Topic: International Economics, Development & Immigration

Lemon Lawsuits

Sunkist Growers, the wholesome name you probably associate with that morning swig of orange juice, has stolen a page from the playbooks of its more traditionally protectionist agricultural brethren. 

Last month Sunkist filed an anti-dumping petition alleging that Argentine and Mexican producers are selling lemon juice in the U.S. market at “unfairly low prices.”  Heavens!  The petition alleges dumping margins in excess of 100 percent, which means that Sunkist believes the U.S. prices of lemon juice from Argentina and Mexico should be more than double what they are today. (Maybe the U.S. prices of U.S. lemon producers would be half as much if our restrictive immigration policies didn’t drive up the cost of labor at harvest time.)

In a carefully crafted petition designed to minimize damage to Sunkist’s public image, only lemon juice used as an ingredient in the production of other products (i.e., not concentrated lemon juice or lemonade purchased directly by consumers) is subject to the anti-dumping investigation. 

Sunkist notes in a press release that: “The anti-dumping duty, if assessed, will not result in increased prices to consumers.”  Obviously, that’s a lie.  What Sunkist really means is that consumers won’t be able to attribute to Sunkist’s litigation the higher prices they will have to pay for the dozens of everyday food items that contain lemon juice.  The prices of soda, fruit juice, ice cream, cake mix, seasonings, salad dressings, microwave dinners, frozen vegetables, hair coloring, candy, chewing gum, cough syrup, and many other items will be affected by any prospective anti-dumping duties. 

And, as has been the case in the sugar-using industries, lemon juice-consuming industries will have greater incentive to move their operations to Canada or Mexico or any number of other countries where the price of lemon juice is market-based.  Whenever the supply of upstream products is choked off by protectionist measures, jobs, revenues, and profits in downstream industries suffer.  And contrary to Sunkist’s feeble rationalization, consumers flip the bill.

Does Big Steel Still Dominate U.S. Trade Policy?

The chart above depicts the operating performance of the industry that is most protected by U.S. antidumping and countervailing duty restraints. As that chart demonstrates, the U.S. steel industry is in robust health–well outperforming overall manufacturing (i.e., its customers) for the past few years.

Should one conclude that that performance is a reflection of the insulation from competition it has been afforded? That’s likely to be one of the steel industry’s arguments before the U.S. International Trade Commission, which is holding a hearing tomorrow concerning the question of whether 13-year old antidumping and countervailing duty restrictions against imported corrosion-resistant steel from six countries should be continued for at least five more years. (This paper explains why revocation in these so-called Sunset Reviews is rare).

But those restrictions, as well as the 160 other trade remedy restraints currently in place to protect the steel industry, date back to the 1990s and earlier, when the industry’s performance was much closer to the first four bars than the last three. If anything, longstanding trade protection delayed the day of reckoning for many inefficient mills by discouraging them from exiting the market and encouraging continued inefficient operation.

From an operating perspective, the year 2004 stands out as a clear dividing line between the steel industry of old, and the new, revitalized industry of today. But the dramatic industry renaissance that has bestowed market power, record profitability, and insulation from any significantly adverse effects of foreign competition on U.S. steel producers began in 2002, after the government assumed $9 billion in the industry’s unfunded pension and health care obligations.

By wiping those liabilities off of the books of several major bankrupt steel producers, that intervention paved the way for mergers and acquisitions and new labor agreements that have enabled the industry to retire inefficient capacity, cut its fixed costs, and consolidate production decisions. In 2003, the top three producers of flat-rolled steel (the steel used in autos, appliances, and construction) controlled 25 percent of flat-rolled steel production capacity. Today, the top three control 70 percent.

That concentration has given the domestic industry a high degree of market power, which enables it to prop up prices and weather downturns in demand by curtailing output. There’s nothing objectionable about that (with the exception of the government-assisted jumpstart) unless, of course, steel is a major component of the products you manufacture. What is objectionable, then, is buttressing this emerging oligopoly with continued trade restraints. Consumers of steel should be expected to adapt to the effects of greater concentration of steel production, but that adaptation requires having access to imported substitutes and supplements.

Taxpayers, steel-using industries, and consumers have subsidized this industry for too long.

The ITC’s decision, expected in December, will speak volumes to the question of whether that agency continues to be a rubber stamp for the steel lobby’s protectionist agenda.

School Vouchers on the Way in India?

According to an article in The Hindu, an education planning commission in India has recommended the creation of pilot voucher programs in its final “Approach Paper.”

I have no doubt that the impetus for this recommendation comes at least in part from James Tooley’s work in India and Africa over the past decade, including his most recent study showing the effectiveness and efficiency of private schools serving the poor in the city of Hyderabad.

A particularly interesting aspect of the article is the extent to which the Union Human Resource Development Ministry (in charge of education) misrepresented the facts in its statements to the reporter, Anita Joshua. I just fired off an e-mail to Ms. Joshua, setting the record straight. Some highlights below the fold…

Most notably, the Ministry claims that “the average cost of schooling in private unaided schools [in India] is much higher than in government schools.” The converse is true. I summarize the evidence from a variety of public/private sector comparisons of Indian schools in pages 6–10 of a book chapter that is available online here: http://www.schoolchoices.org/roo/How_Markets_Affect_Quality.pdf

In one of those studies (of Uttar Pradesh), for example, Oxford University professor Geeta Gandhi Kingdon found that unaided schools spend roughly half of what is spent by government schools, per pupil. (Geeta Gandhi Kingdon, “The Quality and Efficiency of Private and Public Education: A Case-Study of Urban India,” Oxford Bulletin of Economics and Statistics, Vol. 58, No. 1 (1996), pp. 55–80.) Interestingly, the same is largely true in the United states, where the average private school tuition fee is about half the total public school per-pupil expenditure. 

Also, a recent study published by the Cato Institute, conducted by University of Newcastle professors James Tooley and Pauline Dixon, found that personnel costs in Hyderabad’s unaided slum schools were a small fraction of those in nearby government schools — and personnel costs represent the lion’s share of school expenditures. Furthermore, Tooley and Dixon found that students in the private slum schools significantly outperform their peers in the more expensive public schools. 

Nor is there any validity to the Ministry’s claim that private schools are unavailable in rural areas. An extensive 1999 report found private schools in many rural areas across northern India, and also reported that they were providing better facilities and more actual teaching than their public counterparts. (Anuradha De, Jean Drèze, Shiva Kumar, Claire Noronha, Pushpendra, Anita Rampal, Meera Samsom, and Amarjeet Sinha, Public Report on Basic Education in India. New Delhi: Oxford University Press, 1999.)

Let’s hope Ms. Joshua brings this ammunition to her next interview with the Ministry.

Record Trade Deficit + Campaign Season = Infuriating Statements

From the LA Times this morning, an article on the trade deficit for August. Both imports and exports were up slightly from the July figures, and the trade deficit itself was $69.9 billion. But it was not so much the trade figures that interested me (after all, the trade deficit has hit record highs repeatedly lately), but this statement from Rep. Marcy Kaptur:

“We are not only shipping jobs overseas, we are shipping billions of dollars overseas,” said Rep. Marcy Kaptur (D-Ohio), a critic of Bush administration policies calling for free-trade pacts. “We are exporting our jobs and our wealth, not our products.”

We are shipping billions of dollars overseas? On net, the United States must, by definition, be a net importer of capital to balance the current account. I won’t belabor that point, though, since my colleague Dan Griswold has covered the topic more than ably here).

Kaptur, currently seeking reelection in Ohio’s 9th district, is one of the least trade-friendly members of Congress, according to last year’s rating of the 108th Congress (available here). Her press release on the trade deficit seems to boast of her being a “leading critic of “free trade” policies” (note the quotation marks around free trade, signifying, I assume, that free trade is a quaint concept).

I understand that it is election time and all, but I find it very frustrating that marketing oneself as someone who will fight against free trade — a poverty fighter, growth promoter and trust-buster all in one — is perceived to be a winning strategy.

Be(trade)

As we enter the last quarter of what feels like the tenth year of a two-term presidency, the Bush administration’s trade apologists have yet another setback to rationalize. Last week, in an effort to overcome limited opposition to a bill that would grant Vietnam “permanent normal trade relations” (PNTR) status ahead of that country’s accession into the World Trade Organization, the administration announced it would “self-initiate” antidumping cases against Vietnamese exporters of clothing should conditions warrant.

Under the law, only domestic industries producing the product in question, unions representing workers producing the product in question, or the Commerce Department itself can initiate antidumping investigations. Rarely has the executive branch—and never has this administration—initiated an antidumping case on behalf of an industry or its workers. Almost every one of the thousands of U.S. antidumping cases over the years was initiated by industry, and that is why last week’s concession is significant.

Opposition to the bill was mostly confined to the textile industry, which is always opposed to measures that would expand the freedom of Americans to engage in commerce with the world at large. That opposition was expressed as a hold over a vote on the PNTR bill by two Republican senators from textile states, Elizabeth Dole of North Carolina and Lindsey Graham of South Carolina. Their opposition could have been overcome with a far less intrusive concession, if the administration was unwilling to stand on principle. After all, Senator Jim DeMint (R-SC) won his seat by a vast margin in 2004, running unapologetically on a free trade ticket against a candidate hand-picked and financed by South Carolina’s textile magnates.

Instead, the administration delivered to the textile industry it’s most coveted prize. You see, the U.S. textile industry does not have standing in antidumping cases involving imported clothing. Textile producers make the threads, yarns, and fabrics that are used in the manufacture of clothing, but they don’t make clothing. In fact, other than high-end fashion and uniforms made for the military, there isn’t much of a domestic clothing industry to speak of. Apparel producers left long ago, setting up shop in the Caribbean, Mexico, and Central America. Producers remaining in the United States generally don’t compete with imports, and most of those that do are also importers of clothing, and have no interest in impeding access of foreign producers to the U.S. market. In other words, there is no industry in the United States that could actually bring a consequential antidumping case against foreign producers.

The administration’s concession changes all that. If the administration is willing to initiate such cases, U.S. textile producers are that much closer to cordoning off the U.S. market for their own customers and keeping the Vietnamese, the Chinese, and other Asian suppliers at bay, while Americans pay more than they should have to for clothing.

Tongue in cheek, Bush apologists will argue that the administration outsmarted the opposition by agreeing only to take antidumping actions without specifying the conditions that would trigger such actions. But by even indulging in talk of self-initiating antidumping actions, the Bush administration makes crystal clear the insincerity of its own rhetoric about the virtues of free trade. And, it has set a terrible precedent that future administrations and policymakers will have a tougher time disavowing. You can bet your last dollar that presidential candidates stumping through textile country over the next two years will be pressed to honor this unforgivable commitment made by the Bush administration. And as the textile industry’s recourse to special safeguard measures against Chinese clothing imports expires at the end of 2008, it’s a virtual guarantee that its lobby will push for a similar antidumping commitment with respect to Chinese imports. And who knows, other industries might also line up for such treatment.

Prospects for significant trade liberalization were already hanging on by a thread, and the best we could hope for was for the administration holding the line. Last week’s “compromise” constitutes a colossal breach in that line. And none of it makes any sense from a political or diplomatic perspective anyway. The concession was made to improve prospects that the Vietnam PNTR bill would pass in a lame duck session ahead of the president’s visit to Hanoi next month. But does anyone in the White House think the Vietnamese are going to roll out the red carpet for a president bearing such a tainted gift: unfettered access to the U.S. market for all but their most important exports?

The Real Scandal of ‘Tariff Suspensions’

Two weeks ago (yes, I know, an eternity in blog time, but I’ll explain in a moment), the Washington Post published a gotcha front-page expose on a long-established if little noted congressional practice of suspending miscellaneous tariff duties. The article, headlined “A Quiet Break for Corporations” (September 20, 2006), supposedly uncovered yet another pork-barrel scandal. The real scandal of the story, however, is not that U.S.-based producers seek relief from damaging tariffs, but that those tariffs exist in the first place.

For years, Congress has voted regularly on miscellaneous tariff bills that suspend a hodgepodge of duties on obscure products that often are not even made by companies in the United States. In those cases, the tariffs don’t even perform the dubious duty of “protecting” domestic producers.  They only make it more expensive if not impossible for consumers and producers to import certain products.

The Post article emphasized the potential revenue lost to the government by suspension of the duties, while downplaying the costs to consumers and importing producers from the artificially higher prices imposed by the tariffs. Economics 101 teaches that with almost any tariff, the damage to the economy from higher prices and less efficient production will outweigh the duties collected by the government.

The story implied a scandal in the fact that some American companies would actually be hurt by suspension of tariffs on their foreign competition. But since when is it the duty of the government to protect certain producers against their competition? Should the same government that harasses U.S. companies with anti-trust laws be shielding other U.S. companies from the same competitive forces that anti-trust laws supposedly promote? If Americans can buy dog collars more cheaply from a foreign producer, the federal government should keep its nose out of the deal.

One example in the story involves the proposed suspension of duties on basketballs and volleyballs imported by the sporting-goods company Spalding. Again, the real scandal is why the government imposes any duties at all on such goods. The federal government should not be raising revenue with a special “basketball tax,” in the process making basketballs more expensive for American kids while hurting the sales of an American company.

Supposedly adding to the scandal is that fact that many of the “beneficiaries” of the suspended duties would be foreign-owned affiliates located in the United States, especially German and Swiss chemical companies. That fact does not make the special duties any less damaging to the U.S. economy. Foreign-owned affiliates in the United States employ nearly six million Americans (one out of eight manufacturing workers), pay domestic taxes, and serve American customers.

The story tried to clinch the scandal thesis by citing campaign donations and lobbying expenses by the companies seeking removal of the damaging tariffs. Again, the real scandal is not that these companies are trying to change laws that damage them, but that they need to seek specific relief in the first place.

Import duties invite corruption by giving the government power over a range of otherwise innocent and private transactions. A policy of free trade, without arbitrary duties aimed at punishing foreign producers and protecting domestic ones, would eliminate any need to lobby the government over the imposition or suspension of duties. The latest Economic Freedom of the World  report shows that nations with relatively free and open economies are generally less corrupt than those with closed and government-dominated economies. (Check out the chart on page 26.)

By repealing targeted tariffs that damage our economy and that should never have been imposed in the first place, the proposed miscellaneous tariff bill would make our system a bit less corrupt, not more so.

P.S. So why am I blogging about all this two weeks after the fact? I did not want to jeopardize the chances of the Washington Post actually publishing an edited version of this critique in its letters to the editor section. My patience was rewarded this morning with publication of an edited version of my letter.

Wanted: An Excuse to Stop Hurting the Economy

From the Washington Post online: a synopsis of the speech given yesterday by U.S. Trade representative Susan Schwab. In that speech, which I heard, Ambassador Schwab made it clear that the U.S. was not going to offer any more cuts to agricultural subsidies as part of the Doha round of trade negotiations under the auspicies of the WTO. According to her, a “bold” offer on subsidies didn’t elicit the desired response (i.e., an offer from the European Union of further cuts to agricultural tariffs) when it was tried last October. So we shouldn’t expect anything from the U.S. soon, and certainly not before the mid-terms.

To her credit, and this was not reported in the Post article, Ambassador Schwab did admit that unilateral liberalization of trade barriers and subsidies is in America’s best interests, but she went on to say that the administration needed “an excuse” for taking that step. Apparently the significant burden on taxpayers and consumers from the current trade policy is not a large enough reason to liberalize trade.

The negotiation-via-press-release approach is not working, and Ambassador Schwab referred to the “quiet conversations” that were going on among trade ministers to try to revive the round. She gave absolutely no clue on how the talks went with EU trade commissioner Peter Mandelson when he visited Washington DC last week, except to say that the talks were “healthy.” Boy, would I like to have been a fly on that wall.

One last comment on Ambassador Schwab’s speech: her belief in a “critical mass” of bipartisan support for free trade is, I think, misguided. I can’t see the Democrats, should they take control of the House(s), giving the Bush adminstration any wins on trade. That leaves us with the original deadline of July 2007 (when the current trade promotion authority expires) for any Doha deal to come to fruition.