump asked yesterday. One obvious answer is on imported clothing and footwear, where tariffs are both substantial and hit low-income consumers hard.

The United States raised $33.1 billion in tariff revenue in 2017, but $14 billion of that came from tariffs on apparel and footwear alone. These items account for 4.6 percent of the value of U.S. imports, but 42 percent of duties paid. That means while the average effective tariff rate for U.S. imports overall is just over 1.4 percent, rates for apparel and footwear are 13.7 percent and 11.3 percent, respectively.[i]

My colleague Daniel Ikenson has previously examined the evolution of clothing and textile protectionism. He concludes that such high tariffs do not protect domestic apparel manufacturing. Data from the U.S. Trade Representative shows that 91 percent of manufactured apparel goods and 96.5 percent of footwear are imported.

Why then are such highly regressive tariffs imposed? The answer appears to be the lobbying efforts of the capital-intensive U.S. textile industry. Textiles are the major input for labor-intensive apparel production, which largely occurs overseas. To quote Ikenson directly:

The U.S. textile industry insists on preserving those tariffs as leverage to compel foreign apparel producers to purchase their inputs. Preferential access [to U.S. markets] is conditioned on use of U.S. textiles. The high rates of duty apply, generally, to all “normal trade relations” partners. But those duties are much lower or excused entirely for trade agreement partners, provided that the finished garment comprises of textiles made in countries that are signatories to the agreement.

U.S. consumers pay the price of this protectionism, and poorer consumers especially. In 2016, the average household in the bottom income quintile spent $860 on apparel and footwear, or 3.4 percent of overall spending—the highest proportion of any income quintile. The average single-parent household put 4.5 percent of total expenditure toward these goods. The poor spend a disproportionate amount on clothing and footwear, and family structures most likely to be recipients of means-tested welfare programs (single-parent households) spend most of all.

But this protectionism is not just regressive because of relative spending patterns. Edward Gresser’s work has shown how, often, luxury clothes and shoes face lower tariff rates than inexpensive products.

Consider Table 3 from my report below (an updated version of Gresser’s work.) Where duties are applicable, a pure cashmere sweater import incurs a 4 percent tariff, a wool sweater a 16 percent tariff, and an acrylic sweater a whopping 32 percent. Men’s silk shirts see a 0.9 percent tariff, cotton shirts a 19.7 percent tariff, and cheaper polyester shirts a 32 percent tariff. Leather dress shoes have an 8.5 percent tariff, whereas cheap sneakers would see a 43 percent tariff. Windbreakers, leggings, tank tops, and other clothes made cheaply from synthetic fabrics face a 32 percent tariff if sourced from countries that the United States does not have a free-trade agreement with. Assuming poorer households tend to buy cheaper products, these differential tariffs have perniciously regressive effects.

Regressive tariffs

The true overall cost of all this to poorer families is difficult to calculate. To get an accurate estimate would require detailed information on the effect on domestic substitute goods’ prices, knowledge of products bought by poor families and their propensity to import in the absence of protectionism.

Nevertheless, we can develop cautious lower-bound estimates. The average household in the poorest income quintile spends $655 on apparel and $206 on footwear per year. Assuming the import propensities for the population as a whole apply to poorer people implies $595 of apparel spending and $199 of footwear spending is on imported goods. Taking average effective tariff rates for apparel and footwear for this spending (13.7 and 11.3 percent) implies a combined direct tariff cost of $92 per year for the average household in the poorest income quintile, or $204 per year for the average single-parent household.

These figures likely underestimate the true burden, because they only represent the direct cost from current spending on imported goods. They assume tariffs do not raise domestically produced goods prices, though in reality the anti-competitive effect of the tariffs would be expected to raise prices here too. It also assumes the same effective tariff rates for apparel and footwear apply for the poorest households as for the whole population, but we have seen that products that the poor are more likely to buy tend to face higher tariff rates. Consumer welfare losses from tariffs, of course, are higher than the implied costs here, since tariffs make consumers less willing to buy imported products that they would otherwise prefer.

In short, next time the President asks where tariffs are applied, someone shout “apparel and footwear.” They are both large and regressive.


[i] U.S. International Trade Commission, “Interactive Tariff and Trade DataWeb,” at http://dataweb.usitc.gov. Data for imports for consumption, and effective rates calculated using “customs value” and “calculated duties” for 2017.

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A Contemporary Economist’s Account of the “Crowning Folly of Tariff of 1930”

“[T]here came another folly of government intervention in 1930 transcending all the rest in significance. In a world staggering under a load of international debt which could be carried only if countries under pressure could produce goods and export them to their creditors, we, the great creditor nation of the world, with tariffs already far too high, raised our tariffs again. The Hawley-Smoot Tariff Act of June 1930 was the crowning folly of the who period from 1920 to 1933….

Protectionism ran wild all over the world.  Markets were cut off.  Trade lines were narrowed.  Unemployment in the export industries all over the world grew with great rapidity, and the prices of export commodities, notably farm commodities in the United States, dropped with ominous rapidity….

The dangers of this measure were so well understood in financial circles that, up to the very last, the New York financial district retained hope the President Hoover would veto the tariff bill.  But late on Sunday, June 15, it was announced that he would sign the bill. This was headline news Monday morning. The stock market broke twelve points in the New York Time averages that day and the industrials broke nearly twenty points. The market, not the President, was right.”

– Dr. Benjamin M. Anderson [chief economist at Chase National Bank 1920-39], Economics and the Public Welfare: A Financial and Economic History of the United States, 1914-1946 (Indianapolis, Liberty Press, 1979, pp. 229-230)

Despite Growing Tensions, There Is Still Scope to Avert a U.S-China Trade War

If 2017 was the year of fiery trade talk, 2018 has been the year of provocative trade actions. During the first four months, President Trump imposed or announced intentions to impose tariffs on thousands of products stemming from five investigations conducted under three different, seldom-used laws. Talk of trade war is rampant and, as May begins, the troops are in formation—a circular formation, but a formation nonetheless! By Memorial Day, it should become much clearer whether their orders will be to shoot, hold fire, or demobilize.

What follows is a brief recap of the relevant trade policy actions of 2018 that have taken us to the present situation.

In January, the president imposed “safeguard” restrictions following two separate investigations of imports of large washers and solar cells, under Section 201 of the Trade Act of 1974.  Tariffs and tariff rate quotas, respectively, were imposed for a period of four years in both cases against imports from most countries. These safeguard measures are absolutely stupid as a matter of economics, but relatively trivial as far as the impact on U.S.-China relations and the prospects for trade war are concerned.

In March, under the guise of acting to protect national security, Trump invoked Section 232 of the Trade Expansion Act of 1962 to impose tariffs on imported steel and aluminum from all countries. Soon after the announcement and before the tariffs took effect, Trump offered temporary exemptions to several trading partners to “encourage” them to play nice: buy more U.S. stuff; sell Americans less foreign stuff; increase NATO spending (EU countries); agree to U.S. terms on various aspects of the NAFTA renegotiations (Canada, Mexico); agree to export quotas (South Korea) and the temporary exemptions will be made permanent. Well, as the temporary exemption period was about to expire on May 1, the president extended the deadline to June 1. Presumably, if the NAFTA negotiations wrap up this month (apparently, a real possibility) and Trump gets what he wants, Canada and Mexico will be permanently exempted from the steel and aluminum tariffs. Congrats!  It’s much less clear that the Europeans are willing to submit to these tactics. They’ve crafted a retaliation list and seem likely to go that route.  The Chinese, whose steel and aluminum exports have been subject to the tariff since March 23, have already retaliated against a list of 128 U.S. products (amounting to about $3 billion in U.S. exports), including ethanol, wine, nuts, fruit, and a few other commodities. 

Although the “national security” restrictions on steel and aluminum are a more significant irritant than the safeguard restrictions on washers and solar cells, they still only amount to a flea bite on an elephant’s hide relative to Trump’s most recent, most provocative, and—some would argue—most justifiable action so far. At the beginning of April, Trump announced his intention to impose tariffs on 1,300 Chinese products accounting for about $50 billion of exports to the United States, as a result of an investigation into Chinese intellectual property and forced technology transfer policies, under Section 301 of the Trade Act of 1974. The “remedy” also includes instructions for the Treasury Department to publish new investment rules that will make it harder for Chinese companies to purchase U.S. technology and U.S. tech companies.  Within a few hours of the U.S. announcement, China published a list of U.S. products, amounting to about $50 billion of exports to China (farm products, airplanes, autos, etc.), that it would subject to retaliatory duties of 25 percent should the U.S. measures take effect.

As of that point, between the 232 and the 301 cases, $106 billion of U.S.-China trade was in the crosshairs (about 15% of two-way trade). Then in reaction to China’s retaliation threat, Trump raised the stakes by instructing the USTR to identify another $100 billion of Chinese products to assess with tariffs.  That list has not yet been published, but if it is and China responds commensurately (by targeting another $100 billion of U.S. exports), its list would have to include ALL U.S. exports to China because total U.S. goods exports to China in 2017 amounted to $130 billion. (Services exports add another $50 billion, but they’re not easy to hit with tariffs). The next likely target would be U.S. companies operating in China—discriminatory taxes, regulations, restrictions, etc.  In any event, the amount of trade subject to tariffs ($306 billion) would begin to approach half the value of the two-way trade—a decidedly cataclysmic outcome.

President Trump seems to be aware of the stakes.  Last month he tweeted that trade wars can be good and are winnable. He cites the bilateral U.S. trade deficit as evidence that China needs us more than we need them.  Hopefully, he’s rational enough to realize that his avoidable actions would trigger a massive global economic contraction which, even if the United States is less hurt than others, history would not look kindly upon.

The month of May offers some opportunities to ratchet down the tensions and, even, find some solutions. The Trump administration’s trade policy team—USTR Robert Lighthizer, Commerce Secretary Wilbur Ross, Treasury Secretary Steven Mnuchin, National Economic Council Director Larry Kudlow, and National Trade Council Director Peter Navarro—is in Beijing this week, presumably to get China to commit to certain actions that would enable tensions to be dialed down.  Mid-month, the USTR is holding a hearing for the public airing of views about the Section 301 remedies, where it will be impressed upon the administration how costly a trade war would be.  And, presumably, toward the end of the month is the momentous Korean Summit.  If the president gets the results he’s looking for (whatever they may be) and Beijing is perceived as having played an important role in reaching that outcome, that could give Trump the cover he probably needs to put his pistols back in their holsters and focus on an effective, comprehensive U.S.-China free trade agreement. That should be the primary goal of U.S. trade policy during the Trump administration.

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“America’s Finest” Is Another Casualty of the Jones Act

Cato trade policy analyst Colin Grabow explains the sordid details in today’s Wall Street Journal:

America’s Finest, a brand-new 264-foot fishing trawler, ought to be the pride of the fleet. As a newspaper in its birthplace of Anacortes, Wash., explained, the ship features an “on-board mechanized factory, fuel-efficient hull, and worker safety improvements”—priceless features for fishermen operating in the treacherous seas off Alaska. The ship is also said to have a smaller carbon footprint than any other fishing vessel in its region. According to Fishermen’s Finest, the company that ordered the ship, it would be the first new trawler purpose-built for the Pacific Northwest since 1989.

Sadly, it seems increasingly doubtful that the ship will ever ply its trade in U.S. waters. That’s because it contravenes the Jones Act, the 1920 law mandating, among other things, that ships carrying cargo between U.S. ports be domestically built

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Trump to Impose Restrictions on Imports and Investment from China

This afternoon, for the second time in the space of a month, President Trump is expected to invoke his authority under a rarely used statute to levy restrictions on a vast swath of imports and investment from China. The cause for today’s measures is behavior that the U.S. Trade Representative has characterized as rampant, sustained theft of U.S. intellectual property by Chinese entities and the Chinese government.

Although allegations—and the evidence supporting those allegations—that China routinely transgresses in the realm of intellectual property have been accumulating for many years, it does not follow that the appropriate response is to restrict trade and investment. In fact, the collateral damage inflicted by those restrictions will be widespread.

President Trump’s “remedies” are likely to raise production costs for U.S. businesses, diminish U.S. productivity, squeeze real household incomes, reduce the revenues of U.S. farmers and other export-dependent industries targeted by Chinese retaliation, exacerbate tensions with China and other countries adversely affected by the restrictions, and hasten the demise of the rules-based trading system.

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Under the Guise of Security, Trump Sets a Protectionist Fire

Protecting citizens from threats domestic and foreign is the most important function of government.  Among those very threats is a government willing to concoct and aggrandize dangers in order to rationalize abuses of power, which Americans have seen in spades since 9/11. Justifying garden variety protectionism as an imperative of national security is the latest manifestation of this kind of abuse, and it will lead inexorably to a weakening of U.S. security.

The tariffs on imported steel and aluminum that President Trump formalized this afternoon derive, technically, from an investigation conducted by the U.S. Department of Commerce under Section 232 of the Trade Expansion Act of 1962.  The statute authorizes the president to respond to perceived national security threats with trade restrictions. While the theoretical argument to equip government with tools to mitigate or eliminate national security threats by way of trade policy may be reasonable, this specific statute does little to ensure the president conducts a rigorous threat analysis or applies remedies that are proportionate to any identified threat.  There are no benchmarks for what constitutes a national security threat and no limits to how the president can respond. 

In delegating this authority to the president, Congress in 1962 (and subsequently) simply assumed the president would act apolitically and in the best interest of the United States.  The consequences of this defiance of the wisdom of the Founders—this failure to imagine the likes of a President Trump—could be grave.

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