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.
President Trump set off another round of Twitter hyperventilation and financial market selling these past 18 hours with his latest threat to assess duties on another $200 billion of Chinese imports. What to make of this?
I see two (and only two) ways of looking at this. You can conclude that Trump is irrational, engaging in rhetoric and taking actions that are inconsistent with his goals, or you can see him as rational. You may not like his goals, but that doesn’t make him irrational. And he may be rational, but that doesn’t mean he’s not misguided. It seems to me, though, that if you think Trump’s irrational, then there’s not much use in trying to make heads or tails of the daily gyrations. There’s no basis, really, for offering much in the way of useful analysis of U.S. trade policy for the next couple of years.
I see Trump as rational, but deeply misguided. His unpredictability is risky and frustrating, but it’s also a staple of his governance. Unpredictability is the most predictable feature of this administration. But Trump’s goal is consistent and predictable. Trump’s goal is to cut deals that make him look Herculaean. The deals he most covets are those that cast him as fixing the trade problem with China and fixing the “worst trade deal ever negotiated,” NAFTA.
From the outset, Trump set his sights on “fixing” the U.S. bilateral trade deficit with China. Is that a worthwhile priority of trade policy? Absolutely not. But Trump is convinced that reducing the deficit is priority number one. He sees his high stakes engagement as worthwhile because he miscalculates the potential benefits and costs of his approach. I see the upside of Trump’s approach as offering potentially smallish benefits (getting China to do something that may benefit U.S. exporters), but the downside (a deleterious trade war that leaves the world in far worse shape) as severe and significant. My own approach would be far more risk‐averse.
Trump wants the Chinese to buy more American goods and services. On its face, this is a reasonable desire for a U.S. president to have. But Trump wants the Chinese government to commit to purchasing more U.S. goods and services, somewhere in the neighborhood of $100 billion to $200 billion per year (which, of course, reinforces the fact that China’s economy is centrally directed, which is the basis for the legitimate problems in the economic relationship in the first place.) Threatened tariffs of 25 percent on $50 billion of imports from China, announced as result of a U.S. investigation into Chinese technology and IP practices, are Trump’s initial leverage in getting the Chinese to commit to more purchases. Beijing’s announced retaliation slightly negates that leverage, but then the administration cracked down on ZTE, the Chinese information and communications technology company that admittedly violated U.S. export control laws by selling certain products to Iran and North Korea, and was cut off from U.S. suppliers of semiconductors and other critical components.
The on‐again‐off‐again‐on‐again sanctions seem to be conditioned on whether and to what extent Beijing commits to purchasing U.S. exports, and that decision now seems to be conditioned upon Trump granting a reprieve to ZTE. Trump has already given ZTE a reprieve on paper (with certain conditions and requirements), but Congress seems to have strenuous objections, and is considering an amendment to the defense authorization bill to prevent Trump’s reprieve from taking effect.
Trump’s latest threat to hit another $200 billion of Chinese products with tariffs is just as much a threat to Congress as it is to China. Either the Chinese will relent and agree to purchase U.S. stuff (without need of reinstating ZTE) and the tariffs will be called off or Congress, fearing (more than Beijing does) a trade war that will take down U.S. manufacturing and agricultural interests and their representative in Washington, will relent on its legislative push to block ZTE. Of course, relenting on ZTE while continuing to treat Canada, Mexico, the EU and other allies as national security threats (especially since that designation has resulted in those countries applying tariffs to U.S. agricultural and manfuacturing exports, too) isn’t going to sit well with Congress either.
So, in order to fix these asymmetries and make Congress and U.S. allies whole (wholer, whole‐ish): Congress abandons its legislation to block ZTE, which gets back in business (with conditions); the U.S.-China tariff war is called off; China signs purchasing orders for $100 billion to $200 billion of U.S. exports; the steel and aluminum tariffs on Canada, Mexico, and the EU are removed; and the NAFTA negotiations are restarted and concluded before the midterms. This gives Trump two major pyrrhic victories that will reinforce his greatness to his base.
Seems to me these are the only outcomes that could remotely explain (if not justify) the ride Trump is taking us on. I see it as misguided, but not irrational.
Former White House economist Gary Cohn expressed concerns yesterday that Trump’s tariffs would erode the benefits from tax reform. Since the on‐again‐off‐again 25 percent tariffs on imports from China are — as of 3:23pm, Friday, June 15, 2018 — “on again,” let me share this back‐of‐the‐envelope analysis that shows why Cohn’s concerns are justified.
Certainly, the additional profits expected from the reduction in corporate rates from 35 to 21 percent could be entirely wiped out for the manufacturing sector. In 2017, according to Census Bureau data, the pre‐tax profits of the U.S. manufacturing sector were $691 billion. At 35 percent, the taxes on paper would be $242 billion. At 21 percent, the average tax bill is $145 billion. So, roughly speaking, the reduction in rates is estimated to be worth about $97 billion in terms of 2017 profits.
Well, in 2017, the value of U.S. goods imports was $2.33 trillion. Commerce Department data show that half of that value was comprised of intermediate goods (raw materials, production inputs, capital equipment) — the purchases of producers, not households. In other words, approximately $1.17 trillion of imports are U.S. costs of production.
If a tariff of, say, 10 percent were imposed on these imports, the cost of production for manufacturers would rise, roughly speaking, by $117 billion. That’s a $117 billion reduction in profits. Meanwhile, assuming foreign governments responded in kind and hit U.S. exports with 10 percent tariffs, manufacturing revenues also would take a hit. U.S. exports of manufactured goods in 2017 amounted to $1.24 trillion. Again, roughly speaking, that 10 percent tariff would reduce U.S. manufacturing revenues by $124 billion. That, too, reduces profits.
The combined effect of the increased costs and reduced revenues comes to a $241 billion reduction in profits (a 35 percent reduction in manufacturing’s 2017 pre‐tax profits). So, ceteris paribus, a 10 percent across‐the‐board tariff would reduce the U.S. manufacturing sector’s profits by about 35 percent. With that kind of “downturn” in profitability, from where would the resources come to make capital investments, build new production facilities and R&D centers, and to offer new employment opportunities?
Let’s apply this ball park estimate to the actual situation on the ground. The tariffs Trump has already imposed or announced (steel and China tech products — leaving out aluminum, washers, and solar panels) subject $100 billion of imports to tariffs of 25 percent. The retaliation so far announced (by China, Canada, Mexico, and the EU) is commensurate — it will be approximately 25 percent on $100 billion of U.S. exports. So, at the moment, $200 billion of U.S. trade is in the crosshairs.
But a new Trump investigation into the national security implications of auto and auto parts imports could add another $600 billion of trade to the mix — $300 billion of imports hit with 25 percent duties and $300 billion of retaliation. The president wants to get the investigation completed before the election in November, so we could be up to $800 billion of U.S. trade by year’s end. (That’s 20 percent of all U.S. goods trade, by the way.)
So, 25 percent duties assessed on $800 billion of trade, approximately half of which would be U.S. manufacturing inputs and U.S. manufactured exports comes out to a combined $100 billion hit on the sector’s profits (25 percent of $400 billion). That eclipses the $97 billion gain from the corporate rate reduction.
While this is all bad news for the economy, I wonder whether the tax‐reform advocates who held their noses and excused Trump’s trade transgressions because tax reform would make everything right will start to speak out. Paging Larry Kudlow, Steve Moore, and Art Laffer.
Various news outlets are reporting that, at midnight tonight, special U.S. tariffs on imports of steel and aluminum from Canada, Mexico, and the European Union will go into effect. This action stems (incongruously and capriciously) from two nearly yearlong investigations conducted by the U.S. Department of Commerce under Section 232 of the Trade Expansion Act of 1962, which found that imports of steel and aluminum “threaten to impair the national security” of the United States. This seldom used statute gives the president broad discretion both to define what constitutes a national security threat and to prescribe a course to mitigate the threat. On both counts, President Trump has abused that discretion.
In March, the president announced his intention to impose duties of 25 percent on steel imports and 10 percent on aluminum imports from all countries. But temporary exemptions were granted to some countries in an effort to extort commitments from them to do their part to reduce the U.S. trade deficit (by selling us less stuff and buying from us more stuff) or to agree to U.S. demands in ongoing trade negotiations (South Korea, Canada, Mexico). The Koreans succeeded by agreeing to limits on their steel exports and by upping the percentage of US‐made automobiles that can be sold in Korea without meeting all of the local environmental standards. Ah, free trade…
Apparently, the Europeans, Canadians, and Mexicans haven’t bent sufficiently to Trump’s will, therefore those countries — those steadfast allies — constitute threats to U.S. national security and will no longer be exempt from the tariffs, which means that U.S. industries that rely on steel and aluminum (imported or domestic) will be hit with substantial taxes to mitigate that threat. Got it?
This announcement comes on the heels of one made earlier this week regarding the “trade war” with China, which is back on 10 days after Treasury Secretary Steve Mnuchin declared it to be “put on hold.” (I guess it was just a rain delay.) On June 15, the administration will publish the final list of Chinese products—about 1,300 products valued at about $50 billion — that will be hit with 25 percent duties. The Chinese government has published its own list of U.S. exports that will be hit with retaliatory duties in China.
So, as has been the case every day for the past 16+ months, the U.S. and global economies (even as they’ve strengthened) remain exposed to the whims of an unorthodox president who precariously steers policy from one extreme to the other, keeping us in a perpetual state of uncertainty. With the Europeans, Canadians, Mexicans, and Chinese all preparing to retaliate in response to these precipitous U.S. actions, at the stroke of midnight we may finally get the certainty of the beginning of a deleterious trade war.
Reactions in the United States to the Trump administration’s announcement on Saturday that it would refrain from imposing new tariffs on imports from China for the time being have been decidedly negative. One would expect criticism from the unions, the steel producers, and old economy manufacturing trade associations. After all, many seemed not the least bit concerned about burdening the economy with 25 percent duties on $50-$150 billion of Chinese imports and retaliation of similar scale against U.S. exports, as long as they secured for themselves a small bag of booty in the process. Trump’s “America-First” brand of economic nationalism was everything they had ever hoped for—and now it may be in retreat.
Likewise, one can understand why the administration’s decision to reconsider its approach to Chinese technology companies and Chinese technology transgressions makes the security hawks unhappy. Many of them have been peddling a self-perpetuating narrative that is one part fact to three parts innuendo, hearsay, and speculation that war (and not just the trade kind) between the United States and China is inevitable, and that there is very little scope for further cooperation. Why, they wonder, would Trump squander the leverage to compel real Chinese reform that was afforded by the results of the Section 301 investigation and ZTE’s existential predicament?
But I am most disappointed by those who present themselves as pro-trade, internationalist, cosmopolitan, and informed, but who seem strangely disappointed that the administration stepped back from the abyss. There was a point when these folks warned about the perils of Trump’s protectionist path, and screamed from the hilltops about how Trump’s unilateralism would kill the World Trade Organization. On Twitter, they goad Trump: “Trump blinked.” “Xi schooled Trump.” “U.S. credibility has been squandered” (as if it was somehow squandered THAT moment). For some of these people, disdain for Trump or the desire to be perceived as the most offended by his behavior is more important than supporting one of his rare decisions to do the right thing.
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.
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