Given the centrality of trade policy to President Trump’s time in office and re‐election campaign, much has been written about the successes and (more often) failures of the President’s tariffs and resulting trade conflicts, which began in 2018 and accelerated in 2019. The Wall Street Journal today, for example, assesses the President’s “unfinished” trade plans by looking at their effect on manufacturing jobs and economic growth. Numerous other reports — several of which I summarized in a recent article — take a similarly narrow approach when determining who “won the trade war.”
Although such analyses helpfully show some of the ways the President’s trade policies have been ineffective or harmful, they ignore a critical part of the last four years of Trump Trade Wars (and any other period of U.S. trade policy): the political dysfunction that that such protectionism always breeds. In the current case, there’s likely no bigger example of this dysfunction than the billions of dollars in new federal subsidies that the Trump administration has provided — with essentially no congressional oversight — since 2018 to politically‐important American farmers who were harmed by (totally expected) foreign retaliation against U.S. agriculture exports. AAF’s Doug Holtz‐Eakin today details just how dependent on the government these farmers have become, showing that well over 100 percent of the increase in U.S. farmers’ net income between 2017 and 2019 ($9 billion) came from subsidies — “federal direct payments” — tied to Trump’s tariffs ($10.9 billion):
According to Politico, direct farm aid in 2020 is scheduled to hit $32 billion — “an all‐time high, with potentially far more funding still to come… amounting to about two‐thirds of the cost of the entire Department of Housing and Urban Development and more than the Agriculture Department’s $24 billion discretionary budget” — and many experts fear that “Washington could have a difficult time shutting off the spigot” in the future. Some of these funds are tied to the recession and COVID-19, but most simply wouldn’t exist but for the President’s tariffs and, of course, the subsequent lobbying:
Not all farmers received special payouts during the last three years, but the Trump administration has recently moved to ensure that those in critical states do not miss out. That includes the tobacco industry, which was prohibited from receiving any of the trade assistance because of legal restrictions against subsidizing the sector. In September, the Agriculture Department quietly shifted some of the funds that were allocated to its Commodity Credit Corporation fund — which legally cannot subsidize tobacco — into a separate account that can bankroll the crop. Tobacco farmers will receive up to $100 million in payments, easing some of the financial pain that has been felt particularly hard in the battleground state of North Carolina.…
Graham Boyd, the executive vice president of the Tobacco Growers Association of North Carolina, secured subsidies for his crops after his group and lobbyists from other tobacco growing states demonstrated to the Agriculture Department that farmers were losing hundreds of millions of dollars per year in lost exports to China. North Carolina is America’s largest tobacco growing state and China was its biggest customer, but since 2018 Beijing has not bought American tobacco.
Any assessment of the tariffs and “trade wars” is thus incomplete without a thorough accounting of the immediate and long‐term cost of these subsidies — and other government efforts to paper over the inevitable problems that the President’s trade policies created — for both the economy and our political system.
Maybe trade wars aren’t good and easy to win after all.
Last week, the Wall Street Journal examined government efforts to secure early access to doses of the most advanced COVID-19 vaccines, and how this access could prove to be a game‐changer for these economies in 2021. As shown in the following WSJ chart, many governments have contracted with multiple pharmaceutical companies in order to ensure that they have access to at least one vaccine that successfully completes “Phase III” trials, which are now underway for most of the listed drugs. Among these governments is the United States, which has thus far secured vaccine commitments from Oxford/AstraZeneca (0.91 doses per capita); Novavax (0.3); Sanofi/GSK (0.3); BioNTech/Pfizer (1.83); J&J/Janssen (0.3); and Moderna/NIAID (1.52). This puts the United States second, behind only the United Kingdom, in contracting for early vaccine doses and thereby potentially saving thousands of American lives and restarting the struggling domestic economy if one or more of those vaccines pans out.
Beyond the sheer size and scope of the U.S. effort, what’s perhaps most striking here is the extent to which the Trump administration jettisoned its economic nationalism in pursuit of a game‐changing COVID-19 vaccine. Indeed, as shown in the chart below (based our own independent research), each of the vaccines that the United States has secured appears to be heavily reliant on globalization — of investment, manufacturing, testing, and research personnel — to produce the final doses at the absolute maximum speed and scale.
This summary, moreover, is only the tip of the iceberg when it comes to the truly‐global effort to beat COVID-19. Unmentioned in the chart above, for example, are all of the other people from around the world — investors, researchers, production workers, etc. — that make the listed companies, facilities and processes hum, as well as the previous global collaborations that have driven pharmaceutical innovation for decades.
Also unmentioned are the numerous other vaccine candidates that are in earlier stages of development. For example, a recent survey by the Coalition for Epidemic Preparedness Innovations (CEPI), which is working with the World Health Organization to ensure global access to a COVID-19 vaccine, showed over a hundred potential manufacturers of both vaccine‐related drug substances (inputs) and drug products (doses) located in dozens of countries around the world (including, of course, the United States):
Since the unfortunate onset of COVID-19, American politicians of all stripes — but especially in the Trump administration — have blamed “globalization” for the pandemic and promised to re‐shore U.S. manufacturing to bolster American “resiliency” and national security. Yet these very same officials have quietly embraced that very same globalization when it matters the most.
Bloomberg today (emphasis mine):
Midwest prices for diammonium phosphate, or DAP, jumped 29% in the third quarter, the most since 2010, according to a Green Markets index. Prices for a lower concentration phosphate fertilizer also surged the most in a decade, by 34%. The two chemicals make up the primary component for many phosphate‐based fertilizers used by American crop farmers.
Prices spiked after U.S. fertilizer firm Mosaic Co. petitioned the U.S. Department of Commerce and U.S. International Trade Commission in June, saying that fertilizer imports from Morocco and Russia were unfairly subsidized. That prompted an investigation and raised the prospect of countervailing duties. The two countries are the largest sources of the commodity for the U.S. in the most recent crop year, through June.
Politico in July:
Government payments to farmers have surged to historic levels under President Donald Trump as the Agriculture Department floods the industry with cash to stem the financial losses from Trump’s tariff fights and the coronavirus pandemic.
But as agriculture grows more reliant on unprecedented taxpayer support, farm policy experts and watchdog groups warn the subsidies are growing too big and too fast, with no strings attached and little oversight from Congress—and that Washington could have a difficult time shutting off the spigot.
No word yet on whether other foreign producers are on Double Secret Probation.
(Chart via IFPRI’s Joe Glauber.)
Yesterday, President Trump invoked his authorities under the International Emergency Economic Powers Act (IEEPA) to deem U.S. dependence on imports of “critical minerals” from foreign adversaries a national emergency. Among those minerals are so‐called rare earth elements, which are inputs used in the production of high technology and defense‐related equipment and systems.
In a statement to Congress announcing his executive order, the president noted, “Though these minerals are indispensable to our country, we presently lack the capacity to produce them in processed form in the quantities we need… [Our] national security, foreign policy, and economy require a consistent supply of each of these minerals.”
The EO instructs the Secretary of the Interior (in consultation with the Departments of Treasury, Defense, and Commerce) to investigate the degree of U.S. reliance on critical mineral imports and submit a report to the president in 60 days. That report should recommend executive actions, “which may include the imposition of tariffs or quotas or other import restrictions against China and other non‐market foreign adversaries whose economic practices threaten to undermine the health, growth, and resiliency of the United States, or other appropriate action, consistent with applicable law.”
The specter of China restricting its exports of rare earths to the United States in response to the ever‐tightening U.S. restrictions on exports of semiconductors, semiconductor manufacturing equipment, and other high‐tech components to China is a real possibility—one of the significant costs Huan Zhu and I warned about, when the administration was considering broadening its restrictions earlier this year (which it did). Indeed, China has already demonstrated willingness to leverage its dominance in the production of rare earths back in 2010, when it refused to export the critical minerals to Japan in response to Tokyo’s detention of a Chinese ship. Subsequently, China imposed broader export restrictions on rare earths and other minerals that lead to formal challenges at the World Trade Organization by the United States, Japan, and the European Union, resulting, ultimately, in Beijing withdrawing its offending practices.
Now that the WTO dispute settlement process is defunct—thanks to U.S. actions and inactions—and the access of Chinese companies to U.S. semiconductors and other technology has been severely hampered by U.S. export restrictions, Beijing calculations have surely changed.
Over the past few decades, U.S. manufacturers of advanced electronics, medical equipment, automotive batteries, vehicles, green energy components, and nearly every advanced weapons system, including Tomahawk missiles and F-35 fighters have grown increasingly dependent on Chinese sources for rare earths. In 2018, China accounted for 71 percent of the volume of rare earths produced globally and 74 percent of the volume of U.S. imports.
It’s not that rare earths don’t exist in the United States, but that domestic production became less viable because U.S. production costs were relatively high, and the regulatory costs of U.S. mining and refining operations were increasing. Extraction and processing of rare earths requires techniques considered especially taxing on the environment and have been subject to fairly tight regulations in the United States and in most other developed countries.
As inputs to some of our most sophisticated technology and defense systems, rare earths are vital to U.S. economic security and defense. The administration and Congress already know this, and they already know that U.S. manufacturers depend significantly on Chinese refined rare earths. Fifteen months ago, the Commerce Department released a report required by a December 2017 executive order aimed at creating a “Federal Strategy to Ensure Secure and Reliable Supplies of Critical Minerals,” which found the United States to be “import‐reliant (imports are greater than 50 percent of annual consumption) for 31 of the 35 minerals designated as critical by the Department of the Interior.”
That brings us to an obvious question: Why tariffs or other import restrictions? We already know domestic rare earths are in short supply. We already know our dependence on imports from China is significant. We already know tariffs are taxes. We already know that when you tax something, you get less of it. Well, on more than one occasion, U.S. Trade Representative Robert Lighthizer has argued that tariffs are a legitimate tonic for excessive dependence on imports. He argues that tariffs—on medical equipment, for example—will encourage domestic capacity building and production. Well, maybe after a long period of high tariffs, some intrepid investor will take note of the rents to be had and be willing to absorb the higher production and regulatory costs to build production facilities in the United States. Of course, that portends much higher costs and a reduction of national welfare, but maybe that’s a justifiable part of the price of purchasing more (or the perception of more) economic and national security.
Excessive dependence on any one source is a recipe for perpetual uncertainty and risk. The optimal response to uncertainty is diversification. Restricting imports to compel supply chain repatriation and autarky is not diversification. It’s just another form of dependence at higher cost.
Instead of import restrictions, the tools of U.S. policy should aim to remove the unnecessary impediments to producing and refining domestically, while working with other countries to do the same. When national security is legitimately and convincingly demonstrated to be exposed to the risk of supply shortages, policy should encourage domestic stockpiling and a program to oversee its efficient, non‐market distorting operation.
This recent Bloomberg piece written by former Defense Secretary James Mattis and others offers some good ideas and provides more background and a lot of important facts about the production, refinement, and consumption of rare earth minerals.
It is commonly assumed on the left and (increasingly) the right that free markets boost—and that government regulation checks—the growth and market power of large corporations. Liberalized international trade and investment policies, in particular, are often criticized by market skeptics as a tool that Big Business uses to entrench its dominant position to the detriment of workers and potential competitors. Libertarians and other free market advocates, of course, believe much the opposite: that free market competition fuels “creative destruction”—i.e., the economically‐valuable displacement of old, large companies by new competitors, as first described by economist Joseph Schumpeter—and thus serves as a powerful check on Big Business, which often lobbies for and benefits from trade restrictions and other government regulations that discourage new market entrants.
A new paper from economists Mara Faccio and John McConnell of Purdue University provides strong new support for the “libertarian” view. Examining data for 75 countries (including the United States) since 1910, they find—
- Consistent with Schumpeter’s proposition, the displacement of old, large firms is the norm in each of the time periods considered, but exceptions to the creative destruction rule do exist. In fact, 13.6 percent of the 20 largest firms in each country remained in the top 20 a hundred years later; 25 percent of the largest firms in 1980 remained dominant in 2018; and 43.8 percent of the top 20 remained from 2000 to 2018.
- The most important predictor of a firm being an exception to the creative destruction norm is political connections (as measured by the presence of government officials, or people connected to officials, in senior management). In particular, the authors find that “[h]aving a political connection increases the probability that one of the 20 largest firms in 1910 remains among the 20 largest firms in 2018 by 11.5 percentage points” – a “very sizable” effect that is “both economically and statistically significant.” This relationship remains strong in the other, more recent period examined (2000–2018).
- Regulatory barriers to market entry enable politically‐connected firms to remain dominant over the long term. In particular, the authors find a strong and statistically significant relationship between restrictions on cross‐border trade and investment and the likelihood that politically‐connected large firms are just as powerful decades later. By contrast, trade and investment openness checks Big Business: “[P]olitical connections facilitate the ability of big companies to remain or become big only when their home country is closed to both trade and capital flows. The presence of regulatory barriers to entry appear to be a necessary condition for politically connected firms to remain or become dominant.”
Based on these findings, the authors conclude (emphasis mine)—
[P]olitical connections enable big businesses to remain large, particularly when regulatory barriers to cross‐border entry and cross‐border capital flows are in place. The implication is that in an unimpeded market the Schumpeterian process of creative destruction of large firms is likely to prevail. To the extent that it does not, the data suggest that it is because the political process impedes entry.
When skeptics criticize “free markets,” the markets at issue are usually not very free at all. Indeed, the conclusions above are utterly unsurprising to free traders who have for years watched large, well‐connected corporations capture the administrative state and use regulation to restrict foreign competition and maintain power. If the markets were free (or, at least, freer), and large companies were forced to compete without the government’s thumb on the scale, Big Business’ market power could be significantly checked. You’d think such a result would be welcomed by the populist right and left, but progress (especially these days) is often thwarted by emotional antipathy to markets and “globalism” more broadly. As a result, un-free markets proliferate, and corporate power increases—ironically fueling populist calls for the very government action that increased it in the first place.
A few weeks ago, I noted that Congress had just earmarked billions of taxpayer dollars for American semiconductor manufacturers to counter the alleged (and thus far empty) national security threat posed by heavily‐subsidized Chinese competitors. The U.S. subsidies, as you can imagine, have been cheered by both conservative fans of industrial policy and the semiconductor industry, which just released a new report on how “government incentives” will (obviously) help (historically healthy and productive) U.S. semiconductor companies somehow “turn the tide” against China. A recent writeup in The Protocol sets out the industry’s response to critics like me:
[Semiconductor Industry Association CEO John] Neuffer sought to address some of the biggest criticisms of the plan. “There’s this concern that it’s a race to the bottom with subsidies,” he said, referring to the idea that China and the U.S. could keep upping subsidies ad infinitum. “Well, that race began 20 years ago, and we’re still standing at the starting line saying ‘Gee, I wonder if we should get into the race.’ ”
Well then. Now, leaving aside the questionable (at best) efficacy of both the current Chinese subsidies and past U.S. government support for our semiconductor industry, as well as the economic and legal (trade law) concerns raised by the “global subsidies race” more broadly, what’s perhaps most striking about the current push by the politicians, the economic nationalists, and the lobbyists to bolster U.S. chipmakers is the absence of any discussion of one actual policy that has been actually proven to supercharge the industry and is being hobbled by the federal government as we speak: high‐skill immigration. Indeed, a new Georgetown University report underscores the importance of immigration for the semiconductor industry, finding that–
- Approximately 40 percent of high‐skilled semiconductor workers in the United States were born abroad. India is the most common place of origin among foreign‐born workers, followed by China.
- In 2011, 87 percent of semiconductor patents awarded to top U.S. universities had at least one foreign‐born inventor. Between 2000 and 2010, the United States enjoyed a net influx of about 100,000 electrical engineering patent holders, while India and China saw large net outflows.
- International students comprise around two‐thirds of graduate students in electrical engineering and computer science, the top educational fields feeding into the U.S. semiconductor industry among green card applicants. The number of American students enrolled in semiconductor‐ related graduate programs (around 90,000) has not increased since 1990. In that same period, the number of international students nearly tripled from 50,000 to 140,000.
- More than 80 percent of international Ph.D. graduates from semiconductor‐related fields at U.S. universities stay in the country after completing their degrees. Stay rates are highest among Indian and Chinese doctoral recipients.
Clearly, high‐skill immigration (both workers and students) has been a boon for the American semiconductor industry — a finding consistent with analyses showing how educated immigrants boost U.S. innovation and productivity more generally. (As well as past work by the SIA.) By contrast, new research reveals that past high‐skill immigration restrictions push U.S. multinational corporations to move their R&D activities offshore, to increase these activities in other countries (including in China), and thus to diminish the United States’ own innovative capacity. This outcome is particularly relevant for U.S. chipmakers and their current concerns about China: human capital is arguably the Chinese semiconductor industry’s biggest hurdle, and the Georgetown paper finds that “China has so far struggled to attract talent from the United States” and to retain that talent once it’s on the mainland. As such, “[l]arge reductions in the flow of talent between China and the United States would likely be welcomed by Chinese policymakers.” Indeed.
Unfortunately, the Trump administration and its allies are not just ignoring high‐skill immigration, but actively working to restrict it further — even as COVID-19 hasn’t boosted unemployment in the U.S. tech sector. Given these facts, as well as the alleged threat facing the U.S. semiconductor industry (and by extension national security), you’d think that the ones making such allegations — in Congress, the industry, and the policy community — would at least mention immigration instead of just cheering for subsidies.
Or maybe the China threat just isn’t as big as they claim?
A panel ruling last week from the World Trade Organization that U.S. tariffs imposed on Chinese products beginning in 2018 violate WTO rules is both unsurprising and—I’m sorry to say—unimportant. By acting as judge, jury, and executioner, the Trump administration clearly breached the most basic rules of the trading system. The essence of the covenant among WTO members is to deter what is rightly described as vigilantism, where a member decides for itself that it is aggrieved by another member’s practices and unilaterally metes out rough justice in the form of trade restrictions. It affirms the rule of law over the law of the jungle.
Under WTO rules, a member that believes it is aggrieved by another member’s practices must file a formal complaint and—absent resolution following formal consultations—present its claims to a dispute panel, which hears from both sides and renders findings with respect to those claims. Ultimately, if a member found to be in violation of an agreement fails to come into conformity, then retaliation (the “withdrawal of concessions,” in diplomatese) can be authorized by the WTO. Accordingly, regardless of whether you or I or U.S. Trade Representative Robert Lighthizer believes the Chinese practices that gave rise to the U.S. tariffs are predatory, unfair, or violative of China’s own WTO obligations, in the context of agreed international trade rules, the United States was wrong to act as it did. That’s clear. End of story.
But, that outcome is of limited practical utility. The Trump administration is not about to comply with an adverse ruling from an international body it regards with deep skepticism, especially when the finding is considered a victory for China. Moreover, the United States isn’t technically out of compliance until after it has exhausted its appeals. Alas, thanks to the determined refusal of the United States to endorse any new candidates to serve on the WTO Appellate Body (there’s supposed to be a bench of seven jurists, with three assigned to each case) before sitting jurists’ terms expired, the appeals process is now defunct.
So now what? Well, the best place to deal with the China tariffs is at home—in the United States. This is first and foremost, a matter of domestic concern. U.S. consumers and businesses who suffer the costs of the tariffs, as well as anyone rightfully concerned about executive abuse of power or Congress’s capitulation of its constitutional authorities, should be using the U.S. courts to call out the administration’s violations of the Trade Act of 1974 and, better still, to argue that pertinent sections of the Trade Act amount to an unconstitutional delegation of legislative authority to the executive branch.Read the rest of this post »