Topic: Trade Policy

Another Jones Act Absurdity

Cape Ray

As North Carolina grapples with the aftermath of Hurricane Florence, transportation officials in the state are attempting to secure the use of a U.S. government-owned vessel, the Cape Ray, to transport supplies to the port of Wilmington. With the city temporarily transformed into an island by recent flooding, the roll-on, roll-off ship—or “ro-ro” in maritime parlance—will enable trucks filled with needed goods to drive aboard.

It’s a good thing the ship is government-owned—under private ownership the Cape Ray’s provision of relief supplies would be illegal. This absurd situation is due to a nearly 100-year-old law called the Jones Act. Passed in 1920, the law mandates that ships transporting goods between two points in the United States be U.S.-owned, crewed, flagged and built. The Cape Ray, however, was built in Japan.

Even if officials sought the private sector’s help and a Jones Act-compliant ro-ro ship to transport the trucks, none are available. According to data from the U.S. Maritime Administration (MARAD) there are only seven ro-ro ships in the entire Jones Act fleet. The closest one to North Carolina, the Delta Mariner, isn’t even an ocean-going vessel but rather operates on the Tennessee River. The other six vessels ply routes between the West Coast and Alaska or Hawaii.

The picture is little improved if Jones Act containerships and general cargo ships are also included, with a total of six such vessels currently on the East or Gulf Coasts (MARAD shows five but does not include the recently commissioned El Coquí). The closest one to the North Carolina flood victims is a 47-year-old general cargo ship, the Coastal Venture, which is currently moored near Charleston.

One reason behind the dearth of ships is the fact that U.S.-built vessels cost up to eight times as much as those built overseas. Such exorbitant prices mean that fewer are purchased, with fewer available for both general commerce and emergency situations. 

In contrast, there is little difficulty locating foreign-flagged ro-ro vessels in the mid-Atlantic region. The Marshall Islands-flagged Morning Pride, for example, is making its way up the East Coast toward Philadelphia, while the Norwegian-flagged Höegh Asia is bound for Baltimore. A combination cargo/ro-ro vessel, the Saudi-flagged Bahri Tabuk, is currently off the coast of North Carolina.

But because of the Jones Act, none of these ships are eligible to take on relief supplies at a U.S. port and speed them to Wilmington.

The Jones Act’s stated purpose is to ensure that the United States “shall have a merchant marine of the best equipped and most suitable types of vessels sufficient to carry the greater portion of its commerce and serve as a naval or military auxiliary in time of war or national emergency.” But when faced with a genuine emergency, such as Hurricane Maria in 2017 or Hurricane Florence today, the Jones Act fleet is often found wanting.

By its own terms, the law is a failure that actually impedes the realization of its goals. It’s time for the Jones Act to go. 

China Decides To Lower Some Tariffs

Yesterday morning, in an op-ed we published in a Chinese news outlet, we made the case that assuaging the Trump administration will be difficult, and that instead of responding to Trump, China should just focus on being a good citizen of the world trading system. In this context, we said this:

China should unilaterally open up its markets to the greatest extent possible, as a sign of its good faith … includ[ing] tariff reductions.

Later in the day, we saw this Bloomberg story:

China is planning to cut average tariff rates on imports from the majority of its trading partners as soon as next month, two people familiar with the matter said, in a move that would lower costs for consumers as a trade war with the U.S. deepens.

The two people asked not to be named because the matter isn’t public yet. Premier Li Keqiang said Wednesday that China would reduce tariffs, though he didn’t elaborate. 

It’s not yet clear how the planned reduction would affect imports from the U.S., if at all, including Chinese retaliatory tariffs on American products amid the trade war. Those details may only emerge once the government outlines which products will enjoy lower tariffs. …

Now, we’re not claiming cause and effect here, but we’re thinking of making some more requests!

But seriously, we think it is pretty unlikely that our piece led to the Chinese government’s decision here. Nevertheless, this is a positive development. It is helpful that China is recognizing that liberalization is beneficial, and that as a major world economy, it needs to lead by example when it calls itself a defender of “the principles of free trade and the multilateral trading system.”  China has a long way to go to become a true market economy, but this is a good step.

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A Contemporary Economist’s Account of the “Crowning Folly of Tariff of 1930”

“[T]here came another folly of government intervention in 1930 transcending all the rest in significance. In a world staggering under a load of international debt which could be carried only if countries under pressure could produce goods and export them to their creditors, we, the great creditor nation of the world, with tariffs already far too high, raised our tariffs again. The Hawley-Smoot Tariff Act of June 1930 was the crowning folly of the who period from 1920 to 1933….

Protectionism ran wild all over the world.  Markets were cut off.  Trade lines were narrowed.  Unemployment in the export industries all over the world grew with great rapidity, and the prices of export commodities, notably farm commodities in the United States, dropped with ominous rapidity….

The dangers of this measure were so well understood in financial circles that, up to the very last, the New York financial district retained hope the President Hoover would veto the tariff bill.  But late on Sunday, June 15, it was announced that he would sign the bill. This was headline news Monday morning. The stock market broke twelve points in the New York Time averages that day and the industrials broke nearly twenty points. The market, not the President, was right.”

– Dr. Benjamin M. Anderson [chief economist at Chase National Bank 1920-39], Economics and the Public Welfare: A Financial and Economic History of the United States, 1914-1946 (Indianapolis, Liberty Press, 1979, pp. 229-230)

A NAFTA Deal Inches Closer

It has been a whirlwind week of negotiations on the North American Free Trade Agreement (NAFTA), ending on Friday in apparent deadlock. Canada was not able to reach a deal with the United States on some of the remaining contentious issues, but that did not stop President Trump from submitting a notice of intent to Congress to sign a deal with Mexico that was agreed to earlier this week. This action allows the new trade agreement to be signed by the end of November, before Mexican President Enrique Pena Nieto leaves office. While a high degree of uncertainty remains, it is premature to ring the alarm for the end of NAFTA as we know it.

Why? First, there is still some negotiating latitude built into the Trade Promotion Authority (TPA) legislation, which outlines the process for how the negotiations unfold. The full text of the agreement has to be made public thirty days after the notice of intent to sign is submitted to Congress. This means that the parties have until the end of September to finalize the contents of the agreement. What we have now is just an agreement in principle, which can be thought of as a draft of the agreement, with a lot of little details still needing to be filled in. Therefore, it is not surprising that the notice submitted to Congress today left open the possibility of Canada joining the agreement “if it is willing” at a later date. Canadian Foreign Minister Chrystia Freeland will resume talks with U.S. Trade Representative Robert Lighthizer next Wednesday, and this should be seen as a sign that the negotiations are far from over.

Relatedly, TPA legislation does not provide a clear answer as to whether the President can split NAFTA into two bilateral deals. The original letter of intent to re-open NAFTA, which was submitted by Amb. Lighthizer in May 2017, notified Congress that the President intended to “initiate negotiations with Canada and Mexico regarding modernization of the North American Free Trade Agreement (NAFTA).” This can be read as signaling that not only were the negotiations supposed to be with both Canada and Mexico, but also that Congress only agreed to this specific arrangement.  In addition, it could be argued that TPA would require President Trump to “restart the clock” on negotiations with a new notice of intent to negotiate with Mexico alone. The bottom line, however, is that it is entirely up to Congress to decide whether or not it will allow for a vote on a bilateral deal with Mexico only, and so far, it appears that Congress is opposed to this. 

In fact, Congress has been fairly vocal about the fact that a NAFTA without Canada simply does not make sense. Canada and Mexico are the top destination for U.S. exports and combined serve as the top source of imports to the United States, with total trade reaching over $1 trillion annually. Furthermore, we don’t just trade things with each other in North America, we make things together. Taking Canada out of NAFTA is analogous to putting a wall in the middle of a factory floor. Economists estimate that every dollar of imports from Mexico includes forty cents of U.S. value added, and for Canada that figure is twenty-five cents for every dollar of imports—these are U.S. inputs in products that come back to the United States.

While President Trump may claim that he’s playing hardball with Canada by presenting an offer they cannot reasonably accept, we should approach such negotiating bluster with caution. In fact, the reality is that there is still plenty of time to negotiate, and Canada seems willing to come back to the table next week. At a press conference at the Canadian Embassy in Washington D.C. after negotiations wrapped up for the week, Minister Freeland remarked that Canada wants a good deal, and not just any deal, adding that a win-win-win was still possible. Negotiations are sure to continue amidst the uncertainty, and it will be a challenging effort to parse the signal from the noise. However, we should remain optimistic that a trilateral deal is within reach and take Friday’s news as just another step in that direction.

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Today’s U.S.-Mexico Trade Deal: What Was Agreed and What Comes Next

The Trump administration reached a deal with Mexico today on some bilateral issues in the renegotiation of the North American Free Trade Agreement (NAFTA). Some details of what was agreed are here. Other issues have been reported by the press as having been agreed, but until we see official government announcements, we are skeptical that those issues have been fully resolved.

This is not the conclusion of the NAFTA talks, because there are a number of outstanding issues, and Canada has to be brought back to the table as well. Nevertheless, today’s United States - Mexico deal is in some sense, “progress.” In another sense, however, it is a step backwards. To illustrate this, let’s look at the example of what was agreed on auto tariffs.

NAFTA eliminates tariffs on trade between Canada, Mexico, and the United States, but only for products that meet specific requirements to qualify as being made in North America. For example, you couldn’t make a car in China, ship it to Mexico and put the tires on, and then export it to the United States at the NAFTA zero tariff. Under current NAFTA rules, in order to qualify for duty free treatment, 62.5 percent of the content of a vehicle has to be from the NAFTA countries. 

The Trump administration has been opposed to this content threshold, arguing that it needs to be higher. A key part of the bilateral talks between the United States and Mexico was to address this issue, and also add some conditions related to wage levels.

With regard to the content threshold, the United States has asked for this requirement to be raised, and according to the fact sheet released by USTR, the new content requirement will be increased to 75 percent. On the wage levels, the United States has pushed for a provision that requires 40 percent of the content of light trucks and 45 percent of pickup trucks to be made by workers that earn at least $16 an hour, and Mexico appears to have agreed to this as well. These changes make it harder for Mexican producers to satisfy the conditions to get the zero tariffs, while Canada and the United States would not be affected by this change.

So what’s the point of all this? The goal of the Trump administration’s negotiators was to make it more difficult for autos to qualify for the zero tariffs. In other words, they are taking some of the free trade out of NAFTA.

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Which U.S. Industries Will Bear the Brunt of Trump’s China Tariffs?

This morning, as anticipated, the Trump administration broadened the scope of its punitive tariffs on imports from China. The list of products subject to 25 percent duties increased from 818 to 1,097 harmonized tariff schedule (HTS) subheadings. Last year, the value of these imports from China amounted to roughly $50 billion, so the tax incidence (ceteris paribus), for the sake of the argument, will be roughly $12.5 billion. 

As expected, Beijing retaliated in kind, assessing similar duties on a commensurate value of U.S. exports, which is certain to cause revenues to fall for U.S. producers of the industrial goods and agricultural products subject to those retaliatory tariffs. But let’s not forget the adverse impact of our own tariffs on our own manufacturers, farmers, construction firms, transportation providers, miners, wholesalers, retailers, and just about every other sector of the U.S. economy.

About half the value of U.S. imports consists of intermediate goods (raw materials, industrial inputs, machine parts, etc.) and capital equipment. These are the purchases of U.S. businesses, not households. The vast majority of the Chinese products on the tariff list fit this description. They are nearly all inputs to U.S. production. By hitting these products with tariffs at the border, the Trump administration is, in essence, imposing a tax on U.S. producers. Trump is raising the costs of production in the United States in sector after sector.

How significant is a roughly $12.5 billion tax in a $19 trillion economy? Well, not especially significant when put in that context. But that context masks the burdens directly imposed on the companies that rely on these inputs and indirectly imposed on their workers, vendors, suppliers, and downstream customers.

The Input-Output tables produced by the U.S. Bureau of Economic Analysis reveal—among other things—information about the relationships between industries in the United States. The “Use” tables map the output of all industries to their uses by other industries as inputs, as well as by end users.

The most recent “detailed” tables present the U.S. economy in 2007. The value of total commodity output at the time was $26.2 trillion, of which $14.5 trillion was consumed for end use and $11.7 trillion was consumed as intermediate inputs to further production. The $11.7 trillion dollar value of output from each of 389 industries (defined at the 6-digit NAICS level) is mapped to the input of each of the other 388 industries. In other words, $11.7 trillion of commodity output from 389 industries is simultaneously depicted as $11.7 trillion of intermediate inputs to 389 industries. Although the values of that industry-specific output and input certainly have changed over 10 years, it is not unreasonable to assume a roughly similar composition of input use on a percentage basis.  (Sure, production processes change and, consequently, the inputs demanded change too. But the 2007 table provides the best information available and it should produce some useful results.)

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A Feeble Defense of the Jones Act

Rep. Duncan Hunter is not pleased with the Cato Institute’s efforts to repeal the Jones Act. Taking notice of a recent op-ed I penned criticizing the California congressman’s support of this costly law, Hunter took to the pages of the same newspaper last weekend to defend his stance. It’s worth reviewing the piece in full, as it recycles several arguments typically offered in support of the Jones Act—and exposes some glaring weaknesses.

Hunter begins his defense of the Jones Act by disputing accusations that the law negatively impacts Puerto Rico’s economy:

Like many opponents of the Jones Act, the CATO Institute attempts to conflate this 100-year old law with the struggles of Puerto Rico’s economy. They repeat the same tired argument that the Jones Act is responsible for high prices and economic instability, going so far as to make the ridiculous implication that the Jones Act adds $5 to the cost of a pint of ice cream.

A recent economic study disputed these price discrepancies but if concerns remain, it is important to recognize that Puerto Ricans have other options. Most of the ships that call on Puerto Rico are foreign flagged and current law allows them to deliver as many goods from foreign ports as Puerto Ricans can consume. A 2013 Government Accountability Office Study failed to conclude that removing the Jones Act would benefit Puerto Rico and, in fact, acknowledged that the regulation provides a number of advantages. Other studies have found that the Virgin Islands — approximately 100 miles from Puerto Rico — has no Jones Act requirement, but has higher shipping prices than Puerto Rico from the mainland.

There’s a lot to unpack here, but let’s begin by noting that the “recent economic study” Hunter refers to was funded by a pro-Jones Act special interest group with a questionable methodological approach. Pointing out that Puerto Ricans have options for obtaining needed goods that are not subject to the Jones Act, meanwhile, is essentially telling them to eat cake. The rest of the United States is, by far, Puerto Rico’s largest trading partner. Simply doing business with other countries instead of the world’s largest economy with which Puerto Rico shares deep political and cultural links is oftentimes not a feasible option.

But that doesn’t mean Puerto Ricans don’t try to hunt for cheaper alternatives. The 2013 GAO report cited by Hunter highlights numerous examples of this dynamic, including farmers who purchase feed from Canada instead of New Jersey due to lower shipping costs and the sourcing of jet fuel from Venezuela rather than domestically for the same reason.  

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