Trade Policy

August 3, 2020 4:47PM

If Only Senator Hawley Could Legislate Away Unintended Consequences

Seeking to prove the old adage about roads and good intentions, Missouri Senator Josh Hawley has recently introduced legislation, The Slave‐​Free Business Certification Act of 2020, that would impose steep fines and other penalties on large companies doing business in the United States, unless they regularly audited their global supply chains and certified that they and their suppliers did not utilize “forced labor.” The bill’s presumed intent is to discourage slave labor around the world – a goal that’s both laudable and, given troubling reports out of China and elsewhere, still quite important. Unfortunately, good intentions don’t usuallynecessarily make good policy, and in this case recent history shows how Hawley’s bill would likely make things worse, not better, for the world’s most vulnerable people.

The Mercatus Center’s Tyler Cowen helpfully summarized the bill’s theoretical flaws in a recent Bloomberg column, noting that the onerous supply chain regulations would most likely cause companies – worried about high compliance costs, bad publicity, and scary penalties – simply to move their supply chains “from the poorest and neediest” countries to wealthier places clearly free of “forced labor” (which, as Cowen helpfully adds, the Hawley bill defines more broadly than slavery). Sadly, forced labor remains somewhat common around the world, but an exodus of multinational capital and business practices from these places would likely lead to worse, not better, labor conditions. And, like most forms of regulatory protectionism, the law also would likely boost largest corporations (i.e., the ones with the in‐​house lobbying, legal and accounting resources to shoulder new compliance burdens) and increase prices for U.S. consumers. This is Trade Econ 101.

We needn’t, however, rely on wonky economic theory to see the likely consequences of Hawley’s legislation. In fact, recent experience with a similar policy – the “conflict minerals” reporting requirements in Section 1502 of the 2010 Dodd‐​Frank Act – shows that, contrary to some some claims that onerous supply chain reporting mandates are easy and effective, their end result would most likely be more, not less, of the very thing the mandates are trying to discourage. Section 1502 was similar to Hawley’s proposal in that it required multinational manufacturers like Apple and Intel to audit and disclose whether their supply chains utilized “conflict minerals” (tantalum, tin, gold or tungsten, which are commonly found in smartphones and other consumer electronics) sourced from the Democratic Republic of the Congo (DRC) or an adjoining country. Section 1502 also had similar intentions: the mining of these minerals reportedly funded warlords and fueled violence in the region, so a supply chain disclosure rule would force multinationals to scrutinize their suppliers and weed out the bad actors, and thus cut off the warlords’ funds.

Unfortunately, the Section 1502 rules proved to be a huge mistake. Shortly after the law entered into force, reports emerged that, instead of complying with the new regulations, global corporations simply abandoned the DRC – and its poor miners and small‐​scale purchasers – entirely. This effective embargo on the region not only devastated it further, but it actually benefited “some of the very [DRC warlords] it was meant to single out,” allowed less‐​scrupulous Chinese manufacturers to move in, and undermined civil society groups working to end horrific violence and poverty in the DRC.

Things didn’t improve in the following years, either. In fact, Hawley’s fellow Republicans in 2013 held a hearing before the House Subcommittee on Monetary Policy and Trade on “The Unintended Consequences of Dodd-Frank’s Conflict Minerals Provision,” at which several participants from across the spectrum advocated for Section 1502’s reform or elimination due to its harmful impact on the DRC. In 2014, dozens of human rights activists and academics called for the provision’s repeal because, while a few industry giants had resumed business in the DRC, most mines remained off limits and millions of Congolese miners remained unemployed (or worse). Meanwhile, armed groups and smugglers continued to thrive.

Subsequent academic work has confirmed these anecdotes – and the activists’ worst fears. A 2016 study found that Dodd‐​Frank conservatively “increased infant mortality from a baseline average of 60 deaths per 1,000 births to 146 deaths per 1,000 births over this period—a 143 percent increase,” likely by reducing mother’s consumption of infant health care goods and services. A separate study from 2016 found that the “legislation increased looting of civilians and shifted militia battles toward unregulated gold‐​mining territories” in 2011 and 2012. Another paper from 2018 found that the policy also backfired in the longer run (2013–2015): “the introduction of Dodd‐​Frank increased the incidence of battles with 44%; looting with 51% and violence against civilians with 28%, compared to pre‐​Dodd Frank averages.” Finally, in late 2019 economist Jeffery Bloem found that “the passage of the Dodd‐​Frank Act roughly doubled the prevalence of conflict in the DRC,” and “[v]iolence against civilians, rebel group battles, riots and protests, and deadly conflict all increase within the DRC due to the passage of the Dodd‐​Frank Act.”

In short, a U.S. law seeking to discourage conflict and suffering in the DRC ended up breeding more it.

It’s a depressing tale of Unintended Consequences that puts a real face on Cowen’s theory and crystallizes the flaws in Hawley’s plan to stop forced labor around the world. It also shows why alternative policies, such as the Xinjiang boycotts and targeted sanctions that Cowen suggests, are a better approach to attacking the serious issues of slavery and human trafficking. Of course, as I noted last year, arguably the best way to improve working conditions for the world’s poorest people is freer trade with least developed countries:

The lowering of U.S. trade barriers, along with American leadership in creating agreements and institutions such as the WTO, has produced immeasurable benefits for the world’s poorest people. As the World Bank noted in its Report on the Role of Trade in Ending Poverty, since 1990, “a dramatic increase in developing‐​country participation in trade has coincided with an equally sharp decline in extreme poverty worldwide,” and the number of people living in extreme poverty has collapsed. Trade has also “helped increase the number and quality of jobs in developing countries, stimulated economic growth, and driven productivity increases.”

A new report from the International Labor Organization provides jaw‐​dropping stats in this regard: Between 1993 and 2018, the share of individuals in low‐ and middle‐​income countries working in extreme poverty fell from almost 42 percent to less than 10 percent — a decline of around 600 million people. Most moved from subsistence farming to formal wage or salary work, providing themselves with first‐​time access to health care and other benefits. And, contrary to popular belief, the job creation in developing countries did not happen primarily in “sweatshop” manufacturing: The share of industrial workers in low‐ and middle‐​income countries almost did not change between 1991 and 2018, with job growth instead coming from sectors such as construction and retail trade; between 1999 and 2017, inflation‐​adjusted real wages in these countries tripled. Child labor is also disappearing: The overall number of child workers (ages five to 17) decreased by approximately 94 million between 2000 and 2016 (from 246 million to 152 million) and is projected to decline by tens of millions more by 2025. These improvements have been especially strong among women and girls, who in many countries faced truly horrible social conditions (hunger, arranged marriages, etc.) before these new jobs existed.

I can’t say I’m optimistic that the Senator – who has elsewhere demonstratedquestionable understanding of trade and forced labor (which U.S. law already restricts) – will learn this economic lesson or the unfortunate history of Dodd‐​Frank and the DRC. Hopefully, his colleagues in Congress will learn about it before millions of the world’s poorest suffer a similar fate.

July 30, 2020 4:35PM

The WTO and Beef Labelling

Yesterday, the Senate Finance Committee held a hearing on World Trade Organization (WTO) reform. There were a number of big picture points discussed, such as the role of WTO dispute settlement and the failure to negotiate new WTO agreements in recent years, but there’s a narrower point that I want to discuss here. Some people seem to think there was a WTO dispute settlement ruling that says one of the following two things: (1) U.S. beef can’t be labelled with its country of origin when it is for sale in stores, or (2) that the U.S. government can’t require beef to be labelled with its country of origin. Sometimes it can be hard to sort out which point they are making, but it doesn’t matter because neither one of those things is true. (This issue comes up every few months on Twitter, and I figure if I explain it thoroughly here, I can just point people to this blog post in the future.)

The issue arose yesterday when Senator Thune stated the following (1:21:16 and then 1:24:39 of the linked video):

In many parts of my home state of South Dakota, and probably some in your home state of Iowa Mr. Chairman, WTO is a bad word.

That’s because South Dakota ranchers feel like the WTO isn’t with them. And I would say, who can blame them, when the WTO has ruled against them in major disputes impacting their livelihoods like the country of origin labelling case.

Still to this day, it makes no sense to most South Dakotans why the t‐​shirt they wear can say made in country Y but in most instances the beef that they eat cannot.

It is very hard to explain why some products that come into the United States are labelled accordingly, but for something that we consume, that we eat, we can’t seem to get a ruling that recognizes that people in this country would like to know where in the world their beef is coming from.

I can see why that would be hard to explain, but it’s not what happened in the WTO disputes brought by Canada and Mexico over country of origin labelling. Let me explain what actually happened.

After failed attempts by the U.S. industry to get anti‐​dumping and countervailing duties imposed on live cattle imports from Canada and Mexico, the industry was able to convince Congress to pass a country of origin labelling statute that was written in such a way that it could serve the purpose of discriminating against those imports. Under the statute, retailers (e.g. grocery stores) would have to include information on the product label about where the cattle was born, raised, and slaughtered (the statute also applied to pork products, but I’m going to focus on beef here). In order to fulfill this requirement, the stores needed the relevant information on origin from the upstream producers, which was costly for the producers to gather when part of their production relied on imports (if they only used U.S. cattle, the record‐​keeping was much easier). The statute itself was worded vaguely enough that it was not completely clear how it would apply, but when the regulations were developed and implemented, it was clear that there would be an extra cost involved where imports made up part of the production. Sometimes that cost was so high that it made financial sense to shift to using only domestic products.

In response to this, Canada and Mexico brought a complaint at the WTO, basically arguing that the measure discriminated against their products through the extra costs it imposed on the use of their (imported) products. On the basis of the evidence presented, when the panel hearing the case looked at the part of the U.S. statute/​regulation dealing with muscle cuts of beef, it found that discrimination existed. On appeal, the WTO’s Appellate Body agreed.

The U.S. then amended the regulation, but not enough to change the impact. The new regulation was also found to be in violation by the panel and then also by the Appellate Body, for the same reasons.

At that point, Canada and Mexico obtained authorization, through a WTO arbitration, to retaliate with trade sanctions. In response, Congress repealed the statute. (The United States could have just accepted the retaliation as a way to rebalance the obligations under the WTO agreements while leaving the statute in place, but it decided that repeal was the better option.)

Now let me mention a couple key takeaways. First, the WTO panel/​Appellate Body rulings do not say that labelling requirements always violate the rules. They simply looked at this particular requirement, carefully considered its design, and found that it violates the rules because of the way it discriminates against imports. There were plenty of ways to structure such a labelling requirement so that it didn’t discriminate against imports. In fact, the first panel looking at the issues here found that the labelling requirement that applies to ground beef (as opposed to muscle cuts of beef) does not violate the rules.

Second, depending on where you shop, you are probably well aware that labelling on beef products is common. A store like Whole Foods indicates the origin of its products, and often does so in more useful ways than the statute here required. “Product of the United States” was one of the categories under the statute, but that is pretty broad and I’m not sure how valuable it is. Whole Foods sometimes tells you the specific farm the beef comes from, which seems much more useful if you really want to know something about how the product has been made.

Summing up, the explanation to Senator Thune and any others is, companies are always free to put origin labels on beef if they want to. That was not at issue at all in the WTO dispute. And the WTO does not prohibit governments from requiring such labels (although it’s not at all clear to me how many people want such labels to be required if it means they have to pay more for the beef, which they will!). What the WTO does prohibit is using domestic regulations as a disguised way of protecting your domestic industry from foreign competition.

July 30, 2020 12:44PM

Mission Accomplished?

“When net exports are negative, that is, when a country runs a trade deficit by importing more than it exports, this subtracts from growth.” — White House senior adviser Peter Navarro and Commerce Secretary Wilbur Ross, 2016

Hmm:

net exports and GDP

(For further insights on the trade deficit and GDP, see my Cato colleague Dan Ikenson’s work here and here.)

July 29, 2020 6:16PM

The Government’s Plan to Turn Kodak Into a Pharmaceutical Company Sure Seems Underdeveloped

The Wall Street Journal reports that Eastman Kodak Co. has received initial clearance for a $765 million loan from the U.S. International Development Finance Corporation (DFC), issued under the Defense Production Act with no congressional input or oversight (or transparency), to produce “starter materials” and “active pharmaceutical ingredients” (APIs) for generic medicines, including the President’s favorite drug hydroxychloroquine. According to the WSJ story, the government financing – if formally committed after due diligence – would allow the (famously-mismanaged) camera‐​turned‐​digital‐​turned‐cryptocurrency company to “change gears” once again and become a “pharmaceutical company,” with this brand new division eventually (supposedly) making up 30% to 40% of Kodak’s entire business.

For the U.S. government, the goal of the loan is to “reduce reliance on other countries for drugs,” especially in case of a pandemic. Although multiple sources identified China as the primary concern (isn’t it always?), White House senior adviser Peter Navarro was more honest about the loan’s actual intent – supply chain “repatriation”:

This is not about China or India or any one country…. It’s about America losing its pharmaceutical supply chains to the sweat shops, pollution havens, and tax havens around the world that cheat America out of its pharmaceutical independence.

President Trump similarly hailed the deal as a “breakthrough in bringing pharmaceutical manufacturing back to the United States.”

Given these statements and the emergency action at issue, you’d think that American pharmaceutical manufacturers are in dire straits or that the United States is now suffering major shortages of critical pharmaceuticals. Fortunately, a review of the available data tells a different story.

First, although solid public stats on global API production are not available, the data we have do not indicate that government funding is urgently needed:

[A]ccording to the Food and Drug Administration, of the roughly 2,000 global manufacturing facilities that produce active pharmaceutical ingredients (APIs), 13 percent are in China; 28 percent are in the USA, 26 percent in the EU, and 18 percent in India. For the APIs of World Health Organization “essential medicines” on the U.S. market, 21 percent of manufacturing facilities are located in the United States, 15 percent in China; and the rest in the EU, India, and Canada.

The FDA adds that the United States was home to 510 API facilities in 2019, 221 of which supply the aforementioned “essential medicines.”

Second, U.S. government data – on output, R&D and capital expenditures (see tables 1–3 below) – show that American pharmaceutical manufacturers are far from the basket case that Navarro describes:

A recent report from the World Trade Organization further notes that, while the United States is indeed a major importer of pharmaceutical products, it’s also one of the world’s largest exporters, having shipped almost $41 billion in medicines (35% of total U.S. medical goods exports) last year. So it’s safe to say that, contra Navarro and Trump, this is hardly an industry in serious distress.

Third, the pharmaceutical supply chain has held up pretty well (so far). Imports of pharmaceuticals that the U.S. International Trade Commission recently deemed critical to fighting COVID-19 have not collapsed in 2020 – in fact, only 16 of 63 products have seen an average monthly decline of more than 20% (by quantity) as compared to the product’s monthly average in 2019. A majority (35) have increased this year – some quite substantially. These are top‐​line estimates in an extremely volatile market so caution is warranted, but they’re still noteworthy, given that the entire world – including major pharmaceutical suppliers in China, Europe, India and elsewhere – was suffering through a generational pandemic for most or all of the months at issue.

Imports, of course, are only one part of the supply chain story (inventories, stockpiles, domestic production and other factors are also relevant). Most importantly, there have been few (if any) signs of major national drug shortages. The last FDA notice on a potential shortage was in late March for the trendy (at the time) hydroxychloroquine – a shortage that never actually materialized. There’s also been no major spike in drugs that the FDA lists as “currently in shortage”: as I noted a few months ago, there were 109 drugs on the list in mid‐​December of last year; 103 in late February 2020; and then 108 in mid‐​April. This week, after months of unanticipated chaos, that number stood at 117 – a little higher, yes, but not a crisis.

All of this raises a host of questions that deserve to be answered before a dollar of taxpayer money is actually sent to Rochester:

  • Even assuming for the sake of argument that sagging domestic API production qualifies as a national emergency, why did Kodak, which has no API or other pharmaceutical experience (though it does make chemicals), receive this government loan, instead of it going to one or more of the hundreds of API facilities already operating in the United States?
  • Which APIs will Kodak’s new venture produce? The DFC press release touting the loan notes that “Kodak Pharmaceuticals will produce critical pharmaceutical components that have been identified as essential but have lapsed into chronic national shortage, as defined by the [FDA].” However, a search of the FDA’s website shows no such term, and FDA’s last “supply chain update” reported no drug, biologic or ingredient shortages at that time. Indeed, the DFC’s statement about Kodak producing an “identified” list of “critical” APIs seemingly contradicts a subsequent one that “[Kodak] plans to coordinate closely with the Administration and pharmaceutical manufacturers to identify and prioritize components that are most critical to the American people and U.S. national security.” So which is it?
  • Why is federal government involvement needed here at all? If a famous, billion‐​dollar corporation has a viable business plan, and if these “critical” APIs have indeed been in “chronic short supply” for American pharmaceutical manufacturers (who, as shown above, have plenty of money to spend), it stands to reason that financial assistance would be available from a private source on reasonable terms (DFC’s express loan condition), and that neither government coordination nor government capital would therefore be necessary. In other words, where’s the market failure?
  • Finally, what’s the urgency here? Kodak’s API production will probably take years to get off the ground, and the data above raise questions about whether it’s even needed. In fact, the FDA has stated (repeatedly) that it needs more information before it could make any definitive conclusions about the global API situation, drug supply chain “resiliency,” and U.S. national security. Private pharmaceutical companies, moreover, are already adapting to a new reality that accounts for lessons learned from COVID-19 (and for worsening U.S.-China trade frictions). Thus, the supply chain issue that Kodak and the Trump administration claim to have identified yesterday might not even exist by the time Kodak Pharmaceutical is operational. The original CARES Act has commissioned a new study of the pharmaceutical supply chain to identify potential vulnerabilities. Maybe government action might (might) be necessary at that time, but until then, the Trump administration seems to be throwing darts blindfolded. Why?

Unfortunately, there’s seemingly no way to know the answers to these questions at this time (though DFC says it eventually “will make detailed project‐​level information publicly available, consistent with applicable law”). This didn’t stop Kodak’s stock from exploding upward this week (some of it a little early?), but hopefully someone in Congress is a bit more skeptical.

July 23, 2020 2:17PM

Does the U.S. Semiconductor Industry Really Need Urgent Taxpayer Support to Stop China?

Today, the United States Senate approved the FY2021 National Defense Authorization Act (NDAA), which contains an amendment passed earlier this week, with little floor debate and by a 96-4 margin, that would provide billions of dollars in new federal support for the U.S. semiconductor industry, most notably tax credits and grants for the construction of new domestic manufacturing facilities. The House passed a similar bill with a similar amendment earlier this week, so the legislation now goes to conference, where the subsidies are expected to survive.  The two main reasons for the Senate and House amendments (formerly a standalone bill called the “CHIPS Act”), as helpfully summarized by House co-sponsor and Foreign Affairs Committee Ranking Member Michael McCaul (R-TX), are (1) to boost U.S. semiconductor manufacturing and jobs and (2) to prevent China from “dominating” the global semiconductor market:

Ensuring our leadership in the future design, manufacturing, and assembly of cutting edge semiconductors will be vital to United States national security and economic competitiveness. As the Chinese Communist Party aims to dominate the entire semiconductor supply chain, it is critical that we supercharge our industry here at home. In addition to securing our technological future, the CHIPS Act will create thousands of high-paying U.S. jobs and ensure the next generation of semiconductors are produced in the US, not China.

Similarly dire, China-centric statements have been issued by other supporters in Congress (see, e.g., these from Senators Doug Jones (D-AL), Tom Cotton (R-AR), or Chuck Schumer (D-NY)), most of whom – unsurprisingly – appear to have semiconductor manufacturers in their states or districts that stand to profit from the new taxpayer funds. (Schumer’s statement, in classic fashion, actually emphasizes how this cash will help New York companies.)

The congressional statements, urgency and near-unanimity would lead a casual observer to believe that the U.S. semiconductor industry is in a truly-desperate position, hobbled by a heavily-subsidized, globally dominant China and in dire need of a massive and immediate injection of government support. That would not, however, be the reality – even assuming (erroneously) that “reshoring” global supply chains advances actually national security. Instead, numerous facts and analyses show the U.S. semiconductor industry to be in pretty good shape and the Chinese industry – while certainly subsidized – to not be the dangerous juggernaut that our elected officials claim.

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July 20, 2020 7:10PM

We’ll Do Anything for American Innovation, But We Won’t Do That

It seems that everywhere you turn these days you’ll find someone in Washington lamenting the collapse of American innovation and industrial output, and, naturally, proposing his own industrial policy to solve the alleged problems. This includes both President Trump and Democratic challenger Joe Biden, both of whom have promised all sorts of subsidies, protectionism and procurement mandates intended to reinvigorate the American industrial base and restore U.S. innovation supremacy. What these plans have mostly failed to emphasize, however, is how freer markets – especially the liberalization of U.S. trade and immigration restrictions – might help to achieve key industrial innovation objectives (without messy and costly central planning) or how they’ve been harmed by past U.S. government restrictions.

A new NBER Working Paper from Wharton’s Britta Glennon adds to a growing body of literature showing just how wrong‐​headed the candidates’ omission of these free market policies might very well be. In particular, Glennon shows that past U.S. restrictions on high‐​skilled immigration (implemented through caps on H1-B nonimmigrant visas) resulted not in an increase in hiring American workers but instead in a substantial offshoring of multinational corporation (MNC) jobs and R&D activities to these companies’ affiliates in more welcoming countries. Perhaps even more concerning, given recent events at home and abroad, Glennon shows that one of the biggest beneficiaries of these U.S. immigration restrictions was China, and that U.S. firms doing the most R&D offshored the most jobs.

Glennon’s conclusions are worth quoting at length (emphasis mine and citations omitted):

[F]oreign affiliate employment increased as a direct response to increasingly stringent restrictions on H-1B visas. This effect is driven on the extensive and intensive margins; firms were more likely to open foreign affiliates in new countries in response, and employment increased at existing foreign affiliates. The effect is strongest among R&D-intensive firms in industries where services could more easily be offshored. The effect was somewhat geographically concentrated: foreign affiliate employment increased both in countries like India and China with large quantities of high‐​skilled human capital and in countries like Canada with more relaxed high‐​skilled immigration policies and closer geographic proximity. These empirical results also are supported by interviews with US multinational firms and an immigration lawyer.

Despite the outsized role that multinational firms play in the economy – for example, US multinational firms are responsible for 80% of US R&D and employ about ¼ of US private employees – policy debates surrounding immigration have largely overlooked the fact that multinational companies faced with decreased access to visas for skilled workers have an offshoring option, namely, hiring the foreign labor they need at their foreign affiliates. This is the first paper to provide evidence that multinational firms do in fact utilize this option – both at the extensive and the intensive margin – and to examine the relationship between foreign affiliate employees and immigrants, in contrast to the relationship between immigrants and native‐​born workers.

The results have important implications for understanding how multinational firms respond to artificial constraints on resources and how they globally re‐​distribute those resources. The results also have important policy implications; the offshoring of jobs appears to be an unforeseen consequence of restricting skilled immigration flows. Even if H-1B immigrants displace some native workers, any policies that are motivated by concerns about the loss of native jobs should consider that policies aimed at reducing immigration have the unintended consequence of encouraging firms to offshore jobs abroad.

The finding that skilled foreign‐​born workers will be hired at foreign affiliates rather than in the US also has important implications for the innovative capacity of the US. Skilled immigrants have been shown to have outsized impacts on innovation in the host country through spillovers. The spatial diffusion of these spillovers disappears with distance since innovative spillovers are geographically localized. From a nationalistic perspective, this is problematic; if skilled foreign‐​born workers are at a US firm’s foreign affiliate instead of in the US, the innovative spillovers that they generate will go to another country instead. Furthermore, the finding that immigrants often are not equally innovative outside the United States has even wider welfare implications. In short, restrictive H-1B policies could not only be exporting more jobs and businesses to countries like Canada [me: and China], but they also could be causing the U.S.’s innovative capacity to fall behind….

Vice President Biden, to his credit, has elsewhere supported “expanding the number of high‐​skilled visas and eliminating the limits on employment‐​based visas by country” in order to boost “American innovation and competitiveness.” Hopefully the Team Biden folks writing the campaign’s immigration plans can talk some sense into their colleagues writing the industrial policy plans, and perhaps even explain how freer access to all global resources – whether high‐​skilled labor or essential goods like steel and machinery – can boost American companies’ innovation, output and global competitiveness while simultaneously denying potential adversaries those same advantages. As Glennon notes, multinational corporations that drive American R&D have other production options abroad, and they’ll use those options when misguided U.S. policies push them to do so.

Unfortunately, President Trump’s longstanding aversion to increased immigration or freer trade – and recent Trump administration efforts to restrict those things even further – provide little opportunity for similar liberalization hopes in the coming weeks or during any second Trump term. To paraphrase a great American poet, they’ll do anything to boost American innovation (or to counter China’s rise), but they won’t do that.

July 15, 2020 9:50PM

Congress Acquiesces to Tariffs by Fiat

This post is to call your attention to a brand new paper of mine titled “Tariffs by Fiat: The Widening Chasm between U.S. Antidumping Policy and the Rule of Law.” First, some background.

Article 1, Section 8 of the U.S. Constitution gives Congress authority “to lay and collect Taxes, Duties, Imposts and Excises…and to regulate commerce with foreign nations.” From the founding of the republic until the early 20th century, the separation of powers with respect to trade policy held up reasonably well. Congress controlled trade policy—mostly through tariff bills—and the president was consistently and properly deferential.

The changing demands of a rapidly industrializing and expanding 20th century economy, including greater commercial interest in foreign markets, encouraged Congress to write and pass new laws both to facilitate and frustrate trade. Of course, new laws meant an expanded administrative role for the executive branch.

Especially following World War II, as tariffs were lowered and international trade increased, Congress wanted to be sure domestic industries had recourse to new tariffs under certain circumstances, such as to respond to so‐​called unfairly traded imports (antidumping and countervailing duty laws), a surge of imports that might cause serious injury to a domestic industry (Section 201 of the Trade Act of 1974), unfair foreign practices abroad that impeded U.S. trade (Section 301 of the Trade Act of 1974), and threats to national security (Section 232 of the Trade Expansion Act of 1962 and the International Emergency Economic Powers Act of 1977), to name some.

The president was widely perceived as being more capable of responding with dispatch to these urgent matters, less prone than Congress to parochial or reactionary protectionism, and more likely to be mindful of the national interest. So, the legislative branch acquiesced in this larger role for the executive.

Under most of those laws, Congress imposed conditions to circumscribe the president’s actions—requirements of affirmative evidence of injury caused by import surges; time limits after which measures would expire; limits to the types and magnitudes of the remedies imposed; judicial review, etc. The national security laws came, as it turns out, without many conditions or constraints placed on the president.

Last week I moderated a discussion about the erosion of the separation of powers on trade policy. My guests were two of the attorneys who, on behalf of the American Institute for International Steel, challenged the constitutionality of Section 232 of the Trade Act of 1962, which gives the president authority to restrict trade in response to a perceived threat to national security. Infamously, President Trump invoked this law to impose and maintain (to this day) tariffs on imported steel and aluminum, and he has threatened to impose tariffs on automobiles under the same authorities.

The plaintiffs in the case, which ended with the Supreme Court declining to hear the appeal late last month, wrote a compelling brief (as did Cato’s Ilya Shapiro and Will Yeatman) arguing that Section 232, by giving the president carte blanche to define a national security threat and to respond to that threat however he sees fit, amounts to an unconstitutional delegation of legislative authority. The law, they argued, includes no “intelligible principle” to guide the president’s actions, which courts have looked for in deciding whether the non‐​delegation doctrine has been violated.

Unfortunately, even when laws are constitutional, they can contain unwise, vague, lazy, or deferential language that often bestows extraordinary amounts of discretion on the administering agencies. The courts, then, can do very little to rein in all but the most egregious abuses of that discretion because of the primacy of legal precedents that give vast latitude to agencies to administer reasonable interpretations of the law. The courts are not to blame for executive abuses of the trade laws; Congress is.

That brings us to the next example, which concerns recent changes to the U.S. antidumping law. In this new paper, I provide some background about the evolution of U.S. antidumping policy before homing in on some egregious changes made to the law in 2015, especially those concerning what the Commerce Department can do when it finds a so‐​called “Particular Market Situation” (PMS). The antidumping law has long afforded Commerce vast discretion over consequential, in‐​case decision‐​making, even though (as I note in the paper) the Commerce Department also “counsel[s] U.S. industries on how to petition the U.S. government to seek relief from injurious and unfairly traded imports.” There is a clear conflict of interest.

The U.S. courts have been helpful (to an extent) at curbing the government’s worst abuses of that discretion, but the new provisions under the statute seem to give Commerce seemingly endless latitude to reject record information submitted by respondents without having to meet even the slightest conditions. This will prove a formidable barrier to judicial review of bogus, politically‐​driven administrative decisions in antidumping cases going forward. Ultimately, a braver Congress than we have had for many years will have to do its part to rein in the powers it has unwisely (and, possibly, unconstitutionally) bestowed upon the president.

The PMS issue is raising its ugly head in other countries too, as other governments have been building out and weaponizing their own antidumping rules. As predicted, U.S. exporters increasingly are getting ensnared in those “coming home to roost” rules. A World Trade Organization panel even ruled against Australia in December 2019 in a case in which it invoked PMS to cook the books and generate higher dumping margins on Indonesian exporters of A4 Copy Paper. My paper does not get into the WTO issues mostly because of space constraints, but also because in the current international trade environment, I fear a WTO ruling against a member’s antidumping practice will have the perverse effect of warming certain U.S. policymakers to that practice. It would have the opposite effect I am hoping my paper will inspire.

Ultimately, we will need a Congress that is braver, more committed to preserving the separation of powers, and more willing to assert its Article I authorities than we have had in many, many years.