Topic: Trade Policy

A Little Bit of Trade Liberalization by the Trump Administration

As part of the 100 Day Action Plan on economic issues that the U.S. and China negotiated back in May, there was agreement by both sides to liberalize trade in a few areas.  It was a relatively minor set of issues, but nonetheless there was some real progress.  The Trump administration likes to tout exports, not imports, so in their remarks about the agreement, they tended to focus on areas of interest to U.S. exporters.  To provide some balance, I’m going to take it upon myself to tell everyone about some import liberalization the U.S. carried out as part of this agreement.  

In the agreement, the U.S. said it would start to allow imports of certain Chinese chicken products:

The United States and China are to resolve outstanding issues for the import of China origin cooked poultry to the United States as soon as possible, and after reaching consensus, the United States is to publish a proposed rule by July 16, 2017, at the latest, with the United States realizing China poultry exports as soon as possible.

This past week-end, a Washington Post story indicated that these imports are now underway:

The first known shipment of cooked chicken from China reached the United States last week, following a much-touted trade deal between the Trump administration and the Chinese government.

The Post article has a lot of fearmongering in it.  The online title is “The dark side of Trump’s much-hyped China trade deal: It could literally make you sick.”  And the article says, “consumer groups and former food-safety officials are warning that the chicken could pose a public health risk, arguing that China has made only minor progress in overhauling a food safety regime that produced melamine-laced infant formula and deadly dog biscuits.”

But before anyone panics, there is also this from the article:

Because cooking kills bacteria and viruses, including the one that causes bird flu, processed poultry is considered “tremendously safer” than raw chicken, said Richard Raymond, who served as undersecretary of agriculture for food safety from 2005 to 2008.

Anyway, the Chinese exporters will have a pretty big incentive to ensure the safety of the products:  If there are health and safety problems, consumers won’t buy them (and the U.S. government might restore the ban). 

It remains to be seen what is coming from the Trump administration on trade policy more generally.  But it’s nice to see a bit of import liberalization, especially given the protectionist rhetoric we keep hearing.

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The Great Immigrant Threat

The situation is grim. Dangerous foreigners are streaming into the United States, killing and abducting innocent Americans. They depress the wages of American workers and hurt American businesses. Something must be done about these invaders!

Is this another warning from Donald Trump? Another column by Sean Hannity? The conclusion of another paper from the Center for Immigration Studies?

Nope, it’s a paraphrase of warnings from politicians, unions, and major newspapers from a century ago, about the dangers of Chinese immigrants and other “Asiatics,” as well as the businesses they opened, especially “chop suey houses.” These warnings would be comical if they weren’t so abhorrent.

Consider this, from the Chicago Tribune:

More than 300 Chicago white girls have sacrificed themselves to the influence of the chop suey “joints” during the last year, according to police statistics. … Vanity and the desire for showy clothes led to their downfall, it is declared. It was accomplished only after they smoked and drank in the chop suey restaurants and permitted themselves to be hypnotized by the dreamy, seductive music that is always on tap.

Or this, from the Mixer and Server, a publication of the Cooks’ and Waiters’ Union, an ancestor of today’s UNITE HERE:

View this matter from every angle, without heat or racial prejudice, and the fact stares us in the face that there is a conflict between the American wage-earner and the workers or employers from the Orient. Our Government has been compelled to close its doors to Asiatics in recognition of this fact.

Or this resolution from one of the forerunners of the AFL-CIO:

WHEREAS the evils arising from the employment of white women and girls in establishments owned or controlled by Chinese and Japanese constitute, both morally and economically, a serious menace to society; therefore be it

RESOLVED, That the American Federation of Labor be requested to pledge its best endeavors to secure the passage of a law prohibiting the employment of white women or girls in all such establishments.

Brexit Talks Get Underway

The negotiations on the UK exiting the EU start today. Here’s the BBC:

Brexit Secretary David Davis will call for “a deal like no other in history” as he heads into talks with the EU.

Subjects for the negotiations, which officially start in Brussels later, include the status of expats, the UK’s “divorce bill” and the Northern Ireland border.

Mr Davis said there was a “long road ahead” but predicted a “deep and special partnership”.

The UK is set to leave the EU by the end of March 2019.

Day one of the negotiations will start at about 11:00 BST at European Commission buildings in Brussels.

Mr Davis and the EU’s chief negotiator Michel Barnier, a former French foreign minister and EU commissioner, will give a joint press conference at the end of the day. 

I’ve sensed some growing concerns about how well these talks might go, and the recent UK general election only made things worse. It’s not clear to me that the politicians who are in charge here can make this a success. Time will tell.

If you are looking for something positive related to Brexit, however, once the UK does leave the EU the personnel situation on the technical side of things is looking good. On Friday, the UK Department of International Trade announced that it had hired Crawford Falconer as the Chief Trade Negotiation Advisor. From the announcement: 

Together with his team Crawford will:

  • develop and negotiate free trade agreements and market access deals with non-EU countries
  • negotiate plurilateral trade deals on specific sectors or products
  • make the department a ‘centre of excellence’ for negotiation and British trade
  • support the UK’s membership of the World Trade Organization (WTO).

Falconer is not a household name, but he is someone that I am very familiar with. I had just been reading his latest co-authored work. He was one of the judges (technically, a “panelist”) on a WTO dispute panel that ruled earlier this month on whether the U.S. has complied with a previous ruling related to the subsidies it provides to Boeing. He has also acted as a judge in 14 other GATT/WTO decisions.

Now, you may say, international adjudication is all well and good, but how about trade negotiations? Does he have any experience there? In fact, he does. He is a dual UK/New Zealand citizen and has been negotiating for New Zealand for many years. He was New Zealand’s Ambassador to the WTO in Geneva from 2005-2008 (and during that time, in his personal capacity, he chaired the Doha Round negotiations on agriculture and cotton). His LinkedIn page has more on his professional background.

There is still a long way to go before we get to the point of the UK negotiating free trade deals of its own. But once we do get there, its trade policy team is in pretty good hands.

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The Paris Accord and Carbon Tariffs

Since President Trump announced the U.S. withdrawal from the Paris Accord there has been talk of other countries imposing “carbon tariffs” in response. The politics of this are hard to predict. I think (and hope) that such tariffs are unlikely, although if the United States starts imposing tariffs for “national security” reasons, the chances of other countries imposing carbon tariffs on us may go up.

But there is also an international legal question here: Wouldn’t carbon tariffs violate international trade obligations under the World Trade Organization or other trade agreements? There is some dense legal analysis of this question out there already (back when it was people in the U.S. talking about imposing these measures on others, Cato’s Sallie James published a good Policy Analysis of the issue). What I’m going to offer here is a short, non-legalistic explanation, which basically amounts to:  It depends on how exactly the other countries go about formulating these “tariffs.”

At one extreme, you can imagine some government somewhere being so angry with the U.S. withdrawal that it imposes an across-the-board import tariff on all U.S. imported products as a response. This blunt approach would almost certainly violate trade agreement rules.

At the other extreme, you can also imagine a more measured approach, under which a government comes up with objective criteria to assess each country’s climate policies and carbon emissions. Carbon taxes would then be imposed on products, both domestic and foreign, in a way that corresponds to these measurable criteria.  This non-discriminatory approach might not violate trade rules, especially if its focus is on environmental impact, rather than “competitiveness.”

The actual approach is likely to be somewhere in between, and is hard to assess in the abstract.  But in general terms, here is my view:  In theory, some form of “carbon tariff” could be done consistently with trade rules.  However, in practice such a measure is likely to violate, as governments generally aren’t very good at being precise, objective, and non-discriminatory in their laws and regulations.  But hopefully everyone will decide not to impose such measures, and the subject will remain an obscure academic one.

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Cut the Corporate Tax Rate; Drop the BAT.

We will never achieve a good tax reform by trusting bad revenue estimates.

According to Wall Street Journal reporter Richard Rubin, “Each percentage-point reduction in the 35% corporate tax rate cuts federal revenue by about $100 billion over a decade, and independent analyses show economic growth can’t cover all the costs of rate cuts.”

Economic growth does not have to “cover all the cost” to make that $100 billion-per-point rule of thumb almost all wrong.  If extra growth covered only 70% the cost of a lower rate, the static estimates would be 70% wrong.  Yet the other 30% would be wrong too, because it ignores reduced tax avoidance.  Mr. Rubin’s bookkeepers’’ rule-of-thumb implicitly assumes zero “elasticity” of reported taxable profits. Corporations supposedly make no more effort to avoid a 35% tax than to avoid a 25% tax.

Acceptance of this simplistic thumb rule – which imagines a 35% corporate rate could raise $1 trillion more over a decade than a 25% rate – explains why Ways and Means Committee Chairman Kevin Brady still insists a big new import tax is needed to “pay for” a lower corporate tax rate. 

In this view, a border adjustment tax (BAT) is depicted as a tax increase for some companies to offset a tax cut for others.  No wonder the idea has been ruinously divisive – with major exporters lobbying hard for a BAT and major retailers, refiners and automakers vehemently opposed.  Mr. Rubin declares the BAT “dead or on political life support,” while nevertheless accepting that it would and should raise an extra $1 trillion over a decade – assuming no harm to the economy and no effect on trade deficits.

Like Mr. Rubin, Reuters claims “Trump could have trouble getting the rate much below 30 percent without border adjustability.”  That is false even on its own terms because the Ryan-Brady plan would eliminate deductibility of interest expense, which is enough to “pay for” cutting the rate to 25% on a static basis.  Adding a BAT appears to cut the rate further to 20%, but the effective Ryan-Brady rate is really closer to 25% because the import tax and lost interest deduction are not a free lunch.

In any case, the entire premise is wrong. There is no need to “pay for” cutting a 35% corporate “much below 30 percent” because nearly every major country has already done that and ended up with far more corporate tax revenue than the U.S. collects with its 35% tax.  

The average OECD corporate tax rate has been near 25% since 2008, and revenue from that tax averaged 2.9% of GDP.  The U.S. federal tax rate is 35% and revenue averaged just 1.9% of GDP.  Ireland’s 12.5% corporate rate, by contrast, brought in 2.4% of GDP from 2008 to 2015.

Sweden cut the corporate tax rate from 28% to 22% since 2013 and corporate tax revenues rose from 2.6% of GDP in 2012 to 3% in 2015 according to the OECD. Britain’s new 20% corporate tax in 2015 brought in 2.5% of GDP according the same source, unchanged from 2013 when the rate was 23%. 

Paul Krugman on Pump-Priming and Trump

New York Times columnist Paul Krugman recently chided President Trump for imagining he invented the metaphor of “priming the pump” during an Economist interview. Yet Krugman, like Trump, buys into the premise that budget deficits really do “stimulate” total spending or “aggregate demand” which is commonly measured by growth of Nominal GDP (NGDP).

Economic booms and busts clearly have huge effects on budget deficits, but where is the evidence that deficits and surpluses have their own separate (“exogenous”) effect on NGDP? 

To isolate cause and effect, we have to take out the “endogenous” effects that ups and downs in the economy have on taxes and spending. That is why the Congressional Budget Office (CBO)estimates budget deficits or surpluses (divided by GDP) without automatic stabilizers, which has traditionally been called the “cyclically-adjusted” budget. I will label it the “C-A Deficit” for short.  

CA Deficit and NGDP

The red line in the graph shows the CBO’s Cyclically-Adjusted (C-A) deficit or surplus as a share of GDP. The blue line shows the percentage growth in Nominal GDP (NGDP). 

From 1965 to 2016, the C-A Deficit averaged -2.7% of GDP, and growth of nominal GDP averaged 6.6%.

Contrary to 1960s Keynesian orthodoxy, the graph and table reveal no connection between the size of cyclically-adjusted deficits or surpluses and the rate of growth of aggregate demand (NGDP).  From 1991 to 2001, for example, the C-A Budget swings from an average deficit to a sizable surplus with essentially no change in the pace of NGDP growth. 

There is no measurable or even visible connection between larger CA-Deficits and faster NGDP growth in 2009-2012, nor between budget surpluses and slower NGDP growth in 1998-2000.  For more than 50 years, our experience has frequently been the opposite of what demand-side fiscalism predicts. This is not just a short-term phenomenon.

Where Are All These Globalists I Keep Reading About?

There’s a new scholarly journal out there called American Affairs. Eliana Johnson of Politico describes it as “a journal of public policy and political philosophy with an eye toward laying the intellectual foundation for the Trump movement.” Many people in the Trump movement purport to be in favor of “nationalism” over “globalism,” so you can imagine the journal will have some things to say about this topic. In the mission statement, the editors note the following:

We are said to live in a “globalized” world. Yet the most conspicuous global phenomenon of the present time would appear to be the resurgence of nationalism, in the United States as well as in Europe and Asia. What is the future of nations and nationalism, and what are the consequences of further separating political sovereignty from the existing political community of the nation-state? Is further “globalization” both inevitable and desirable? Can nationalism be leavened by justice—or even be essential to it—rather than being abandoned to its worst expressions?

And in the first issue, nationalism vs. globalism gets some prominent discussion. Georgetown political science professor Joshua Mitchell has a piece called “A Renewed Republican Party,” in which he talks about the “repudiation of globalism” in the 2016 election:

What term, then, should Republicans use to name the repudiation of globalism during the recent historic election? There will be a division, I suspect, along the lines we saw during the painful run-up to the 2016 election itself. On the one hand, Republicans who sided with globalists on the issue of commerce or who had a low estimation of American culture will indeed call what has happened a populist revolt. On the other hand, Republicans who think that globalism has not only been a disaster for the whole of the America but also that it is theoretically untenable will—or should—call what has happened a revolt in the name of national sovereignty, not populism.

Now, I’m not convinced that Trump really is the nationalist he plays on the campaign trail, or that his supposedly nationalist advisers are either. (The way they reach out to like-minded people in the UK, France, Germany and Russia seems kind of, well, globalist. Maybe it’s not really a repudiation of globalism they are after, but rather a different kind of globalism.)

Regardless, that’s the narrative going on right now: nationalism vs. globalism. And not suprisingly, this talking point has made the leap to a full-fledged academic fad, as evidenced by the creation of the American Affairs journal.

But what I keep wondering is: where are all these globalists that we are supposed to be afraid of? Mitchell tells us that American citizens want “their towns, counties, cities, states, and country” back. But back from whom? Who exactly has taken these things from us?

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