The United States ranks 15 in the Human Freedom Index 2019 released today by the Cato Institute, the Fraser Institute in Canada, and the Liberales Institut at the Friedrich Naumann Foundation for Freedom in Germany. The five freest jurisdictions are New Zealand, Switzerland, Hong Kong, Canada, and Australia.
The annual Index uses 76 indicators of personal, civil, and economic freedom in 162 countries for 2017, the most recent year for which sufficient, globally comparable data are available. The report finds that global freedom has declined slightly since 2008, with more countries (79) seeing a fall in their levels of freedom than seeing an improvement (61).
Other selected countries rank as follow: United Kingdom (14), Taiwan (19), Chile (28), France (33), Mauritius (50), South Africa (64), India (94), Russia (114), China (126), Saudi Arabia (149) and Venezuela (161).
My coauthor Tanja Porcnik and I also find a strong relationship between economic and personal freedom, suggesting that if you want to live in a country that has high levels of personal freedom, you should choose a place with relatively high levels of economic freedom. Overall freedom is also correlated with significantly higher incomes per capita ($40,171 for the top quartile countries vs. $15,721 for the bottom quartile) and with democracy (see graph below).
The index allows you to examine regional and country trends. Compared to other free countries, for example, the United States has a low rating for the rule of law, which has experienced a slight deterioration in recent years. Those are worrisome developments given the fundamental role that the rule of law plays in upholding liberty. The effects of populism and especially authoritarian populism on freedom around the globe can be seen in the report. For example, Turkey under Recep Tayyip Erdogan’s increasingly autocratic leadership has seen a notable decline in liberty this decade (see graph). Among ten regions in the world, the largest drop in freedom since 2008 has occurred in the Middle East and North Africa, also the region with the least freedom.
Read more about how your country rates, about global freedom trends, and why it matters here.
The liberal tax group ITEP has a new study suggesting that many large corporations did not pay income taxes in 2018. The study relies on taxes reported on financial statements, but those are often quite different than actual IRS payments, which are private and undisclosed.
Low corporate income taxes may seem like a scandal, but we should eliminate these taxes altogether. Corporate taxes ultimately land on individuals as workers, shareholders, and consumers, and in today’s global economy economists think that corporate taxes land mainly on workers. Cutting corporate taxes should boost worker compensation over time as business investment and productivity increase. Capital and labor are not enemies — as often assumed on the political left — but complements, as I discuss here.
Another reason to eliminate corporate taxes is that they are undemocratic. The corporate tax burden ultimately lands on individuals, but the tax payments are hidden from voters. Politicians may want to hide the costs of government, but the interest of citizens is visibility.
ITEP finds that the 2017 GOP tax law reduced corporate taxes, but that was a feature of the law, not a bug. For example, the law changed the rules for capital investment. ITEP found: “Industrial machinery companies as a group enjoyed the lowest effective federal tax rate in 2018, paying a tax rate of negative 0.6 percent. These results were largely driven by the ability of these companies to claim accelerated depreciation tax breaks on their capital investments.” These companies apparently did what lawmakers had hoped for — increased their investment, which had the side effect of reducing their taxes. That’s not a scandal.
Finally, note that ITEP’s calculations of average effective tax rates are not the only way to measure tax rates. This recent study by the Canadian Department of Finance examines marginal effective tax rates (METRs), which are the rates on additional investments. METRs indicate the attractiveness of a country’s tax system toward new investment.
The Finance chart shows that the U.S. METR is 18.4 percent, which is lower than some major countries but the same as the average across all OECD nations.
The libertarian legal movement lost one of its early, important scholars last month with the passing of David N. Mayer on November 23 at the age of 63, after a lengthy illness. Long a friend of the Cato Institute and a member of the editorial board of the Cato Supreme Court Review from its founding in 2001, David was professor emeritus of law and history at the Capital Law School in Columbus, Ohio, where he taught since joining that faculty in 1990. David’s love was legal history, earning an A.B. in history with distinction and highest honors from the University of Michigan in 1977, a law degree from Michigan in 1980, then an M.A. in 1982 and a Ph.D. in 1988 from the University of Virginia, both again in history. Given that intellectual odyssey, it’s no accident that his first book, published in 1994 by the University of Virginia Press, bore the title The Constitutional Thought of Thomas Jefferson, an oft‐cited seminal work on its subject.
We were fortunate that David came to us with his proposal for his 2011 book, Liberty of Contract: Rediscovering a Lost Constitutional Right, which I had the pleasure of editing. It took little: David was an excellent writer. And he had mastered both the philosophical and the historical foundations of contractual freedom. As Northwestern Law’s Stephen B. Presser wrote on the book’s back cover, “David Mayer has emerged as one of the most insightful constitutional scholars on the scene today. In this superb new book, he rescues the constitutional value of liberty of contract, which was so important to the Framers but has been systematically and wrongly slighted by three generations of biased and seriously deficient scholarship.”
David’s contributions to libertarian thought and undertakings were numerous. In The Encyclopedia of Libertarianism, for example, he wrote the essays on “Declaration of Independence,” “Constitution of the United States,” and “Thomas Jefferson.” Among other appointments, he served on the editorial board of The Journal of Ayn Rand Studies, as a member of the Academic Review Committee for fellowships awarded by the Institute for Humane Studies, and as the faculty advisor to the Capital University Law School’s Federalist Society chapter and the Capital University’s College Libertarians. David’s writings are of the kind that will endure and continue to instruct future generations. May he rest in peace.
Milton Friedman (1951, 1960) provided influential back-of-the-envelope estimates of the costs devoted to extracting gold under what he called a “strict” gold standard. I have criticized those estimates elsewhere (White 1999, pp. 42-48) for exaggerating the volume of gold reserves used by actual gold-standard economies, and thus exaggerating the resource cost. Friedman’s estimates assumed a 100 percent gold reserve ratio against demand deposits (1951) or against all bank deposits (1960), whereas sophisticated banking systems in gold-standard economies historically operated on small prudential reserve ratios (as he elsewhere recognized). Plugging a historically observed 2 percent reserve ratio against all the bank liabilities in the broad monetary aggregate M2, rather than Friedman’s 100 percent, yields a resource cost estimate one-fiftieth of his 1960 figure, namely 0.05 percent rather than 2.5 percent of national income.
President Nixon closed the gold window in 1971, ushering in our present era of fiat money. As inflation rose and became more variable, people began acquiring gold and silver coins and bullion for hedging against fiat money regimes. Friedman to his credit was alert to the resource costs of the gold and silver acquisition that emerged. In a note on “The Resource Costs of Irredeemable Paper Money” he observed (Friedman 1986, p. 644):
Real resources are employed … in the production of the gold and silver absorbed into the hoards accumulated by [individuals] who have come to regard gold or silver as a prudent component of their asset portfolios. Since the end of Bretton Woods, even the direct resource cost of the gold and silver accumulated in private hoards may have been as great as or greater than it would have been under an effective gold standard. That depends on whether gold production since 1971 has been greater or less than it would have been under an effective gold standard—a promising research topic whose conclusion is by no means obvious from casual empiricism.
Recent data on gold production from the World Gold Council (2019) allow us to revisit the question with something better than casual empiricism, and to reach a conclusion. Plugging recent numbers from the World Gold Council into Friedman’s own model, it is fairly clear that gold coins and bullion in recent years have been produced in greater volumes than would have been the case under a gold standard with reasonable prudential reserve ratios, and thus gold-extraction resource costs have been higher under fiat money in practice. Note that this accounting effort provides an underestimate of the total resource costs induced by fiat money, because it neglects the costs incurred in acquiring silver, collectibles, cryptocurrencies, and other inflation hedges.Read the rest of this post »
More clarity and more questions emerged over the weekend about the terms of the U.S.-China trade deal, which warrants an update to this preliminary assessment published on Friday.
The deal is pretty good for what is seems to accomplish. That may sound like fingernails on a chalkboard to those more interested in preventing Trump from gaining traction with claims that he won the trade war than they are interested in actually ending the trade war.
The deal is pretty good because it reduces business uncertainty, confirms that the administration realizes its approach was unsustainable, and — by formalizing terms to resolve the variety of issues that, frankly, distract attention from the most difficult problems in the relationship — creates needed space to shift focus to the genuinely challenging matters.
That, of course, refers to the challenge for technological preeminence and its attendant considerations: industrial policy; technology subsidies; development and proliferation of standards; related security issues; and the impact on this race for primacy on commercial and strategic outcomes.
So, what was agreed upon? In a nutshell, Washington agreed to cancel tariffs on about $160 billion of imports from China, which were scheduled to take effect yesterday; keep in place the 25 percent tariffs currently imposed on about $250 billion of Chinese goods (rather than increase them to 30 percent, as was scheduled); and reduce tariffs from 15 percent to 7.5 percent on about $110 billion of Chinese products.
Relative to what was looming (higher tariffs on all imports from China), these terms should be welcome news to most consumers, workers, businesses, and investors in the United States and China, and throughout the world. The specter of an escalating tariff war, with all the commercial uncertainty that portends, is no longer casting such a large shadow on the global economy. That’s good.
Relative to the way things were 18 months ago, we are still torso deep in costly taxes. About half of the value of U.S. imports from China remain subject to a 25 percent tax (as opposed to an average tariff of about 2 percent in June 2018) and about one‐fifth of the value of those imports remain subject to a 7.5 percent tax (as opposed to an average tariff of about 2 percent in June 2018).
Presumably, those tariffs are considered leverage and will be lowered or removed if, and when, Beijing demonstrates that it has held up its end of the bargain. Yes, it’s true that U.S. tariffs are taxes on U.S. consumers and businesses, which may raise questions about their value as leverage on Beijing. But the fact is that taxes on U.S purchasers dissuade purchases from Chinese producers. So, while the Chinese aren’t paying the taxes, those taxes are reducing demand for Chinese products. After all, something in the administration’s approach made Beijing agree to the “Phase 1” deal.
Beijing made no explicit commitments to reduce the retaliatory tariffs it imposed over the last 18 months, but it did agree to purchase, over the course of the next two years, $200 billion more goods and services from the United States than it purchased in 2017. The value of U.S. exports of goods and services to China in 2017 was about $185 billion, so the pledge to purchase $200 billion more is very significant — an average annual increase of 45 percent, which is, first, unheard of for a large economy and, second, strong confirmation — as if it were needed — that China’s is not a market economy. Realistically, it is hard to imagine how the Chinese economy can absorb that much in two years but then again, maybe U.S. companies will jack up their prices by a factor of five or ten!
U.S. goods exports to China year‐to‐date through October 2019 are down about 16 percent from where they were in the January‐October 2017 period. Roughly translated, that means that U.S. exports to China are down about $25 billion from the pre‐trade war period.
Despite reports that this deal does nothing to make amends for lost market share suffered by U.S. exporters as a result of the trade war, a $200 billion aggregate increase in exports over two years would certainly seem to more than make up for the average financial losses incurred by U.S. firms so far. However, those U.S. export gains most likely would come at the expense of other countries’ exports, as Chinese buyers divert their purchases from other suppliers in line with Beijing’s demands. And that, of course, would have ripple effects throughout the global economy, including a likely reduction in demand for U.S. exports in third countries.
So, what other commitments did China make to give Trump cover to begin lowering U.S. tariffs? Remember what started this whole trade war thing? In June 2018, the president first imposed tariffs as a result of a formal investigation conducted by the U.S. Trade Representative’s Office under Section 301 of the Trade Act of 1974, which found fault with a variety of Chinese practices, including intellectual property theft, cyber intrusions, discriminatory indigenous innovation policies, forced technology transfer requirements, and other related items.
But ever since then, the focus of negotiations has been on tangential issues, such as market access in China, trade balances, currency practices — pretty much everything EXCEPT those objectionable IP and technology practices. Well, to my surprise, the agreement worked out, and summarized by the White House Friday includes commitments from China to undertake effective measures to curtail, prohibit, and punish some of the kinds of forced technology and intellectual property transgressions that the United States wants resolved. Beijing also agreed to refrain from directing or supporting outbound investments aimed at acquiring U.S. technology. It also agreed to fix problems that have created non‐tariff barriers to U.S. agricultural products in China, such as circuitous licensing practices and opaque sanitary and phytosanitary requirements.
China also committed to open wider and more transparently its financial services markets to allow more competition from U.S. banks, insurance companies, and brokerages. It also made certain commitments to ensure that it doesn’t intervene in currency markets in a way that suppresses the value of the Chinese yuan to secure a trade advantage. And, importantly, the parties agreed to create a mechanism that, ostensibly, will allow for rapid hearing, adjudication, and, hopefully, resolution of disputes.
Skeptics of the deal are quick to point out that — in the provisions regarding intellectual property rights enforcement and disavowal of forced technology transfer — Beijing didn’t agree to anything they hadn’t already agreed to or weren’t already doing, as a result of obligations under previous agreements. That may be true, but Beijing’s and Washington’s definitions of “forced” technology transfer (to use one example) have been very different historically. If this agreement includes a broader understanding by the Chinese of the term “forced,” it will be a step in the right direction.
Beijing’s pledge to stay away from backing or promoting technology acquisitions by state‐owned enterprises is a nice gesture that amounts to very little, considering that U.S. policymakers are already ramping up scrutiny of these kinds of deals, as required under the new Foreign Investment Risk Review Modernization Act. It’s something that U.S. policymakers are intent on scrutinizing and, frankly, protecting sensitive U.S. technology in a systematic and transparent way is far superior to levying tariffs and encouraging divestment.
Commitments on currency, of course, have nothing to do with the impetus for the trade war. This is perennial gripe that should be of very low priority on the U.S. list of concerns.
Time will tell whether Beijing actually makes good on these commitments and whether the administration will work hard to address the outstanding issues. But for now (and probably through the 2020 elections), new or higher U.S. tariffs on imports from China seem to be unlikely. Of course, we will have to endure 25 percent tariffs on half of our imports from China and 7.5 percent tariffs on about one‐fifth, but the uncertainty that has racked markets for over 18 months is likely to abate. This deal, for all its shortcomings, is an agreement to not escalate the trade war. There’s some value in that, right?
The United States and China are locked in a race for technological preeminence, which raises all sorts of strategic and security concerns that can no longer be treated with indifference. Technology bestows first‐mover advantages with significant commercial and strategic implications. As 2020 progresses, the U.S. debate over China policy should shift focus away from tariffs and trade measures to the broader strategies, tactics, and domestic measures needed to stay on top in the race for technological supremacy.
Despite some last‐minute additions that make substantial changes to the deal, the congressional approval process for the U.S.-Mexico-Canada Agreement (USMCA) is hurtling forward. The House implementing bill was posted late Friday afternoon. As per the Trade Promotion Authority (TPA) rules under which the agreement was negotiated, Congress will cast an up or down vote on this bill, with no amendments. A vote is expected in the House on Thursday, with a Senate vote likely coming in January.
There are over 200 pages of text in the implementing bill, and there is a lot of detail spelled out therein about how the agreement will operate as part of U.S. law. We want to highlight here three issues of importance—we offered a discussion of a broader range of issues here—and how the implementing bill addresses them. These issues warrant careful deliberation and consideration before a vote is cast, although they may not get it.
First, one of the biggest trade issues in the USMCA is the extent to which the agreement pulls back—as compared to NAFTA—from free trade in autos and auto parts between the U.S., Canada, and Mexico. At least on paper, it will now be much harder to fulfill the conditions for qualifying for zero tariffs on these products. However, there is still a question of how these conditions will be applied in practice. The implementing legislation creates a new interagency committee for the purpose of reviewing the operation of the updated, and far more stringent, rules of origin (RoO) requirements for automotive goods. Rules of origin are part of every trade agreement and specify the amount of production that has to happen within the territory of the parties to the agreement in order to qualify for a preferential duty. RoO can have a big impact on whether or not companies even bother to utilize the preferential rates of a trade agreement (if they are too burdensome, sometimes companies just pay the normal tariff rate).
In Section 202A, Special Rules for Automotive Goods, the legislation creates an interagency committee to implement these rules. The Chair of the interagency committee is the U.S. Trade Representative. It also includes the Secretary of Commerce, the Commissioner of Customs and Border Protection, the Chair of the International Trade Commission, and “Any other members determined to be necessary by the Trade Representative.” This oversight mechanism places a significant amount of discretion in the hands of the executive branch in implementing these new rules. There is no role for Congress here. Such an important change to a highly integrated manufacturing sector across the three countries warrants, at the very least, a consultative role for Congress. How these provisions are implemented will have a significant impact on how much the new rules raise the cost of manufacturing autos in North America.
The second issue is one of the biggest changes announced last week: There is a vast and uncertain new process created to oversee Mexican labor reforms, including special panels to review practices at specific Mexican factories (someone on Twitter referred to this as a Labor Avengers Squad). Again, there will be an interagency committee to decide whether to pursue cases; there will be U.S. labor attachés assigned to monitor the situation in Mexico (this caused some outrage in Mexico, resulting in a letter from Ambassador Lighthizer to smooth things over); there will be the possibility of “rapid response” panels made up of independent labor experts to evaluate specific complaints; and the remedy will be penalties applied to imports from the factories in question. There is definitely the potential here for a litigation boondoggle and a powerful new mechanism to restrict trade.
And finally, with regard to congressional/executive separation of power issues, one of the most important parts of the implementing bill is the provision that explains how the “sunset clause” will function. We addressed problems with the sunset clause late last year when the USMCA was signed. The most troubling aspect of the legislation is that it appears the role of Congress will only be consultative, as described in Section 611, Participation in Joint Reviews with Canada and Mexico Regarding Extension of the Term of USMCA and Other Action Regarding USMCA. Consultations are great, but the most important element of congressional involvement is not addressed: a vote. While USTR is obligated to consult with Congress regarding the review of the agreement, Congress does not have a final say on whether or not to extend the agreement. This is a problem, as it means that the executive has the sole power to decide whether or not to extend the USMCA as part of the joint review/sunset clause process.
Similarly, in Section 621 on Termination of USMCA, no additional clarity is provided with regard to USMCA Article 34.6 (the withdrawal provision). In the context of NAFTA and other trade agreements, there has been a big debate on who has the power to withdraw from trade agreements. Through this implementing legislation, there was a chance to clarify that Congress has a crucial role, and that a president cannot withdraw on his/her own. A failure to clarify this issue here is a missed opportunity.
Many politicians and interest groups involved in the debate over the fate of NAFTA seem eager to put everything behind them and ratify USMCA as quickly as possible. We think it is worth discussing and debating what’s in USMCA first. A lot of these changes will have serious consequences, and it’s worth understanding them better before plunging forward.
Last Friday, the U.S. Trade Representative’s Office released a “fact sheet” about the U.S. — China trade deal that it had just announced. Reports suggest that the deal will be signed in early January, with the text released some time after that. A full analysis of the deal will have to wait until then, but in this post, we offer some comments on the details set out in the fact sheet.
The first issues mentioned are intellectual property and technology transfer. The fact sheet addresses these as follows:
• Intellectual Property: The Intellectual Property (IP) chapter addresses numerous longstanding concerns in the areas of trade secrets, pharmaceutical‐related intellectual property, geographical indications, trademarks, and enforcement against pirated and counterfeit goods.
• Technology Transfer: The Technology Transfer chapter sets out binding and enforceable obligations to address several of the unfair technology transfer practices of China that were identified in USTR’s Section 301 investigation. For the first time in any trade agreement, China has agreed to end its long‐standing practice of forcing or pressuring foreign companies to transfer their technology to Chinese companies as a condition for obtaining market access, administrative approvals, or receiving advantages from the government. China also commits to provide transparency, fairness, and due process in administrative proceedings and to have technology transfer and licensing take place on market terms. Separately, China further commits to refrain from directing or supporting outbound investments aimed at acquiring foreign technology pursuant to industrial plans that create distortion.
With regard to these issues, two points are worth noting. First, there are already rules on these issues at the World Trade Organization (the “For the first time in any trade agreement” claim related to forced technology transfer is not accurate). When the text of the U.S.-China deal is released, it will be interesting to compare and see if there is anything new here, or if the deal just restates existing WTO obligations.
Second, China was in the process of making domestic law changes in these areas anyway (examples can be found in a new Foreign Investment Law, and in 2019 Chinese amendments to its Trademark Law and pending revisions to its Patent Law), so the commitments in this deal will not necessarily lead to any new legislative actions.
Next up is agriculture:
• Agriculture: The Agriculture Chapter addresses structural barriers to trade and will support a dramatic expansion of U.S. food, agriculture and seafood product exports, increasing American farm and fishery income, generating more rural economic activity, and promoting job growth. A multitude of non‐tariff barriers to U.S. agriculture and seafood products are addressed, including for meat, poultry, seafood, rice, dairy, infant formula, horticultural products, animal feed and feed additives, pet food, and products of agriculture biotechnology.
With regard to “structural barriers to trade,” there are rules at the WTO as well. Again, when we see the text, we can see if there is anything new here. In addition, China is having some problems with meeting its demands for agricultural products (most famously pork, due to an outbreak of swine flu), so it would not be a surprise to see an increase in Chinese purchases of these products.
And on financial services, the fact sheet says:
• Financial Services: The Financial Services chapter addresses a number of longstanding trade and investment barriers to U.S. providers of a wide range of financial services, including banking, insurance, securities, and credit rating services, among others. These barriers include foreign equity limitations and discriminatory regulatory requirements. Removal of these barriers should allow U.S. financial service providers to compete on a more level playing field and expand their services export offerings in the Chinese market.
China was in the process of changing its domestic law here as well, and there are also some existing WTO obligations in this area to compare this with.
With regard to other issues, the fact sheet talks about currency, which will probably mean provisions similar to those in the U.S.-Mexico-Canada Agreement.
And then there is a section indicating that China will buy a massive additional amount of U.S. exports of goods and services, as follows:
• Expanding Trade: The Expanding Trade chapter includes commitments from China to import various U.S. goods and services over the next two years in a total amount that exceeds China’s annual level of imports for those goods and services in 2017 by no less than $200 billion. China’s commitments cover a variety of U.S. manufactured goods, food, agricultural and seafood products, energy products, and services. China’s increased imports of U.S. goods and services are expected to continue on this same trajectory for several years after 2021 and should contribute significantly to the rebalancing of the U.S.-China trade relationship.
Total U.S. exports of goods and services to China in 2017 was $188 billion. Exceeding that amount over the next two years by “no less than $200 billion” is a little hard to fathom. Do U.S. producers have that much to sell to China? Will there just be a shift of purchases by buyers and sellers, so U.S. companies sell less to the rest of the world and more to China? In a press conference last Friday, Chinese officials emphasized that trade expansion would be based on market principles and WTO rules. How will this work when there is an express trade volume quota to meet?
Finally, there is dispute resolution. The fact sheet tells us this:
• Dispute Resolution: The Dispute Resolution chapter sets forth an arrangement to ensure the effective implementation of the agreement and to allow the parties to resolve disputes in a fair and expeditious manner. This arrangement creates regular bilateral consultations at both the principal level and the working level. It also establishes strong procedures for addressing disputes related to the agreement and allows each party to take proportionate responsive actions that it deems appropriate.
The fact sheet details are vague, but based on other statements by the Trump administration, it seems like this process will not involve neutral adjudication of disputes about compliance. Rather, if consultations fail, the United States will simply decide on its own whether China is in violation of the agreement, and then decide on its own what tariff penalties are appropriate. In our view, this is not really a dispute resolution mechanism, but simply a process to restart the tariff war if one side is unhappy with the arrangement (and which could have been restarted without such a provision in place). But this is still a bit speculative, and we need to see the final text first.