Tag: trade

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.

U.S. Trade Policy Agenda in 2019? Fixing What’s Been Breaking Since January 20, 2017

Upon taking office in 2017, President Trump accused trade partners of underhandedness, demonized U.S. companies with foreign supply chains, and perpetuated the false narrative that trade is a zero-sum game requiring an “America First” agenda. He withdrew the United States from the Trans-Pacific Partnership, threatened to pull out of North American Free Trade Agreement and the Korea-U.S. Free Trade Agreement, and initiated a war of attrition against the World Trade Organization by refusing to endorse any new Appellate Body judges until his unspecified demands were met. Yet, those were still the halcyon days of trade.

In 2018, straining all credulity, the Trump administration dusted off a seldom-used law (Section 232 of the Trade Expansion Act of 1962) to impose tariffs on imported steel and aluminum from most countries on the basis that national security is threatened by U.S. dependence on foreign sources of these widely available commodities.

Later in the year, invoking another controversial U.S. trade statute (Section 301 of the Trade Act of 1974), which is widely considered an act of vigilantism under WTO rules, the administration announced tariffs on $50 billion worth of imports from China for alleged unfair practices, such as forced technology transfer and intellectual property theft. When Beijing retaliated with tariffs on U.S. agricultural products, Trump announced that he would hit another $200 billion of imports from China with tariffs. Once again, Beijing responded by broadening its list of targeted U.S. products and the president subsequently threatened to apply U.S. levies to all imports from China (over $500 billion in 2017).

To be fair, U.S. trade policy in 2018 wasn’t only rancor, hostage-taking, and trade war. Juxtaposed against this contentious, grievance-based, enforcement-oriented U.S. posture was some “trade liberalization.” Instead of withdrawing from NAFTA and KORUS, the Trump administration renegotiated both. Both included some liberalizing provisions, but also some lamentable, protectionist retrogression, which wasn’t totally unexpected given that, in both cases, U.S. insistence on renegotiation was motivated less by an interest in updating, expanding, and modernizing the agreements than by a desire to revise provisions that would—at least nominally—tilt the playing field in favor of U.S. workers and certain manufacturers.

As 2019 begins, five major issues cast long shadows over the trade policy landscape. First is whether and how the U.S.-China trade war will be contained, scaled back, and ultimately ended. Second is the looming possibility that the Trump administration will invoke national security to impose sweeping new tariffs on automobile imports. Third is the question of whether and when Congress will pass the implementing legislation for the new NAFTA (the United States-Mexico-Canada Agreement or USMCA). Fourth is whether, when, and how the crisis at the WTO will be resolved. And fifth concerns whether the Trump administration has the wherewithal to make good on its stated intentions of negotiating new trade agreements with Japan, the European Union, the Philippines, possibly the United Kingdom, and other countries. With much of the rest of the world moving forward with a slew of new trade agreements and the United States stuck on revamping old deals, the real and opportunity costs to U.S. businesses, consumers, and taxpayers continue to mount.

Throughout the year ahead, these major issues will be the predominant focus of the research and writing of the Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies.

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NAFTA 2.0: The Best Trade Agreement Ever Negotiated (Except for All of the Others)

The text of the new “United States-Mexico-Canada Agreement” was released last Sunday night, a few hours after I had spoken at an event in Birmingham, England about the virtues of “The Ideal U.S.-U.K. Free Trade Agreement.” To borrow from the late Sen. Lloyd Bentsen: I know the ideal free trade agreement; USCMA, you’re no ideal free trade agreement.

The ideal free trade agreement is one which accomplishes maximum market barrier reduction, enables maximum market integration, forecloses governments’ access to discriminatory protectionism, and obligates the parties to refrain from backsliding.

As explained in the paper:

The ideal free trade agreement provides for the elimination of tariffs as quickly as possible on as many goods as possible and to the lowest levels possible. It should limit the use of so-called trade remedy or trade defense measures. It should open all government procurement markets to goods and services providers from the other party. It should open all sectors of the economy to investment from businesses and individuals in the other party. It should open all services markets without exception to competition from providers of the other party. It should ensure that the rules that determine whether products and services are originating (meaning that they come from one or more of the agreement’s parties) are not so restrictive that they limit the scope for supply chain innovations…

…[T]he ideal FTA must also include rules governing e-commerce. Digital trade — data flows that are essential components in the provision of goods and services in the 21st century — must remain untaxed and protected from misuse and abuse. Rules that prohibit governments from imposing localization requirements or any particular data architectures that reduce the efficacy of digital services should be included, and obligations should be imposed on entities to ensure data privacy, consistent with the requirement that data flow as smoothly as possible.

When border barriers come down, the potentially protectionist aspects of regulation and regulatory regimes become more evident. Certainly, when businesses have to comply with two sets of regulations to sell in two different markets, it limits their capacity to realize economies of scale and reduces their capacity to pass on cost savings in the form of lower prices or reinvestment.

If those regulations are comparable when it comes to achieving the same social outcomes — consumer safety, product reliability, worker safety, environmental friendliness — there may be scope to require businesses to comply with only one set. A regulatory cooperation mechanism to promote mutual recognition would be a useful innovation, as a means to reducing business costs (provided no deep cultural aversion or science-based reason exists for considering one regulation better than the other and worth the greater cost).

Finally, the rules of the ideal FTA must be enforceable. What’s the point of a trade agreement if its terms are just suggestions? To make sure governments keep their promises, trade agreements should have a binding and enforceable dispute settlement mechanism, to ensure that the agreement is followed.

Here’s how the USMCA stacks up to the ideal free trade agreement, which:

  • Would provide for the elimination of tariffs as quickly as possible on as many goods as possible and to the lowest levels possible.

In USMCA, most goods trade will continue to be tariff-free (the NAFTA status quo) under the new agreement, and barriers to certain agricultural products will be reduced as well. Moreover, the value thresholds for importing goods without having to pay any duties have been raised in Mexico and Canada, which will benefit small businesses, disproportionately, as they tend to conduct a larger share of transactions online.

(Conclusion: Criterion is almost met).

  • Would limit the use of so-called trade remedy or trade defense measures.

Trade remedy laws give domestic industries recourse to trade restrictions when they can demonstrate injury caused by “dumped,” subsidized, or substantially increasing imports. These laws are prone to misuse and abuse and become loopholes through which the benefits of trade barrier reduction achieved in the agreement can be quickly rescinded.  

In USMCA, no restrictions on the use of antidumping, countervailing duty, or safeguard measures are made. Rather, the long arm of the Safeguard law extends further under the revised deal by making it more difficult for Canadian and Mexican exporters to be excused from prospective safeguard tariffs. Moreover, the failure of the United States agreeing to blanket exemptions for Canada and Mexico from prospective tariffs on imported automobiles under Section 232 of the Trade Expansion Act of 1962 and the failure of the United States to remove the existing Section 232 tariffs on Canadian and Mexican aluminum and steel—thereby enshrining the view of Canada and Mexico as threats to U.S. national security—is in extremely poor taste, violates the spirit of a trade agreement, and reflects an absence of understanding of the meaning of being a good trade partner. 

(Conclusion: Criterion worse than unmet.)

Weighing Trump’s Trade Apologists

In the wake of the recent “trade agreement” between President Trump and EU Commission President Jean Claude Juncker, we have seen a surfeit of commentary heaping praise on the U.S. president for his strategic trade policy vision and tactical brilliance. Much of that praise has come from people who share the president’s flat-earth view that trade is a zero-sum game played by national governments where the objective is to promote exports, block imports, and secure a trade surplus. Trump throwing U.S. weight around to assert the rule of power over the rule of law is music to this crowd’s ears.

But then there are the apologists who know better; the enablers. They are the bigger problem. In their obsequious tones, they explain how our brilliant president is blazing his own path toward free trade and that the evidence of his success is all around us. If we just disregarded Trump’s nationalist rhetoric, ignored his belief that the trade deficit means the United States is getting ripped off, shoveled away his mounting pile of destructive, protectionist actions, and stopped believing our own lying eyes, we too would rejoice in the greatness of a man who is committed—above all else and above all others—to free trade. 

Engaging in such extreme mental contortions is no easy task, but that’s exactly what an op-ed by tax reform luminaries Steve Moore, Art Laffer, and Steve Forbes in the New York Times last week expects readers to do.

Moore, Laffer, and Forbes (MLF) portray Trump’s “gunboat diplomacy” (you open your markets fully or I’ll close ours!) as strategic genius, akin to Reagan’s nuclear arms race, which broke the Soviets’ backs.  They conclude: “Just as no one ever thought Mr. Reagan would stem nuclear proliferation, if Mr. Trump aggressively pursues this policy, he could build a legacy as the president who expanded world commerce and economic freedom by ending trade barriers rather than erecting them.” Well, yeah, maybe he could.  But so far Trump has only increased trade barriers, more are coming, and there are no negotiations underway—with anyone—aimed at lowering tariffs or other barriers to trade.  But just close your eyes and imagine.

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Why All Went Quiet on the Western Trade Front

Although many hailed last week’s “trade agreement” between President Trump and European Commission President Jean-Claude Juncker as an important achievement, it included no firm commitments to reduce tariffs, non-tariff barriers, or subsidies—or to do anything for that matter. The only agreement of substance was that new tariffs would not be imposed, while Washington and Brussels negotiated longer-term solutions to problems both real and imagined.

Those hungering for some good trade news might call that progress, but the only new tariffs that were under consideration (outside the exclusive domain of the president’s head) were those related to the Commerce Department’s investigation into the national security implications of automobile and auto parts imports. Of course, that investigation is still proceeding and there’s no reason to think Trump won’t leverage the threat of imposing auto tariffs to bend the outcome of those EU negotiations in his favor.

So what does Trump want? Trump seems committed to prosecuting a trade war with China and he expects the EU to have his back in that fight. Trump’s tariffs on $34 billion of Chinese products are scheduled to expand to $50 billion in early August and potentially to $250 billion in September. In a recent CNBC interview, Trump even threatened to subject all Chinese goods—more than $500 billion worth of imports in 2017—to additional tariffs.

For the first $34 billion, China has retaliated in kind, targeting mostly agricultural, aquaculture, and meat products. Beijing has pledged to go tit-for-tat throughout, even though its retaliation would have to take other forms—such as penalizing U.S. multinationals operating in China—because annual U.S. exports to China are in the neighborhood of only $130 billion.

The only real factor constraining Trump’s trade war is the potential that workers in red states will abandon the cause and turn on him. But so far, even as domestic production and employment are threatened as a consequence of the tariffs and the retaliation, Trump’s base still seems to be supporting his unorthodox, zero-sum approach to trade. Last month, a worker at Wisconsin’s Harley-Davidson facility, which will be downsizing as the company shifts production to Europe as a result of the EU’s retaliatory tariffs, said of Trump: “He wouldn’t do it unless it needed to be done, he’s a very smart businessman.” That worker and many others agree that the United States should be throwing its weight around to obtain a larger slice of the pie—even if that process ends up reducing the overall size of the pie.

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The Hidden Costs of Tariffs

This news report from the Washington Post is a striking example of the absurd costs of complex tariff systems:

Brand-new Ford Transit Connect vans, made in Spain, are dropped off at U.S. ports several times a month. First, they pass through customs — and then workers hired by the automaker start to rip the vehicles apart. The rear seats are plucked out. The seat belts in back go, too. Sometimes, the rear side windows are covered with painted plates. Any holes left in the floor are patched over. 

Why? Because there’s a 25 percent tariff on imported pickup trucks and work vans, but only a 2.5 percent tariff on passenger vans. So even with all the extra effort of building a passenger-quality van, and then dismantling it, it’s still cheaper to do that than to pay a substantial tax on the import. 

The story is also a reminder of how bad policies can linger for decades. In the early 1960s Europeans increased their purchases of American chicken. European governments responded by imposing tariffs on chicken imported from the United States. In retaliation, President Lyndon B. Johnson imposed a 25 percent tariff – known as the “chicken tax” – on potato starch, dextrin, brandy, and light trucks. Tariffs on the other products were eventually lifted, but the high tax on light trucks remains. Thus the counterproductive construction and destruction. And by the way, this is no secret; the Wall Street Journal wrote about Ford’s practice in 2009.

The Post goes on to report:

Tariff engineering has a long history.

In the 1880s, the Supreme Court ruled it was acceptable for a sugar importer to intentionally darken refined sugar with molasses to lower the grade and secure a lower duty. Three decades later, the court took up the case of a company accused of trying to evade a 60 percent duty on strung pearls by instead shipping loose pearls with holes pre-drilled for stringing. Those faced only a 10 percent duty….

For example, some athletic shoes, such as Converse All-Stars, come with just enough fuzzy cloth on the rubber soles to qualify them as lower-duty slippers. In the early 1980s, the United States imposed a tariff on motorcycles with engines larger than 700 cubic centimeters in a bid to protect U.S.-based Harley-Davidson, so Japanese companies turned to making 699-cubic-centimeter motorcycles instead.

[See https://www.cato.org/publications/policy-analysis/taking-america-ride-politics-motorcycle-tariffs]

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U.S. Maritime Sector Among the Jones Act’s Biggest Victims

Monday of this week marked the Day of the Seafarer, an occasion meant to recognize the critical role played by mariners in the global economy. American seafarers, however, increasingly find little to celebrate. A large source of their travails is the Jones Act. Signed into law 98 years ago this month, the law mandates that cargo transported between two domestic ports be carried on ships that are U.S.-built, U.S.-owned, U.S.-flagged, and U.S.-crewed.

The harm caused by this law is well documented. By reducing competition from foreign shipping options and mandating the use of domestically built ships that are vastly more expensive than those constructed elsewhere, the Jones Act has raised transportation costs and served as a de facto tax on the economy.

Too often overlooked is that the Jones Act has also presided over the decimation of the U.S. maritime sector, the very industry whose fortunes it was meant to promote (an age-old story in the annals of protectionism). The numbers speak for themselves. Since 2000 the number of oceangoing vessels of at least 1,000 tons which meet the Jones Act’s requirements has shrunk from 193 to 99. A mere three U.S. shipyards are capable of producing oceangoing vessels for commercial shipping, and one of them, the Philly Shipyard, is facing a possible shutdown. Europe, in contrast, has roughly 60 major shipyards capable of building vessels of at least 150 meters in length, while the United States has a total of seven such shipyards when those producing military vessels are included.

Both the declining number of Jones Act ships and the struggles of the shipyards that build them are in large part explained by the vastly inflated cost of ships constructed in the United States. According to the Congressional Research Service, American-built coastal and feeder ships—the types of ships commonly used in domestic sea transport—cost between $190 and $250 million, whereas similar vessels constructed in a foreign shipyard cost about $30 million.

One unsurprising consequence of such stratospheric costs is a reluctance on the part of domestic shipping firms to invest in new ships, with U.S. seafarers forced to work aboard vessels that are significantly older than those found in other countries. Excluding tankers (these vessels were subject to a requirement in the wake of the Exxon Valdez oil spill that they be double-hulled by 2015, thus encouraging the purchase of new ships and decreasing their average age), the Jones Act fleet averages 30 years of age—fully 11 years older than the average age of a ship in the merchant fleet of other developed countries. For context, the maximum economic life of a ship in the world market is typically 20 years

International comparisons of specific ship types are even more eye-opening. Jones Act containerships, for example, average more than 30 years old. The international average is 11.5. The only two bulk ships in the Jones Act fleet average 38 years old, while the international average is 8.8. General cargo ships average 34 years of age compared to an international average of 25.2.

Struggling shipyards, a dwindling fleet of old ships, and fewer jobs are now the order of the day in the maritime sector. As Mark H. Buzby, head of the U.S. Maritime Administration, testified before Congress earlier this year, “over the last few decades, the U.S. maritime industry has suffered losses as companies, ships, and jobs moved overseas.” Also addressing members of Congress, one senior union official admitted that “the pool of licensed and unlicensed mariners has shrunk to a critical level.”

This is not a new story. During Operations Desert Shield and Desert Storm, the United States was so desperate for civilian mariners to crew transport vessels that it enlisted the services of two octogenarians and one 92-year-old. Its search for ships was equally frantic, resulting in two requests to borrow a ship from the Soviet Union—and two rejections. Notably, during this conflict a much larger share of U.S. military equipment and supplies was carried by foreign-flagged vessels (26.6 percent) than U.S.-flagged commercial vessels (12.7 percent).

Supporters of the Jones Act often claim the law is vital to assure a strong merchant marine capable of answering the country’s call in times of war or national emergency. Should the Jones Act be repealed, they warn that the maritime industry will enter a dangerous downward spiral. But the record clearly shows that their nightmare scenario, in fact, describes the status quo. It’s time for this law to go, or be significantly reformed.

Toward that end the Cato Institute has unveiled its Project on Jones Act Reform, which will feature a series of policy papers exposing the fallacies and realities of this archaic law. The first of these policy analyses, The Jones Act: A Burden America Can No Longer Bear, is now available and provides an overview of the law, its history, and myriad shortcomings. More such policy analyses will follow both this year and next, along with other commentary pieces about this failed law, so be sure to check back for the latest updates. 

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