1029 (Author at Cato Institute) https://www.cato.org/ en We Can Finally Stop Pretending Trump Isn’t a Protectionist https://www.cato.org/publications/commentary/we-can-finally-stop-pretending-trump-isnt-protectionist Scott Lincicome <div class="lead mb-3 spacer--nomargin--last-child text-default"> <p>The U.S. tariffs on Canadian aluminum that&nbsp;<a href="https://www.washingtonpost.com/business/2020/08/06/trump-canada-aluminum-tariffs/" target="_blank">President Trump reimposed</a>&nbsp;last week are a&nbsp;bad idea for many reasons: They hurt American manufacturers in the middle of a&nbsp;recession, have already sparked Canadian retaliation, stab a&nbsp;close ally in the back, and amplify uncertainty in an uncertain time.&nbsp;The tariffs do, however, have a&nbsp;silver lining: They should finally kill the myth of President Trump as something—anything—other than a&nbsp;protectionist.</p> </div> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>Given the president’s&nbsp;<a href="https://www.nytimes.com/2019/05/15/us/politics/china-trade-donald-trump.html" target="_blank">longstanding views</a>&nbsp;and numerous anti‐​trade actions, you may be forgiven for thinking that this debate has been settled already.&nbsp;Nevertheless, the last four years are replete with examples of the&nbsp;<a href="https://www.whitehouse.gov/briefings-statements/president-donald-j-trump-launches-new-reciprocal-trade-relationship-european-union/" target="_blank">White House</a>&nbsp;and its&nbsp;<a href="http://accf.org/2018/09/05/3298/" target="_blank">allies</a>&nbsp;taking to the airwaves every time the president imposed new tariffs or threatened to blow up a&nbsp;U.S. trade agreement to proclaim that this isn’t actually protectionism.&nbsp;For trade watchers and those unwilling to ignore their lying eyes, such claims were always a&nbsp;stretch, but they often did enjoy a&nbsp;veneer of defensibility because of the context in which the president’s actions occurred.</p> </div> , <aside class="aside--right aside--large aside pb-lg-0 pt-lg-2"> <div class="pullquote pullquote--default"> <div class="pullquote__content h2"> <p>Let’s just look at the tariffs he reimposed on Canadian aluminum, and who benefits. </p> </div> </div> </aside> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>Perhaps the most common defense of Trump’s trade moves is that they are only a&nbsp;temporary step backward in order to take two steps forward on freer trade. Trump, you see, was actually using tariffs to advance a “<a href="https://www.washingtonpost.com/opinions/trump-may-end-up-being-one-of-the-greatest-free-trade-presidents-in-history/2018/07/26/6eb6e65e-90fc-11e8-8322-b5482bf5e0f5_story.html" target="_blank">radical free trade agenda</a>” and open markets in China, Canada, Europe, and elsewhere that have stubbornly remained closed for decades.&nbsp;Indeed, Trump himself has frequently defended his tariffs as a&nbsp;successful way to both bring foreign countries “to the table” and seal new trade deals, including the United States‐​Mexico‐​Canada Agreement (USMCA).&nbsp;“Without tariffs,” Trump&nbsp;<a href="https://www.whitehouse.gov/briefings-statements/remarks-president-trump-united-states-mexico-canada-agreement/" target="_blank">said in 2018</a>&nbsp;about the USMCA and his “national security” tariffs on steel and aluminum (and threatened ones on automotive goods), “we wouldn’t be talking about a&nbsp;deal, just for those babies out there that keep talking about tariffs.” In those same comments he praised the “power of tariffs” to open other markets, and&nbsp;<a href="https://www.usda.gov/media/press-releases/2020/01/29/secretary-perdue-statement-usmca-signing" target="_blank">supporters</a>&nbsp;have eagerly pointed out that USMCA (<a href="https://www.brookings.edu/blog/up-front/2018/10/08/extra-milk-exports-to-canada-under-trumps-rebranded-nafta-will-be-a-drop-in-the-bucket/" target="_blank">modestly</a>) opens Canada’s dairy market. (Never mind that it also&nbsp;<a href="https://www.cato.org/blog/protectionist-love-child-labor-left-nationalist-right" target="_blank">closes markets</a>, too.)</p> <p>As of last week, however, that excuse is toast.&nbsp;The USCMA, hailed by the president as “the largest, most significant, modern, and balanced trade agreement in history,” entered into force in July.&nbsp;Eliminating the U.S. tariffs on aluminum (and steel) from the other USMCA countries was a&nbsp;core condition for the deal’s ratification before the&nbsp;<a href="https://www.grassley.senate.gov/news/news-releases/grassley-welcomes-end-metal-tariffs-canada-and-mexico" target="_blank">U.S. Congress</a>&nbsp;and in both&nbsp;<a href="https://www.npr.org/2019/05/17/724357441/u-s-to-lift-tariffs-on-canadas-and-mexico-s-steel-and-aluminum" target="_blank">Canada and Mexico</a>.&nbsp;Now the tariffs are back, and so is the&nbsp;<a href="https://twitter.com/scottlincicome/status/1292831611940147201" target="_blank">Canadian retaliation</a>&nbsp;(both theoretically permitted under the 2019&nbsp;<a href="https://ustr.gov/sites/default/files/Joint_Statement_by_the_United_States_and_Canada.pdf" target="_blank">side agreement</a>&nbsp;that nixed them in the first place).&nbsp;“Radical free trade,” indeed.</p> <p>Trump’s new tariffs also fail their other most common defense, “national security.”&nbsp;The original steel and aluminum tariffs were&nbsp;<a href="https://www.whitehouse.gov/presidential-actions/presidential-proclamation-adjusting-imports-aluminum-united-states-4/" target="_blank">implemented</a>&nbsp;under a&nbsp;U.S. law, Section 232 of the Trade Expansion Act of 1962, that permits the president to take action against imports that “threaten to impair the national security” of the United States.&nbsp;At that time, the facts supporting those decisions, especially with respect to Canadian aluminum, were&nbsp;<a href="https://www.cato.org/publications/commentary/metal-tariffs-nonsensical-solution-search-problem" target="_blank">dubious at best</a>: Canada is part of the United States’ own&nbsp;<a href="https://twitter.com/scottlincicome/status/1291783580310556672" target="_blank">defense industrial base</a>, and the U.S. and Canadian aluminum markets were highly integrated due to NAFTA and the countries’ comparative advantages.&nbsp;Nevertheless, the Trump administration could at least claim then that the tariffs were necessary to support an essential domestic industry and to prevent Chinese metals from entering the country through Canada.</p> <p>But the bases for such claims have since disappeared.&nbsp;Chinese aluminum imports into the United States&nbsp;<a href="https://www.aluminum.org/news/report-us-foil-investments-after-adcvd-decision-drives-down-imports-china" target="_blank">collapsed</a>&nbsp;in 2019 as a&nbsp;result of new and high U.S. anti‐​dumping and countervailing duties on those products that were imposed in 2018.&nbsp;That same year, Canada&nbsp;<a href="https://pm.gc.ca/en/news/news-releases/2018/03/27/canada-acts-further-prevent-transshipment-and-diversion-steel-and" target="_blank">implemented</a>&nbsp;new measures to prevent the illegal “transshipment” of such metals through Canada and into the United States, and took&nbsp;<a href="https://www.canadianmanufacturing.com/manufacturing/ottawa-takes-promised-steps-to-prevent-transshipments-of-aluminum-steel-237827/" target="_blank">further steps</a>&nbsp;in 2019 as part of the aforementioned deal to lift U.S. tariffs. The USMCA also contains several&nbsp;<a href="https://ustr.gov/sites/default/files/files/agreements/FTA/USMCA/Text/07_Customs_Administration_and_Trade_Facilitation.pdf" target="_blank">new provisions</a>&nbsp;intended to enhance enforcement of such violations or otherwise&nbsp;<a href="https://www.globenewswire.com/news-release/2019/12/12/1960154/0/en/Aluminum-Association-Strong-Import-Monitoring-and-Trade-Enforcement-Vital-to-Effective-USMCA-Implementation.html" target="_blank">boost</a>&nbsp;the North American aluminum industry.</p> <p>At the same time, evidence has&nbsp;<a href="https://twitter.com/scottlincicome/status/1034585951220256776" target="_blank">mounted</a>&nbsp;that Trump’s tariffs on Canadian aluminum not only&nbsp;<a href="https://econofact.org/steel-tariffs-and-u-s-jobs-revisited" target="_blank">undermined</a>&nbsp;the U.S. manufacturing sector due to higher prices and&nbsp;<a href="https://www.cmtradelaw.com/2018/06/canada-announces-u-s-section-232-retaliatory-tariff-list-effective-july-1/" target="_blank">Canadian retaliation</a>, but actually&nbsp;<a href="https://www.industryweek.com/leadership/article/22025974/americas-largest-aluminum-maker-is-getting-hit-by-us-tariffs" target="_blank">hurt</a>&nbsp;<em>U.S. aluminum companies</em>, especially—but not&nbsp;<a href="https://www.chicagobusiness.com/manufacturing/how-aluminum-industrys-loudest-tariff-cheerleader-got-burned" target="_blank">only</a>—the nation’s largest producer&nbsp;<a href="https://twitter.com/scottlincicome/status/1020097302512488449?s=20" target="_blank">Alcoa</a>&nbsp;(which has operations in both countries).&nbsp;Even the White House itself&nbsp;admitted&nbsp;in January of this year that the aluminum tariffs caused a&nbsp;surge in “derivative” aluminum products and hadn’t achieved their objectives: “[c]apacity utilization in the aluminum industry has improved, but it is still below the target capacity utilization that the Secretary recommended in his report.”&nbsp;Likely for these reasons, Trump’s decision last week to reimpose the aluminum tariffs elicited immediate and vocal opposition from both the&nbsp;<a href="https://twitter.com/JayTimmonsNAM/status/1291502601452883970" target="_blank">National Association of Manufacturers</a>&nbsp;and the&nbsp;<a href="https://www.aluminum.org/news/reinstating-section-232-aluminum-tariffs-wrong-approach-us-industry" target="_blank">Aluminum Association</a>, which represents the “vast majority of domestic aluminum companies.”</p> <p>Not included in that “vast majority,” of course, are the two U.S. aluminum companies, Century Aluminum and Magnitude 7&nbsp;Metals,&nbsp;<a href="https://www.dtnpf.com/agriculture/web/ag/columns/washington-insider/article/2020/08/10/aluminum-tariffs-re-imposed" target="_blank">that</a>&nbsp;“have lobbied intensely for the tariffs to be re‐​imposed” and want U.S. consumers to pad their bottom lines.&nbsp;And why do their demands outweigh those of the much larger Alcoa, the rest of the U.S. aluminum industry, and all other American manufacturers?&nbsp;Well, it sure doesn’t seem like&nbsp;<a href="https://ca.finance.yahoo.com/news/politics-pandemics-russian-aluminum-why-144733777.html" target="_blank">national security</a>: “two of Century’s four smelters are in Kentucky, while Magnitude 7&nbsp;operates in Missouri, two states vital to Trump’s electoral fortunes.”&nbsp;Century’s biggest shareholder, moreover, is the Swiss trading company Glencore, whose former employee owns Magnitude 7&nbsp;and who “holds the exclusive rights to sell Russian‐​made aluminum in the U.S.”&nbsp;Oh.</p> <p>Conspiracy theories aside, there’s simply nothing here to indicate an urgent national security threat necessitating the re‐​imposition of painful tariffs on imports from a&nbsp;close ally—one that had already agreed to implement the president’s signature trade deal&nbsp;<em>and</em>&nbsp;further regulate the product at issue.&nbsp;Instead, it’s just plain old protectionism, and—as with the rest of Trump’s trade policies—it’s time we stop pretending otherwise.</p> </div> Wed, 12 Aug 2020 09:50:15 -0400 Scott Lincicome https://www.cato.org/publications/commentary/we-can-finally-stop-pretending-trump-isnt-protectionist Scott Lincicome discusses his blog post, “The Government’s Plan to Turn Kodak Into a Pharmaceutical Company Sure Seems Underdeveloped,” on WYSL’s Radio Free New York https://www.cato.org/multimedia/media-highlights-tv/scott-lincicome-discusses-blog-post-governments-plan-turn-kodak Fri, 07 Aug 2020 12:38:19 -0400 Scott Lincicome https://www.cato.org/multimedia/media-highlights-tv/scott-lincicome-discusses-blog-post-governments-plan-turn-kodak “Seemingly Out of Nowhere” https://www.cato.org/blog/seemingly-out-nowhere Scott Lincicome <p>A few short&nbsp;<s>interminable</s> months ago, COVID-19 had made it almost impossible to find hand sanitizer, disinfecting wipes, and other cleaning products at the local grocery store or online. The shortages not only sent Americans scrambling for supplies (I actually <a href="https://twitter.com/scottlincicome/status/1238935268020944897">mailed my mom</a> some Clorox Wipes), but also elicited calls from both the right and the left for major changes to U.S. trade and economic policy. Florida Senator Marco Rubio, for example, in April <a href="https://www.nytimes.com/2020/04/20/opinion/marco-rubio-coronavirus-economy.html">wrote</a> in the <em>New York Times</em> that our empty shelves proved that America, suffering a “severely diminished” manufacturing base due to U.S. politicians’ decades‐​long “choice to facilitate offshoring,” needed a “sensible industrial policy” that included “the re‐​shoring of supply chains integral national interest.” Sure, Rubio argued, “some heroic businesses have shifted production to help fill this gap and produce masks, hand sanitizer and other goods,” but “the nation is still behind” because “we by and large lack the ability to make things.” Scott Paul of the union‐​backed Alliance for American Manufacturing <a href="https://www.nytimes.com/2020/04/14/opinion/coronavirus-industry-manufacturing.html">made similar claims</a>&nbsp;on those very same pages a&nbsp;few days earlier. Others <a href="https://www.washingtonpost.com/outlook/2020/04/04/uncle-sam-needs-start-giving-us-all-free-hand-sanitizer/">implored</a> the president to invoke the wartime Defense Production Act to “contract with companies throughout the country to widely produce and distribute free soap and hand sanitizer.” Others still said that the sanitizer shortages of March and April called both global supply chains and&nbsp;<a href="https://messaging-custom-newsletters.nytimes.com/template/oakv2?uri=nyt://newsletter/f7f57bd8-b9ac-4323-acf4-c8cd9c0f1fe6&amp;productCode=INT&amp;te=1&amp;nl=the-interpreter&amp;emc=edit_int_20200314">capitalism itself</a>&nbsp;into question. “Medical masks are already in short supply, and everyday items such as hand sanitizer have become difficult to find,” <a href="https://www.marketwatch.com/story/this-is-how-america-will-beat-covid-19-2020-03-05">said </a>progressive economist James K. Galbraith in March, because “[T]he heavily globalized, consumer‐ and finance‐​driven U.S. economy was not designed for a&nbsp;pandemic.”</p> <p><a href="https://www.cnn.com/2020/08/05/business/hand-sanitizer-purell-clorox/index.html">Fast forward to today</a>: “Walk into any drug store, grocery chain or market today, and you’ll be hit with a&nbsp;wall of <a href="https://www.cnn.com/interactive/2020/07/us/cnn-fda-hand-sanitizer-quiz-july-15-2020-trnd/" target="_blank">hand sanitizers</a> and cleaning products that help fight against the coronavirus.” Wow!</p> <p>So how did this amazing change occur? Did President Trump use the Defense Production Act to force U.S. companies to make these essential goods? Or did Congress, at Senator Rubio’s prodding, enact a “sensible industrial policy” that restored our&nbsp;manufacturing base, re‐​shored our supply chains and thus ended our “dangerous dependency” on foreign countries? Did we finally throw out global capitalism and “design” a&nbsp;better economic system?</p> <p>Actually, it was just the market at work:</p> <blockquote><p>Lesser‐​known brands have popped up seemingly out of nowhere.</p> <p>Although Brands International has always been in the business of making sanitizer, albeit on a&nbsp;smaller scale, the pandemic led it to ramp up production and focus solely on hand sanitizer, according to Mark Rubinoff, the Canadian company’s founder and CEO.</p> <p>Brands International’s 10 production lines were converted to only making Germs Be Gone hand sanitizer. The company sold about 35 million bottles of sanitizer this year, up from 1&nbsp;million in all of 2019.</p> <p>SmartCare, a&nbsp;value‐​products brand of California‐​based Ashtel Studios, has been producing sanitizer since 2014. President Anish Patel said he had planned to build the brand this year and talk to retailers to get it into stores — and then Covid‐​19 came to the US and demand was “explosive.”</p> <p>“What we had planned was going to happen in three‐​to‐​four years happened in a&nbsp;couple months,” he said.</p> <p>The company already sold soaps, bath tissues and kitchen towels at Walgreens, CVS, Menards and Meijer. Patel said those relationships helped SmartCare set up an ever‐​expanding delivery schedule.</p> <p>Israeli company Albaad, which makes wet wipes and feminine hygiene products, was started nearly 35&nbsp;years ago and expanded to the US in 2004 with a&nbsp;production facility in North Carolina. Albaad CEO Dan Mesika said that demand is so high for wipes that the company has been getting requests via its website from individuals desperate to find wipes, asking them to send to their homes.</p> <p>To help meet demand, the company developed Cleanitize disinfecting wipes, which Albaad expects to be released in September or October.</p> <p>Walgreens and CVS started looking in some atypical places for hand sanitizer when demand outstripped supply. They placed orders to M. Skin Care and Miss Spa for hand sanitizer in the late spring. They had made hand sanitizer for the drug store chains off and on over the past decade, but the brands weren’t producing it at all this time last year, according to President Lisa Ashcraft. The company’s sanitizer products hit stores nationwide by June.</p> </blockquote> <p>These are not cherry‐​picked examples, either. While most name brands are still sold out due to persistently high demand, a&nbsp;quick Amazon search shows dozens of other brands of <a href="https://www.amazon.com/s?k=hand+sanitizer&amp;crid=3PVNN334QKBXL&amp;sprefix=hand+sanit%2Caps%2C156&amp;ref=nb_sb_ss_midas-iss_1_10">hand sanitizer</a>, <a href="https://www.amazon.com/s?k=cleaning+wipes&amp;crid=1NK3HIPC407UY&amp;sprefix=cleaning+%2Caps%2C147&amp;ref=nb_sb_ss_i_1_9">cleaning wipes</a>, and other <a href="https://www.amazon.com/s?k=cleaning+supplies+disinfectant&amp;crid=1KWT6H4YVKWKU&amp;sprefix=cleaning+su%2Caps%2C156&amp;ref=nb_sb_ss_i_5_11">cleaning products</a> that were in critical short supply just a&nbsp;couple months ago. You can also get face masks (even <a href="https://mqdirect.com/products/n95-fda-ce-niosh-approved">N95s</a>) or other important COVID-19 consumer goods if you still need them. Certainly, things aren’t perfect out there (the CNN article above notes, for example, that “some companies have resorted to putting sanitizer in unusual bottles” due to materials shortages), but these new producers and their products show how the market — not any government plan or policy — can quickly adjust in response to unexpected situations and thereby meet our essential material needs. It’s also a&nbsp;real testament to the incredible hard work and ingenuity of U.S. retailers and global manufacturers, driven by the aforementioned market signals.</p> <p>“Seemingly out of nowhere,” indeed.</p> <p>Of course, there are things that governments can do to facilitate these necessary market adjustments, but the <em>most important</em> ones mainly involve just getting out of the market’s way. The CNN article notes, for example, that the Food and Drug Administration “temporarily ease[d] restrictions on manufacturers looking to make sanitizer, outlining that ‘the agency does not intend to take action against manufacturing firms that prepare alcohol‐​based hand sanitizers for consumer use.’&nbsp;” In this regard, we seem to be following <a href="https://twitter.com/scottlincicome/status/1247681857812078594" target="_blank">Korea’s lead</a>, which years ago implemented detailed “pandemic preparedness” regulations that allow for the swift approval and production of testing and other essential medical equipment. Other actions, such as refraining from onerous <a href="https://www.cato.org/blog/coronavirus-anti-price-gouging-madness">anti‐​gouging</a> laws that prevent price signals that would encourage new production and discourage hoarding, could also help speed adjustment. In general, however, all those tales of the death of American manufacturing and the failures of free markets and global supply chains thus far seem <a href="https://www.cato.org/blog/governments-plan-turn-kodak-pharmaceutical-company-sure-seems-underdeveloped">greatly</a> <a href="https://www.cato.org/publications/commentary/supply-chain-repatriation-its-buyer-nation-beware">exaggerated</a>.</p> <p>Maybe we don’t need to abandon capitalism after all.</p> Fri, 07 Aug 2020 09:42:29 -0400 Scott Lincicome https://www.cato.org/blog/seemingly-out-nowhere Will President Trump Do to Essential Medicines What He Did to Washing Machines? (Let’s Hope Not.) https://www.cato.org/blog/will-president-trump-do-essential-medicines-what-he-did-washing-machines-lets-hope-not Scott Lincicome <p>Speaking today at a Whirlpool factory in Clyde, Ohio, President Trump will <a href="https://www.thenews-messenger.com/story/news/local/2020/08/03/president-donald-trump-visit-clydes-whirlpool-plant-thursday/5574368002/">credit</a> his January 2018 decision to <a href="https://ustr.gov/about-us/policy-offices/press-office/press-releases/2018/january/president-trump-approves-relief-us">impose 50% “safeguard” tariffs</a> (at Whirlpool’s request) on imported washing machines with creating 200 Ohioan jobs and spurring new domestic investment in appliance manufacturing across the country — a testament to the President’s economic nationalist policy and vision. Continuing that vision, Trump will also <a href="https://www.usatoday.com/story/news/politics/2020/08/06/trump-ohio-president-order-essential-drugs-made-usa/3297875001/">announce</a> he’s signing an Executive Order that “instructs the government to develop a list of ‘essential’ medicines and then buy them and other medical supplies from U.S. manufacturers instead of from companies around the world.”</p> <p>If news reports are correct, however, President Trump will omit several crucial details about Whirlpool and his washing machine tariffs – details that caution against following a similar economic nationalist path for essential drugs and other medical goods.</p> <ul><li>First, those tariffs <a href="https://www.wsj.com/articles/consumers-bore-cost-for-u-s-tariffs-on-washing-machines-paper-finds-11555936276#:~:text=President%20Trump&#039;s%20tariffs%20on%20imported,of%20washing%20machines%20by%2012%25.">dramatically raised prices</a> for both washers <em>and</em> dryers, which economists last year <a href="https://bfi.uchicago.edu/wp-content/uploads/BFI_WP_201961-1.pdf">calculated</a> cost American consumers an additional $1.5 billion per year. Had U.S. retailers been unable spread out the washers’ cost increase to dryers, that already‐​high 12% price increase would have almost <em>doubled</em>. Given these higher costs, and even factoring in the additional tariff revenue collected by the U.S. government, the researchers found that – even under the rosiest job creation scenario — each new American appliance manufacturing job cost U.S. consumers $817,000 <em>per year</em>. Yikes.</li> </ul><p> </p><div data-embed-button="image" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="e9d67e08-e618-44f4-b8ba-547853c571ba" class="align-center embedded-entity" data-langcode="en"> <img srcset="/sites/cato.org/files/styles/pubs/public/2020-08/screencapture-www-wsj-com-articles-consumers-bore-cost-for-u-s-tariffs-on-washing-machines-paper-finds-11555936276-1596719099167.png?itok=vb-vk8F7 1x, /sites/cato.org/files/styles/pubs_2x/public/2020-08/screencapture-www-wsj-com-articles-consumers-bore-cost-for-u-s-tariffs-on-washing-machines-paper-finds-11555936276-1596719099167.png?itok=i5sNC7c4 1.5x" width="337" height="430" src="/sites/cato.org/files/styles/pubs/public/2020-08/screencapture-www-wsj-com-articles-consumers-bore-cost-for-u-s-tariffs-on-washing-machines-paper-finds-11555936276-1596719099167.png?itok=vb-vk8F7" alt="Washer prices increased after tariffs" typeof="Image" class="component-image" /></div> <ul><li>Second, according to an <a href="https://www.usitc.gov/publications/701_731/pub4941.pdf">August 2019 examination</a> of the tariffs’ effects by the United States’ International Trade Commission (ITC), which recommended the tariffs and is required by law to review them periodically, the tariffs have <em>not</em> produced a thriving domestic industry. Although capacity and employment reportedly increased, for example, actual production declined, “resulting in declining capacity utilization, lower productivity levels, and higher unit labor costs.” (The ITC also noted the aforementioned price increases.) Indeed, Whirlpool itself told the Commission that the safeguard “has fallen short of delivering the intended remedial benefits to the continuously operating U.S. producers” due to “unanticipated” responses to the tariffs by foreign exporters (absorbing some of the tariff cost), U.S. importers (stockpiling), and consumers (buying fewer appliances). [Ed. note: all of these actions are common and expected market responses to tariffs.]</li> </ul><ul><li>Finally, it’s doubtful that President Trump will mention Whirlpool’s own <a href="https://www.heritage.org/trade/commentary/whirlpool-advocated-tariffs-washers-now-its-going-through-the-wringers">financial difficulties</a> – caused in large part by <em>other Trump tariffs</em>. In particular, Trump’s “national security” tariffs on steel and aluminum cost the company $300 million per year, collapsing its profits and stock prices (which peaked in January 2018 after the tariffs were announced but <a href="https://www.heritage.org/trade/commentary/whirlpool-advocated-tariffs-washers-now-its-going-through-the-wringers">never recovered</a>). Whirlpool was also affected by Trump’s “Section 301” tariffs on Chinese imports and unsuccessfully sought <a href="https://comments.ustr.gov/s/docket?docketNumber=USTR-2019-0005">exclusions</a> therefrom. (Economic nationalism for thee, but not for me.) The ITC’s 2019 report notes that other U.S. appliance manufacturers faced similar cost pressures due to the steel, aluminum and China tariffs (which raised all prices, not just those for Chinese imports).</li> </ul><p>None of this inspires confidence about the President’s new economic nationalist plans to revive domestic production of pharmaceuticals and other “essential” medical goods. Granted, at this stage President Trump’s new executive order sounds more like a campaign message than a serious policy change, and it involves Buy American rules, not tariffs. However, the administration has already announced subsidies for new domestic production of both pharmaceutical inputs and finished generic drugs – despite <a href="https://www.cato.org/blog/governments-plan-turn-kodak-pharmaceutical-company-sure-seems-underdeveloped">serious questions</a> about the need and implementation of such plans – and economic nationalist policies have a <a href="https://www.cato.org/publications/policy-analysis/doomed-repeat-it-long-history-americas-protectionist-failures">long history of snowballing</a>. (In fact, Trump’s washing machine tariffs were actually the <em>third time</em> that Whirlpool had petitioned and received government protection from imports.) It’s quite logical to assume that subsidized national champions making low‐​margin bulk commodities like generic drugs and their ingredients will seek more government help when faced with intense, lower‐​cost import competition, and that the government will at that point have a strong incentive to provide it.</p> <p>If Trump’s washing machine tariffs are any indication, however, we should all hope that they pass on the chance – especially for something far more essential than a washer‐​dryer.</p> Thu, 06 Aug 2020 13:40:57 -0400 Scott Lincicome https://www.cato.org/blog/will-president-trump-do-essential-medicines-what-he-did-washing-machines-lets-hope-not If Only Senator Hawley Could Legislate Away Unintended Consequences https://www.cato.org/blog/only-senator-hawley-could-legislate-away-unintended-consequences Scott Lincicome <p>Seeking to prove the <a href="https://en.wikipedia.org/wiki/The_road_to_hell_is_paved_with_good_intentions">old adage</a> about roads and good intentions, Missouri Senator Josh Hawley has recently introduced legislation, <a href="https://www.hawley.senate.gov/sen-hawley-introduce-bill-hold-corporate-america-accountable-having-slave-labor-supply-chains">The Slave‐​Free Business Certification Act of 2020</a>, that would impose steep fines and other penalties on large companies doing business in the United States, unless they regularly audited their global supply chains and certified that they <em>and</em> their suppliers did not utilize “forced labor.” The bill’s presumed intent is to discourage slave labor around the world – a&nbsp;goal that’s both laudable and, given troubling reports out of China and elsewhere, still quite important. Unfortunately, good intentions don’t <s>usually</s>necessarily make good policy, and in this case recent history shows how Hawley’s bill would likely make things <em>worse</em>, not better, for the world’s most vulnerable people.</p> <p>The Mercatus Center’s Tyler Cowen helpfully summarized the bill’s theoretical flaws in a&nbsp;recent <em><a href="https://www.bloomberg.com/opinion/articles/2020-07-31/fight-slavery-with-boycotts-not-a-new-law-about-supply-chains">Bloomberg</a></em><a href="https://www.bloomberg.com/opinion/articles/2020-07-31/fight-slavery-with-boycotts-not-a-new-law-about-supply-chains"><span> column</span></a>, noting that the onerous supply chain regulations would most likely cause companies – worried about high compliance costs, bad publicity, and scary penalties – simply to move their supply chains “from the poorest and neediest” countries to wealthier places clearly free of “forced labor” (which, as Cowen helpfully <a href="https://marginalrevolution.com/marginalrevolution/2020/08/how-not-to-fight-modern-day-slavery.html">adds</a>, the Hawley bill defines more broadly than slavery). Sadly, forced labor remains somewhat common around the world, but an exodus of multinational capital and business practices from these places would likely lead to worse, not better, labor conditions. And, like most forms of <a href="https://www.cato.org/publications/policy-analysis/regulatory-protectionism-hidden-threat-free-trade">regulatory protectionism</a>, the law also would likely boost largest corporations (i.e., the ones with the in‐​house lobbying, legal and accounting resources to shoulder new compliance burdens) and increase prices for U.S. consumers. This is <a href="https://www.cato.org/multimedia/cato-daily-podcast/tariffs-not-only-impose-immense-economic-costs-also-fail-achieve-their">Trade Econ 101</a>.</p> <p>We needn’t, however, rely on wonky economic theory to see the likely consequences of Hawley’s legislation. In fact, recent experience with a&nbsp;similar policy – the “conflict minerals” reporting requirements in <a href="https://www.sec.gov/spotlight/dodd-frank-section.shtml#1502">Section 1502</a> of the 2010 Dodd‐​Frank Act – shows that, contrary to some <a href="https://twitter.com/oren_cass/status/1289220424992251905">some claims</a> that onerous supply chain reporting mandates are easy and effective, their end result would most likely be more, not less, of the very thing the mandates are trying to discourage. Section 1502 was similar to Hawley’s proposal in that it required multinational manufacturers like Apple and Intel to audit and disclose whether their supply chains utilized “conflict minerals” (tantalum, tin, gold or tungsten, which are commonly found in smartphones and other consumer electronics) sourced from the Democratic Republic of the Congo (DRC) or an adjoining country. Section 1502 also had similar intentions: the mining of these minerals reportedly funded warlords and fueled violence in the region, so a&nbsp;supply chain disclosure rule would force multinationals to scrutinize their suppliers and weed out the bad actors, and thus cut off the warlords’ funds.</p> <p>Unfortunately, the Section 1502 rules proved to be a&nbsp;<a href="https://www.youtube.com/watch?v=GwQW3KW3DCc">huge mistake</a>. Shortly after the law entered into force, <a href="https://www.nytimes.com/2011/08/08/opinion/how-congress-devastated-congo.html?_r=1">reports</a> emerged that, instead of complying with the new regulations, global corporations simply abandoned the DRC – and its poor miners and small‐​scale purchasers – entirely. This effective embargo on the region not only devastated it further, but it actually benefited “some of the very [DRC warlords] it was meant to single out,” allowed less‐​scrupulous Chinese manufacturers to move in, and undermined civil society groups working to end horrific violence and poverty in the DRC.</p> <p>Things didn’t improve in the following years, either. In fact, Hawley’s fellow Republicans in 2013 held a&nbsp;<a href="https://www.govinfo.gov/content/pkg/CHRG-113hhrg81758/pdf/CHRG-113hhrg81758.pdf">hearing</a> before the House Subcommittee on Monetary Policy and Trade on “The Unintended Consequences of Dodd-Frank’s Conflict Minerals Provision,” at which several participants from across the spectrum advocated for Section 1502’s reform or elimination due to its harmful impact on the DRC. In 2014, dozens of human rights activists and academics <a href="http://www.humanosphere.org/human-rights/2014/09/conflict-mineral-law-dr-congo-harm-good-say-experts/">called</a> for the provision’s repeal because, while a&nbsp;few industry giants had resumed business in the DRC, most mines remained off limits and millions of Congolese miners remained unemployed (or worse). Meanwhile, armed groups and smugglers continued to thrive.</p> <p>Subsequent academic work has confirmed these anecdotes – and the activists’ worst fears. A&nbsp;<a href="https://www.perc.org/2018/09/27/the-unintended-consequences-of-u-s-conflict-mineral-regulation/">2016 study</a> found that Dodd‐​Frank conservatively “increased infant mortality from a&nbsp;baseline average of 60 deaths per 1,000 births to 146 deaths per 1,000 births over this period—a 143 percent increase,” likely by reducing mother’s consumption of infant health care goods and services. A&nbsp;separate <a href="https://www.journals.uchicago.edu/doi/abs/10.1086/689865">study</a> from 2016 found that the “legislation increased looting of civilians and shifted militia battles toward unregulated gold‐​mining territories” in 2011 and 2012. Another <a href="https://journals.plos.org/plosone/article?id=10.1371/journal.pone.0201783">paper</a> from 2018 found that the policy also backfired in the longer run (2013–2015): “the introduction of Dodd‐​Frank increased the incidence of battles with 44%; looting with 51% and violence against civilians with 28%, compared to pre‐​Dodd Frank averages.” Finally, in late 2019 economist Jeffery Bloem <a href="https://blogs.worldbank.org/impactevaluations/unintended-consequences-regulating-conflict-minerals-africas-great-lakes-region">found</a> that “the passage of the Dodd‐​Frank Act <em>roughly doubled</em> the prevalence of conflict in the DRC,” and “[v]iolence against civilians, rebel group battles, riots and protests, and deadly conflict all increase within the DRC due to the passage of the Dodd‐​Frank Act.”</p> <p>In short, a&nbsp;U.S. law seeking to discourage conflict and suffering in the DRC ended up <em>breeding more it</em>.</p> <p>It’s<em>&nbsp;</em>a&nbsp;depressing tale of <a href="https://www.econlib.org/library/Enc/UnintendedConsequences.html">Unintended Consequences</a>&nbsp;that puts a&nbsp;real face on Cowen’s theory and crystallizes the flaws in Hawley’s plan to stop forced labor around the world.&nbsp;It also shows&nbsp;why alternative policies, such as the Xinjiang boycotts and targeted sanctions that Cowen suggests, are a&nbsp;better approach to attacking the serious issues&nbsp;of slavery and&nbsp;human trafficking. Of course, as I&nbsp;<a href="https://www.cato.org/publications/commentary/case-free-trade">noted</a> last year, arguably the <em>best</em> way to improve working conditions for the world’s poorest people is freer trade with least developed countries:</p> <blockquote><p>The lowering of U.S. trade barriers, along with American leadership in creating agreements and institutions such as the WTO, has produced immeasurable benefits for the world’s poorest people. As the World Bank noted in its Report on the Role of Trade in Ending Poverty, since 1990, “a dramatic increase in developing‐​country participation in trade has coincided with an equally sharp decline in extreme poverty worldwide,” and the number of people living in extreme poverty has collapsed. Trade has also “helped increase the number and quality of jobs in developing countries, stimulated economic growth, and driven productivity increases.”</p> <p>A new report from the International Labor Organization provides jaw‐​dropping stats in this regard: Between 1993 and 2018, the share of individuals in low‐ and middle‐​income countries working in extreme poverty fell from almost 42 percent to less than 10 percent — a&nbsp;decline of around 600 million people. Most moved from subsistence farming to formal wage or salary work, providing themselves with first‐​time access to health care and other benefits. And, contrary to popular belief, the job creation in developing countries did not happen primarily in “sweatshop” manufacturing: The share of industrial workers in low‐ and middle‐​income countries almost did not change between 1991 and 2018, with job growth instead coming from sectors such as construction and retail trade; between 1999 and 2017, inflation‐​adjusted real wages in these countries tripled. Child labor is also disappearing: The overall number of child workers (ages five to 17) decreased by approximately 94 million between 2000 and 2016 (from 246 million to 152 million) and is projected to decline by tens of millions more by 2025. These improvements have been especially strong among women and girls, who in many countries faced truly horrible social conditions (hunger, arranged marriages, etc.) before these new jobs existed.</p> </blockquote> <p>I can’t say I’m optimistic that the Senator – who has elsewhere <a href="https://www.cato.org/blog/senator-hawleys-many-misunderstandings-wto">demonstrated</a> a&nbsp;<a href="https://twitter.com/scottlincicome/status/1263210548524695553">questionable understanding</a> of trade <em>and</em> forced labor (which U.S. law <a href="https://www.cbp.gov/trade/programs-administration/forced-labor#:~:text=USMCA-,Forced%20Labor,labor%20%E2%80%93%20including%20forced%20child%20labor.">already restricts</a>) – will learn this economic lesson or the unfortunate history of Dodd‐​Frank and the DRC. Hopefully, his colleagues in Congress will learn about it before millions of the world’s poorest suffer a&nbsp;similar fate.</p> Mon, 03 Aug 2020 16:47:34 -0400 Scott Lincicome https://www.cato.org/blog/only-senator-hawley-could-legislate-away-unintended-consequences Scott Lincicome participates in the webinar, “The China Shock in Context: Understanding Normalized Trade with China and its Role in Contemporary Policy Discussions,” hosted by the R Street Institute< https://www.cato.org/multimedia/media-highlights-tv/scott-lincicome-participates-webinar-china-shock-context Mon, 03 Aug 2020 12:02:29 -0400 Scott Lincicome https://www.cato.org/multimedia/media-highlights-tv/scott-lincicome-participates-webinar-china-shock-context Mission Accomplished? https://www.cato.org/blog/mission-accomplished Scott Lincicome <p>“When net exports are negative, that is, when a country runs a trade deficit by importing more than it exports, this subtracts from growth.” — White House senior adviser Peter Navarro and Commerce Secretary Wilbur Ross, <a href="https://assets.donaldjtrump.com/Trump_Economic_Plan.pdf">2016</a></p> <p><a href="https://fred.stlouisfed.org/graph/?g=tyXp">Hmm</a>:</p> <p> </p><div data-embed-button="image" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="0388cca2-da73-4733-8f44-de3a17527767" data-langcode="en" class="embedded-entity"> <img srcset="/sites/cato.org/files/styles/pubs/public/2020-07/fredgraph.png?itok=8fdJxrtV 1x, /sites/cato.org/files/styles/pubs_2x/public/2020-07/fredgraph.png?itok=nuCIeZqc 1.5x" width="700" height="270" src="/sites/cato.org/files/styles/pubs/public/2020-07/fredgraph.png?itok=8fdJxrtV" alt="net exports and GDP" typeof="Image" class="component-image" /></div> <p>(For further insights on the trade deficit and GDP, see my Cato colleague Dan Ikenson’s work <a href="https://www.cato.org/publications/commentary/navarros-trade-views-misguided-dangerous">here</a> and <a href="https://www.cato.org/blog/peter-navarro-harvard-phd-economist-trade-warrior">here</a>.)</p> Thu, 30 Jul 2020 12:44:50 -0400 Scott Lincicome https://www.cato.org/blog/mission-accomplished The Government’s Plan to Turn Kodak Into a Pharmaceutical Company Sure Seems Underdeveloped https://www.cato.org/blog/governments-plan-turn-kodak-pharmaceutical-company-sure-seems-underdeveloped Scott Lincicome <p>The <em>Wall Street Journal</em> <a href="https://www.wsj.com/articles/kodak-lands-765-million-u-s-loan-in-start-of-medical-supply-chain-fix-11595930400">reports</a> that Eastman Kodak Co. has received initial clearance for a $765 million loan from the U.S. International Development Finance Corporation (DFC), issued under the Defense Production Act with no congressional input or oversight (<a href="https://www.washingtonpost.com/opinions/2020/04/28/we-dont-need-guessing-games-we-need-trump-be-transparent-about-ordering-tests/">or transparency</a>), to produce “starter materials” and “active pharmaceutical ingredients” (APIs) for generic medicines, including the President’s favorite drug hydroxychloroquine. According to the <em>WSJ</em> story, the government financing – if formally committed after due diligence – would allow the (<a href="https://hbr.org/2016/07/kodaks-downfall-wasnt-about-technology?registration=success">famously</a>-<a href="https://petapixel.com/2018/10/19/why-kodak-died-and-fujifilm-thrived-a-tale-of-two-film-companies/">mismanaged</a>) camera‐​turned‐​digital‐​turned‐<a href="https://ftalphaville.ft.com/2020/07/29/1596011042000/Once-again-Kodak-pivots--and-the-share-price-explodes/">cryptocurrency</a> company to “change gears” once again and become a “pharmaceutical company,” with this brand new division eventually (supposedly) making up 30% to 40% of Kodak’s entire business.</p> <p>For the U.S. government, the goal of the loan is to “reduce reliance on other countries for drugs,” especially in case of a pandemic. Although multiple sources identified China as the primary concern (<a href="https://www.cato.org/blog/does-us-semiconductor-industry-need-urgent-federal-support-stop-china">isn’t it always?</a>), White House senior adviser Peter Navarro was more honest about the loan’s actual intent – supply chain “repatriation”:</p> <blockquote><p>This is not about China or India or any one country…. It’s about America losing its pharmaceutical supply chains to the sweat shops, pollution havens, and tax havens around the world that cheat America out of its pharmaceutical independence.</p> </blockquote> <p>President Trump similarly <a href="https://twitter.com/Breaking911/status/1288226416849453058">hailed</a> the deal as a “breakthrough in bringing pharmaceutical manufacturing back to the United States.”</p> <p>Given these statements and the <a href="https://www.whitehouse.gov/presidential-actions/eo-delegating-authority-dpa-ceo-u-s-international-development-finance-corporation-respond-covid-19-outbreak/">emergency</a> action at issue, you’d think that American pharmaceutical manufacturers are in dire straits or that the United States is now suffering major shortages of critical pharmaceuticals. Fortunately, a review of the available data tells a different story.</p> <p>First, although solid public stats on global API production are <a href="https://www.rstreet.org/wp-content/uploads/2020/06/Final-No.-197-Protectionism-in-Pharma-Supply-Chain.pdf">not available</a>, the <a href="https://www.cato.org/publications/commentary/supply-chain-repatriation-its-buyer-nation-beware">data we have</a> do not indicate that government funding is urgently needed:</p> <blockquote><p>[A]ccording to the Food and Drug Administration, of the roughly 2,000 global manufacturing facilities that produce active pharmaceutical ingredients (APIs), 13 percent are in China; 28 percent are in the USA, 26 percent in the EU, and 18 percent in India. For the APIs of World Health Organization “essential medicines” on the U.S. market, 21 percent of manufacturing facilities are located in the United States, 15 percent in China; and the rest in the EU, India, and Canada.</p> </blockquote> <p>The FDA <a href="https://www.fda.gov/news-events/congressional-testimony/safeguarding-pharmaceutical-supply-chains-global-economy-10302019">adds</a> that the United States was home to 510 API facilities in 2019, 221 of which supply the aforementioned “essential medicines.”</p> <p>Second, U.S. government data – on output, R&amp;D and capital expenditures (see tables 1–3 below) – show that American pharmaceutical manufacturers are far from the basket case that Navarro describes:</p> <p> <div data-embed-button="embed" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="bf93cab6-3bca-47a9-9340-af0f3a83b530" data-langcode="en" class="embedded-entity"> <div class="embed embed--infogram js-embed js-embed--infogram"> <div class="infogram-embed" data-id="9f8d0cf7-4112-43dc-a504-a38ee45e5432" data-type="interactive" data-title="Pharmaceutical Manufacturing"></div> </div> </div> </p><p>A recent <a href="https://www.wto.org/english/news_e/news20_e/rese_03apr20_e.pdf">report</a> from the World Trade Organization further notes that, while the United States is indeed a major importer of pharmaceutical products, it’s also one of the world’s largest exporters, having shipped almost $41 billion in medicines (35% of total U.S. medical goods exports) last year. So it’s safe to say that, contra Navarro and Trump, this is hardly an industry in serious distress.</p> <p>Third, the pharmaceutical supply chain has held up pretty well (so far). Imports of pharmaceuticals that the U.S. International Trade Commission recently <a href="https://www.cato.org/blog/new-data-show-americas-limited-dependence-china-essential-medical-goods">deemed critical</a> to fighting COVID-19 have not collapsed in 2020 – in fact, <a href="https://dataweb.usitc.gov/">only 16 of 63</a> products have seen an average monthly decline of more than 20% (by quantity) as compared to the product’s monthly average in 2019. A majority (35) have <em>increased </em>this year – some quite substantially. These are top‐​line estimates in an extremely volatile market so caution is warranted, but they’re still noteworthy, given that the <em>entire world</em> – including major pharmaceutical suppliers in China, Europe, India and elsewhere – was suffering through a generational pandemic for most or all of the months at issue.</p> <p>Imports, of course, are only <a href="https://www.cato.org/blog/new-data-show-americas-limited-dependence-china-essential-medical-goods">one part of the supply chain story</a> (inventories, stockpiles, domestic production and other factors are also relevant). Most importantly, there have been few (if any) signs of major national drug shortages. The last <a href="https://www.fda.gov/emergency-preparedness-and-response/counterterrorism-and-emerging-threats/coronavirus-disease-2019-covid-19#new">FDA notice</a> on a potential shortage was in late March for the trendy (at the time) hydroxychloroquine – a shortage that <a href="https://www.fda.gov/news-events/press-announcements/coronavirus-covid-19-update-fda-revokes-emergency-use-authorization-chloroquine-and">never actually materialized</a>. There’s also been no major spike in drugs that the FDA lists as “currently in shortage”: as I <a href="https://www.cato.org/publications/commentary/supply-chain-repatriation-its-buyer-nation-beware">noted</a> a few months ago, there were 109 drugs on the list in mid‐​December of last year; 103 in late February 2020; and then 108 in mid‐​April. This week, after months of unanticipated chaos, that number <a href="https://www.accessdata.fda.gov/scripts/drugshortages/default.cfm">stood</a> at 117 – a little higher, yes, but not a crisis.</p> <p>All of this raises a host of questions that deserve to be answered before a dollar of taxpayer money is actually sent to Rochester:</p> <ul><li>Even assuming for the sake of argument that sagging domestic API production qualifies as a national emergency, why did Kodak, which has no API or other pharmaceutical experience (though it does make chemicals), receive this government loan, instead of it going to one or more of the <em>hundreds</em> of API facilities already operating in the United States?</li> <li>Which APIs will Kodak’s new venture produce? The DFC <a href="https://www.dfc.gov/media/press-releases/dfc-sign-letter-interest-investment-kodaks-expansion-pharmaceuticals">press release</a> touting the loan notes that “Kodak Pharmaceuticals will produce critical pharmaceutical components that have been identified as essential but have lapsed into chronic national shortage, as defined by the [FDA].” However, a <a href="https://search.usa.gov/search?utf8=%E2%9C%93&amp;affiliate=fda1&amp;sort_by=&amp;query=%22chronic+national+shortage%22">search</a> of the FDA’s website shows no such term, and FDA’s <a href="https://www.fda.gov/news-events/press-announcements/coronavirus-covid-19-supply-chain-update">last “supply chain update”</a> reported no drug, biologic or ingredient shortages at that time. Indeed, the DFC’s statement about Kodak producing an “identified” list of “critical” APIs seemingly contradicts a subsequent one that “[Kodak] plans to coordinate closely with the Administration and pharmaceutical manufacturers <em>to identify</em> and prioritize components that are most critical to the American people and U.S. national security.” So which is it?</li> <li>Why is federal government involvement needed here at all? If a famous, <a href="https://www.businesswire.com/news/home/20200317005784/en/Kodak-Reports-Full-Year-2019-Financial-Results#:~:text=%2D%2D(BUSINESS%20WIRE)%2D%2DEastman,of%20the%20Flexographic%20Packaging%20Division.">billion‐​dollar corporation</a> has a viable business plan, and if these “critical” APIs have indeed been in “chronic short supply” for American pharmaceutical manufacturers (who, as shown above, have plenty of money to spend), it stands to reason that financial assistance would be available from a private source on reasonable terms (DFC’s <a href="https://www.dfc.gov/sites/default/files/media/documents/DFC-DPALoanProgramGuide.pdf">express loan condition</a>), and that neither government coordination nor government capital would therefore be necessary. In other words, where’s the <a href="https://www.cato.org/publications/commentary/beware-dogma">market failure</a>?</li> <li>Finally, what’s the urgency here? Kodak’s API production will probably take years to get off the ground, and the data above raise questions about whether it’s even needed. In fact, the FDA has <a href="https://www.fda.gov/news-events/congressional-testimony/safeguarding-pharmaceutical-supply-chains-global-economy-10302019">stated</a> (<a href="https://www.fda.gov/news-events/press-announcements/coronavirus-covid-19-supply-chain-update">repeatedly</a>) that it needs more information before it could make any definitive conclusions about the global API situation, drug supply chain “resiliency,” and U.S. national security. Private pharmaceutical companies, moreover, are already <a href="https://www.mckinsey.com/industries/pharmaceuticals-and-medical-products/our-insights/pharma-operations-the-path-to-recovery-and-the-next-normal">adapting</a> to a new reality that accounts for lessons learned from COVID-19 (and for worsening U.S.-China trade frictions). Thus, the supply chain issue that Kodak and the Trump administration claim to have identified yesterday might not even exist by the time Kodak Pharmaceutical is operational. The original CARES Act has <a href="https://www.congress.gov/bill/116th-congress/senate-bill/3548/text?q=product+update#toc-idF66D8E36FC5F45A084A3DDC0D7DED21E">commissioned</a> a new study of the pharmaceutical supply chain to identify potential vulnerabilities. Maybe government action might (<em>might</em>) be necessary at that time, but until then, the Trump administration seems to be throwing darts blindfolded. Why?</li> </ul><p>Unfortunately, there’s seemingly no way to know the answers to these questions at this time (though DFC <a href="https://www.dfc.gov/sites/default/files/media/documents/DFC-DPALoanProgramGuide.pdf">says</a> it eventually “will make detailed project‐​level information publicly available, consistent with applicable law”). This didn’t stop Kodak’s stock from exploding upward this week (some of it a <a href="https://www.benzinga.com/news/20/07/16814320/kodak-had-some-very-suspicious-trading-activity-ahead-of-drug-news">little early</a>?), but hopefully someone in Congress is a bit more skeptical.</p> Wed, 29 Jul 2020 18:16:08 -0400 Scott Lincicome https://www.cato.org/blog/governments-plan-turn-kodak-pharmaceutical-company-sure-seems-underdeveloped Testing the “China Shock” https://www.cato.org/multimedia/cato-daily-podcast/testing-china-shock Scott Lincicome, Caleb O. Brown <div class="mb-3 spacer--nomargin--last-child text-default"> <p>Were economists and others wrong about China with respect to trade? Cato’s Scott Lincicome is author of “<a href="https://www.cato.org/publications/policy-analysis/testing-china-shock-was-normalizing-trade-china-mistake" rel="noopener noreferrer" target="_blank">Testing the ‘China Shock.’</a>”</p> </div> Fri, 24 Jul 2020 17:31:23 -0400 Scott Lincicome, Caleb O. Brown https://www.cato.org/multimedia/cato-daily-podcast/testing-china-shock Does the U.S. Semiconductor Industry Really Need Urgent Taxpayer Support to Stop China? https://www.cato.org/blog/does-us-semiconductor-industry-need-urgent-federal-support-stop-china Scott Lincicome <p>Today, the United States Senate <a href="https://www.wsj.com/articles/senate-passes-defense-policy-bill-with-bipartisan-support-11595530292?mod=djemalertNEWS">approved</a> the FY2021 National Defense Authorization Act (NDAA), which contains an <a href="https://www.congress.gov/amendment/116th-congress/senate-amendment/2244/actions">amendment</a> passed earlier this week, with little floor debate and by a 96-4 margin, that would provide billions of dollars in new federal support for the U.S. semiconductor industry, most notably tax credits and grants for the construction of new domestic manufacturing facilities. The House <a href="https://www.congress.gov/bill/116th-congress/house-bill/6395/amendments?searchResultViewType=expanded">passed</a> a similar bill with a <a href="https://amendments-rules.house.gov/amendments/MATSUI_070_xml71720090438438.pdf">similar amendment</a> earlier this week, so the legislation now goes to conference, where the subsidies are expected to survive.  The two main reasons for the Senate and House amendments (formerly a standalone bill called the “<a href="https://www.warner.senate.gov/public/index.cfm/2020/6/bipartisan-bicameral-bill-will-help-bring-production-of-semiconductors-critical-to-national-security-back-to-u-s">CHIPS Act</a>”), as helpfully summarized by House co-sponsor and Foreign Affairs Committee Ranking Member <a href="https://www.warner.senate.gov/public/index.cfm/2020/6/bipartisan-bicameral-bill-will-help-bring-production-of-semiconductors-critical-to-national-security-back-to-u-s">Michael McCaul</a> (R-TX), are (1) to boost U.S. semiconductor manufacturing and jobs and (2) to prevent China from “dominating” the global semiconductor market:</p> <blockquote><p>Ensuring our leadership in the future design, manufacturing, and assembly of cutting edge semiconductors will be vital to United States national security and economic competitiveness. As the Chinese Communist Party aims to dominate the entire semiconductor supply chain, it is critical that we supercharge our industry here at home. In addition to securing our technological future, the CHIPS Act will create thousands of high-paying U.S. jobs and ensure the next generation of semiconductors are produced in the US, not China.</p> </blockquote> <p>Similarly dire, China-centric statements have been issued by other supporters in Congress (<em>see</em>, <em>e.g.</em>, these from Senators <a href="https://www.alreporter.com/2020/07/22/jones-bill-aimed-at-bringing-jobs-back-from-china-included-in-senate-ndaa/">Doug Jones</a> (D-AL), <a href="https://www.cotton.senate.gov/?p=press_release&amp;id=1391">Tom Cotton</a> (R-AR), or <a href="https://www.schumer.senate.gov/newsroom/press-releases/following-their-push-schumer-gillibrand-announce-massive-federal-investment-in-semiconductor-manufacturing_including-incentives-to-expand-and-build-robust-domestic-microelectronics-industry--secured-in-national-defense-bill">Chuck Schumer</a> (D-NY)), most of whom – unsurprisingly – appear to have <a href="https://www.semiconductors.org/map/">semiconductor manufacturers</a> in their states or districts that stand to profit from the new taxpayer funds. (Schumer’s statement, in classic fashion, actually emphasizes how this cash will help New York companies.)</p> <p>The congressional statements, urgency and near-unanimity would lead a casual observer to believe that the U.S. semiconductor industry is in a truly-desperate position, hobbled by a heavily-subsidized, globally dominant China and in dire need of a massive and immediate injection of government support. That would not, however, be the reality – even <em><strong>assuming</strong></em> (<a href="https://www.pnas.org/content/112/50/15277">erroneously</a>) that “reshoring” global supply chains advances actually national security. Instead, numerous facts and analyses show the U.S. semiconductor industry to be in pretty good shape and the Chinese industry – while certainly subsidized – to <strong><em>not</em></strong> be the dangerous juggernaut that our elected officials claim.</p> <p>Let’s first start with the U.S. industry. Most basically, Bureau of Economic Analysis (BEA) <a href="https://apps.bea.gov/iTable/index_industry_gdpIndy.cfm">data</a> show U.S. “Semiconductor and other electronic component manufacturing” to have increased substantially in recent years, topping $113.4 billion in real gross output and $88 billion in real value-added in 2018 (the last year for which detailed data are available). Real gross output for “Semiconductor and related device manufacturing” alone reached $64.9 billion; more detailed value-added data are not available.</p> <p>The Semiconductor Industry of America (SIA) <a href="https://www.semiconductors.org/wp-content/uploads/2020/04/2020-SIA-Factbook-FINAL_reduced-size.pdf">further</a> <a href="https://www.semiconductors.org/chips-for-america-act-would-strengthen-u-s-semiconductor-manufacturing-innovation/">notes</a> that there are commercial semiconductor manufacturing facilities (called “fabs”) in 18 states, employing more than 240,000 Americans, and that the United States has 12.5 percent of global semiconductor manufacturing capacity. And while the U.S. industry does indeed utilize fabs around the world, the largest share (44.3%) of that work remains in the United States while only small portion (5.6%) is in China:</p> <p> </p><div data-embed-button="image" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="882efa64-04d6-40d9-be6f-aec2f111ec4e" data-langcode="en" class="embedded-entity"> <img srcset="/sites/cato.org/files/styles/pubs/public/2020-07/US%20Wafer%20Capacity%20by%20Location.png?itok=mng1_UBi 1x, /sites/cato.org/files/styles/pubs_2x/public/2020-07/US%20Wafer%20Capacity%20by%20Location.png?itok=H4KBYU8a 1.5x" width="512" height="315" src="/sites/cato.org/files/styles/pubs/public/2020-07/US%20Wafer%20Capacity%20by%20Location.png?itok=mng1_UBi" alt="Percent of U.S.-Headquartered Firm Semiconductor Wafer Capacity by Location" typeof="Image" class="component-image" /></div> <p>The United States is also a <a href="https://comtrade.un.org/data/">top-5 global exporter</a> of semiconductors and related equipment, shipping almost $47 billion in goods falling under Harmonized System subchapters 8542 ($40.0 billion) and 8541 ($6.7 billion) last year. These and other data led the SIA to <a href="https://www.semiconductors.org/2020-state-of-the-u-s-semiconductor-industry/">conclude</a> in its 2020 “State of the U.S. Semiconductor Industry” report that “the semiconductor manufacturing base in the United States remains on solid footing.”</p> <p>In terms of sales (not just manufacturing), moreover, the SIA reports that the U.S. industry is the global leader in market share, with “nearly half” of the entire world semiconductor market – a share that has been remarkably steady (ranging from the mid-40s to low-50s) since the late 1990s – and sales leadership in every major regional market, including China. Sales by U.S semiconductor firms also grew from $76.7 billion in 1999 to $192.8 billion in 2019 - a compound annual growth rate of almost 5%.</p> <p>Beyond output and sales, the U.S. semiconductor industry has been a global leader in capital spending (“capex”) and research and development – a testament to not only their business acumen but also U.S. <a href="https://finance.yahoo.com/chart/SMH#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">capital markets</a>. SIA notes that total R&amp;D and capital expenditures by U.S. semiconductor firms (including "fabless" companies) was $71.7 billion in 2019, growing steadily between 1999 and 2019 at a 6.2% annual rate. R&amp;D expenditures hit $39.8 billion last year, constituting 16.4% of the industry’s total sales last year – a “R&amp;D intensity” second only to pharmaceuticals in the United States and the highest in the world:</p> <p> </p><div data-embed-button="image" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="e9b6e580-ff44-458a-8615-19d02fa317f6" data-langcode="en" class="embedded-entity"> <img srcset="/sites/cato.org/files/styles/pubs/public/2020-07/R%26D%20Intensity.png?itok=9EoJYZWB 1x, /sites/cato.org/files/styles/pubs_2x/public/2020-07/R%26D%20Intensity.png?itok=TTYqo2wo 1.5x" width="700" height="559" src="/sites/cato.org/files/styles/pubs/public/2020-07/R%26D%20Intensity.png?itok=9EoJYZWB" alt="U.S. R&amp;D as a Percentage of Sales, Domestic and Global" typeof="Image" class="component-image" /></div> <p>The U.S. industry’s capex has been similarly world-class: SIA reports that 2018 capital expenditures reached “an all-time high of $32.7 billion” and constituted 12.5% of sales in 2019, with only Korea having a larger global share of semiconductor capex last year:</p> <p> </p><div data-embed-button="image" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="f1f6ad3f-0c0f-4548-9c1d-88e9f9c2af27" data-langcode="en" class="embedded-entity"> <img srcset="/sites/cato.org/files/styles/pubs/public/2020-07/Capital%20Intensity.png?itok=FDzr5rYp 1x, /sites/cato.org/files/styles/pubs_2x/public/2020-07/Capital%20Intensity.png?itok=C1HWiYy_ 1.5x" width="700" height="337" src="/sites/cato.org/files/styles/pubs/public/2020-07/Capital%20Intensity.png?itok=FDzr5rYp" alt="US Semiconductor Firms' Capital Intensity, Global" typeof="Image" class="component-image" /></div> <p>Other data corroborate these findings. According to the U.S. National Science Board’s <a href="https://ncses.nsf.gov/pubs/nsb20203/u-s-business-r-d">2020 report</a> on R&amp;D Trends, U.S. computer and electronic (including semiconductor) companies spent more on R&amp;D in 2016 (the last year available) than any other country surveyed – often many times more – with only South Korea’s sector having greater share of total or manufacturing R&amp;D than the United States:</p> <p> </p><div data-embed-button="embed" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="6e1956b3-298b-4c83-9936-0bda9ebab723" data-langcode="en" class="embedded-entity"> <div class="embed embed--infogram js-embed js-embed--infogram"> <div class="infogram-embed" data-id="1fe78fdc-bc1f-4429-aec2-48053d897bdd" data-type="interactive" data-title="Business R&amp;amp;D (2016)"></div> //--&gt; </div> </div> <p>The BEA <a href="https://apps.bea.gov/iTable/index_MNC.cfm">further calculates</a> that foreign multinational corporations in 2017 spent $7.3 billion and $2.2 billion on R&amp;D and capex, respectively, for their U.S. affiliates in the “semiconductors and other electronic components” sector, up from $4.4 billion and $1.9 billion in 2007. And U.S. semiconductor companies’ stock prices have <a href="https://finance.yahoo.com/chart/SMH#eyJpbnRlcnZhbCI6IndlZWsiLCJwZXJpb2RpY2l0eSI6MSwidGltZVVuaXQiOm51bGwsImNhbmRsZVdpZHRoIjo2LjIwNjg5NjU1MTcyNDEzOCwiZmxpcHBlZCI6ZmFsc2UsInZvbHVtZVVuZGVybGF5Ijp0cnVlLCJhZGoiOnRydWUsImNyb3NzaGFpciI6dHJ1ZSwiY2hhcnRUeXBlIjoibGluZSIsImV4dGVuZGVkIjpmYWxzZSwibWFya2V0U2Vzc2lvbnMiOnt9LCJhZ2dyZWdhdGlvblR5cGUiOiJvaGxjIiwiY2hhcnRTY2FsZSI6ImxpbmVhciIsInN0dWRpZXMiOnsi4oCMdm9sIHVuZHLigIwiOnsidHlwZSI6InZvbCB1bmRyIiwiaW5wdXRzIjp7ImlkIjoi4oCMdm9sIHVuZHLigIwiLCJkaXNwbGF5Ijoi4oCMdm9sIHVuZHLigIwifSwib3V0cHV0cyI6eyJVcCBWb2x1bWUiOiIjMDBiMDYxIiwiRG93biBWb2x1bWUiOiIjZmYzMzNhIn0sInBhbmVsIjoiY2hhcnQiLCJwYXJhbWV0ZXJzIjp7IndpZHRoRmFjdG9yIjowLjQ1LCJjaGFydE5hbWUiOiJjaGFydCJ9fX0sInBhbmVscyI6eyJjaGFydCI6eyJwZXJjZW50IjoxLCJkaXNwbGF5IjoiU01IIiwiY2hhcnROYW1lIjoiY2hhcnQiLCJpbmRleCI6MCwieUF4aXMiOnsibmFtZSI6ImNoYXJ0IiwicG9zaXRpb24iOm51bGx9LCJ5YXhpc0xIUyI6W10sInlheGlzUkhTIjpbImNoYXJ0Iiwi4oCMdm9sIHVuZHLigIwiXX19LCJzZXRTcGFuIjp7Im11bHRpcGxpZXIiOjUsImJhc2UiOiJ5ZWFyIiwicGVyaW9kaWNpdHkiOnsicGVyaW9kIjoxLCJpbnRlcnZhbCI6IndlZWsifX0sImxpbmVXaWR0aCI6Miwic3RyaXBlZEJhY2tncm91bmQiOnRydWUsImV2ZW50cyI6dHJ1ZSwiY29sb3IiOiIjMDA4MWYyIiwic3RyaXBlZEJhY2tncm91ZCI6dHJ1ZSwiZXZlbnRNYXAiOnsiY29ycG9yYXRlIjp7ImRpdnMiOnRydWUsInNwbGl0cyI6dHJ1ZX0sInNpZ0RldiI6e319LCJjdXN0b21SYW5nZSI6bnVsbCwic3ltYm9scyI6W3sic3ltYm9sIjoiU01IIiwic3ltYm9sT2JqZWN0Ijp7InN5bWJvbCI6IlNNSCIsInF1b3RlVHlwZSI6IkVURiIsImV4Y2hhbmdlVGltZVpvbmUiOiJBbWVyaWNhL05ld19Zb3JrIn0sInBlcmlvZGljaXR5IjoxLCJpbnRlcnZhbCI6IndlZWsiLCJ0aW1lVW5pdCI6bnVsbCwic2V0U3BhbiI6eyJtdWx0aXBsaWVyIjo1LCJiYXNlIjoieWVhciIsInBlcmlvZGljaXR5Ijp7InBlcmlvZCI6MSwiaW50ZXJ2YWwiOiJ3ZWVrIn19fV19">steadily climbed</a> over the last decade. Clearly, the sector remains quite attractive.</p> <p>As a result of this investment, the SIA notes that in 2019 the United States remained at or near the “leading edge” of current semiconductor technology (“essentially neck-and-neck [with Korea and Taiwan] in logic process technology as all three nations have raced to bring leading-edge 7/10 nm technology to market”). Taiwan’s TSMC has <a href="https://www.gsmarena.com/production_of_snapdragon_875_chips_has_started_on_tsmcs_5_nm_node-news-43892.php">reportedly</a> begun production of 5 nm chips, but these are just now hitting the market. U.S.-based Intel, meanwhile, is <a href="https://www.extremetech.com/computing/306978-intel-expects-to-reach-process-parity-with-7nm-in-2021-lead-on-5nm">racing</a> to catch up after making what appears to be a bad bet on 10 nm wafers a few years ago.</p> <p>In short, the U.S. semiconductor industry may have temporarily lost its global manufacturing lead, but it’s still quite healthy – in many ways still globally dominant – and is investing billions of its own dollars to stay at or near the top in the future (something the companies’ shareholders seem to think they will accomplish).</p> <p>China, on the other hand, remains <strong><em>years</em> </strong>behind industry leaders in the United States, Korea and Taiwan, and it might never catch up, despite (or perhaps because of) boatloads of subsidies and industrial planning. In fact, a detailed <a href="https://www.usitc.gov/publications/332/journals/chinese_semiconductor_industrial_policy_prospects_for_success_jice_aug_2019.pdf">2019 report</a> on China’s semiconductor industry by the United States International Trade Commission showed that it is precisely this planning and subsidization, along with human capital constraints and international competition, holding back China’s industry:</p> <blockquote><p>China’s semiconductor industrial plans have lacked defined goals and clear implementation strategies, and have been hampered by bureaucratic redundancies. Relying heavily on state-owned enterprises (SOEs), these plans have been hindered by poor management, production inefficiencies, and a level of support from the state that resulted in profligate spending. In particular, the SOEs lack absorptive and innovative capacity, producing chips that fail to gain commercial traction….</p> <p>China’s current plans look more sustainable, but still rely heavily on well-funded but poorly directed SOEs that benefit from a market that lacks true competition. At the same time, some of the larger challenges that hindered previous development, such as a dearth of human capital, remain unaddressed.</p> </blockquote> <p>The report thus concludes that China’s industrial planning efforts – <strong><em>the express basis for new U.S. government subsidies</em></strong> – “will not achieve their desired success,” a conclusion shared by many other <a href="https://www.gizchina.com/2020/06/25/analysts-believe-that-smic-will-not-develop-a-process-below-7-5nm/">industry experts</a>. In fact, analysts recently told the <em><a href="https://www.wsj.com/articles/chinas-semiconductor-contender-isnt-holding-that-many-chips-11594030022">Wall Street Journal</a> </em>that China’s national champion, Semiconductor Manufacturing International Corp. (SMIC), “is still around five years behind TSMC and the gap will likely remain in the foreseeable future.”</p> <p>Some threat.</p> <p>Finally, there is the question of whether these new U.S. subsidies will achieve their “national security” or economic objectives; here too, there’s reason for concern (beyond the aforementioned point about re-shoring and security). Previous U.S. government support for the semiconductor industry has ranged from “<a href="https://www.aei.org/technology-and-innovation/on-semiconductor-industrial-policy-proceed-with-caution/">checkered</a>” to <a href="https://www.cato.org/publications/policy-analysis/doomed-repeat-it-long-history-americas-protectionist-failures">total debacle</a>. In the 1980s, for example, U.S. efforts to support the semiconductor industry through protectionism and industrial policy – then deemed necessary to fend off Japan – cost U.S. computer companies and the economy billions of dollars; encouraged offshoring of high-tech industries and political dysfunction in the United States and Japan; failed to boost U.S. semiconductor production capacity; and actually strengthened Japanese and Korean competitors. Indeed, government policymakers ended up picking the <em><strong>entirely wrong product</strong></em> to subsidize and protect in its attempt to ensure “the future of U.S. global technology leadership.” Yikes.</p> <p>More recent history might not be much better. TSMC, for example, just scored its own U.S. billions to produce semiconductors in Arizona, but the <em>Wall Street Journal</em> <a href="https://www.wsj.com/articles/taiwan-company-to-build-advanced-semiconductor-factory-in-arizona-11589481659">reports</a> that, although construction will begin next year, actual production is targeted for 2024 (at best). Once operational, moreover, the fab will make only 20,000 wafers a month (“making it a relatively small facility for a company that made more than 12 million wafers last year alone”), and it “would likely not be at the leading edge of chip-making technology” because TSMC and other companies plan to move to even smaller, 3 nm chips in the next few years. And, while heralded as a <a href="https://focustaiwan.tw/politics/202005150010">“national security” victory</a> by Secretary of State Pompeo, the aforementioned article notes that “TSMC’s project would also not likely address a desire by the Pentagon to have a U.S. firm make more chips for defense purposes.” (On the other hand, the project, <em>has</em> been deemed a political “<a href="https://www.nytimes.com/2020/05/14/technology/trump-tsmc-us-chip-facility.html">win</a>” for President Trump in a state that he needs in 2020. So it’s got that going for it, <a href="https://www.youtube.com/watch?v=pBWcRqPesws">which is nice</a>.)</p> <p>Lastly, these subsidies could actually hurt U.S. semiconductor exports, which as noted above are significant, and thus end up costing U.S. companies revenue or global market share. As I explained in a <a href="https://www.cato.org/publications/policy-analysis/countervailing-calamity-how-stop-global-subsidies-race">2012 Cato Institute paper</a>, global trade rules and national “countervailing duty” laws allow nations to slap duties on subsidized imports that are found to have “injured” the nation’s own domestic industry. These cases are especially easy where, as here, the subsidies expressly target a specific industry in law, and they ticked up the last time the United States joined the “global subsidies race” in 2009. Another round of “stimulus,” especially for major exporting industry, could do the same today.</p> <p>So, to recap: the House and Senate just fast-tracked billions in direct government subsidies (not just R&amp;D support) to U.S. semiconductor manufacturers that are, by their own account, “on solid footing,” in order to counter a threat that, by the U.S. government’s own account, doesn’t actually exist – billions that, if history is any guide, won’t produce clear benefits and could actually harm the industry.</p> <p>And who says Washington is broken?</p> <p>Ironically, recent U.S. policy – in particular onerous new restrictions on high-skill immigration – <a href="https://www.cato.org/blog/well-do-anything-american-innovation-we-wont-do">could actually help China</a> solve its human capital problem and thus boost its currently-low chances to become an actual player in the global semiconductor game. In a sane world, policymakers eager to help the U.S. semiconductor industry or to counter China’s high-tech ambitions would start there (and then move on to the <a href="https://www.semiconductors.org/growth-based-incentives-not-tariffs-will-strengthen-u-s-chip-manufacturing-and-leadership/">tariffs costing U.S. chipmakers</a> hundreds of millions of dollars) <strong><em>before</em></strong> ramming through billions of “emergency” taxpayer dollars to healthy companies. Even <em><strong>saner</strong></em> would be Congress and Washington policymakers having a serious debate about trade, industrial policy and national security, instead of just diving head-first into economic nationalism every time a <a href="https://twitter.com/Kate_OKeeffe/status/1267086027379834883">lobbyist or industry group</a> says the word “China.”</p> <p>As this week’s votes make clear, unfortunately, such sanity seems to be in very short supply these days.</p> <p></p> Thu, 23 Jul 2020 14:17:20 -0400 Scott Lincicome https://www.cato.org/blog/does-us-semiconductor-industry-need-urgent-federal-support-stop-china We’ll Do Anything for American Innovation, But We Won’t Do That https://www.cato.org/blog/well-do-anything-american-innovation-we-wont-do Scott Lincicome <p>It seems that everywhere you turn these days you’ll find someone in Washington <a href="https://www.nytimes.com/2019/08/20/opinion/america-industrial-policy.html">lamenting</a> the collapse of American innovation and industrial output, and, naturally, proposing his own industrial policy to solve the alleged problems. This includes both <a href="https://www.whitehouse.gov/briefings-statements/america-will-dominate-industries-future/">President Trump</a> and Democratic challenger <a href="https://joebiden.com/madeinamerica/">Joe</a> <a href="https://joebiden.com/supplychains/">Biden</a>, both of whom have promised all sorts of subsidies, protectionism and procurement mandates intended to reinvigorate the American industrial base and restore U.S. innovation supremacy. What these plans have mostly failed to emphasize, however, is how freer markets – especially the liberalization of U.S. trade and immigration restrictions – might help to achieve key industrial innovation objectives (without <a href="https://www.cato.org/blog/ignoring-recent-ignominious-history-buy-american">messy and costly central planning</a>)&nbsp;or how they’ve been harmed by past U.S. government restrictions.</p> <p>A new <a href="http://papers.nber.org/tmp/93044-w27538.pdf">NBER Working Paper</a> from Wharton’s Britta Glennon adds to a&nbsp;growing body of literature showing just how wrong‐​headed the candidates’ omission of these free market policies might very well be. In particular, Glennon shows that past U.S. restrictions on high‐​skilled immigration (implemented through caps on H1-B nonimmigrant visas) resulted not in an increase in hiring American workers but instead in a&nbsp;substantial offshoring of multinational corporation&nbsp;(MNC) jobs <strong>and</strong> R&amp;D activities to these companies’ affiliates in more welcoming countries. Perhaps even more concerning, given recent events at home and abroad, Glennon shows that one of the biggest beneficiaries of these U.S. immigration restrictions was <strong>China</strong>, and that U.S. firms doing the most R&amp;D offshored the most jobs.</p> <p>Glennon’s conclusions are worth quoting at length (emphasis mine and citations omitted):</p> <blockquote><p>[F]oreign affiliate employment increased as a&nbsp;direct response to increasingly stringent restrictions on H-1B visas. This effect is driven on the extensive and intensive margins; firms were more likely to open foreign affiliates in new countries in response, and employment increased at existing foreign affiliates. The effect is strongest among R&amp;D-intensive firms in industries where services could more easily be offshored. The effect was somewhat geographically concentrated: foreign affiliate employment increased both in countries like India and China with large quantities of high‐​skilled human capital and in countries like Canada with more relaxed high‐​skilled immigration policies and closer geographic proximity. These empirical results also are supported by interviews with US multinational firms and an immigration lawyer.</p> <p>Despite the outsized role that multinational firms play in the economy – for example, US multinational firms are responsible for 80% of US R&amp;D and employ about ¼&nbsp;of US private employees – <strong><em>policy debates surrounding immigration have largely overlooked the fact that multinational companies faced with decreased access to visas for skilled workers have an offshoring option, namely, hiring the foreign labor they need at their foreign affiliates</em></strong>. This is the first paper to provide evidence that multinational firms do in fact utilize this option – both at the extensive and the intensive margin – and to examine the relationship between foreign affiliate employees and immigrants, in contrast to the relationship between immigrants and native‐​born workers.</p> <p><strong><em>The results have important implications for understanding how multinational firms respond to artificial constraints on resources and how they globally re‐​distribute those resources. The results also have important policy implications; the offshoring of jobs appears to be an unforeseen consequence of restricting skilled immigration flows</em></strong><em>.</em> Even if H-1B immigrants displace some native workers, any policies that are motivated by concerns about the loss of native jobs should consider that policies aimed at reducing immigration have the unintended consequence of encouraging firms to offshore jobs abroad.</p> <p>The finding that skilled foreign‐​born workers will be hired at foreign affiliates rather than in the US also has important implications for the innovative capacity of the US. Skilled immigrants have been shown to have outsized impacts on innovation in the host country through spillovers. The spatial diffusion of these spillovers disappears with distance since innovative spillovers are geographically localized. <strong><em>From a&nbsp;nationalistic perspective, this is problematic; if skilled foreign‐​born workers are at a&nbsp;US firm’s foreign affiliate instead of in the US, the innovative spillovers that they generate will go to another country instead. Furthermore, the finding that immigrants often are not equally innovative outside the United States has even wider welfare implications. In short, restrictive H-1B policies could not only be exporting more jobs and businesses to countries like Canada [me: and China], but they also could be causing the U.S.’s innovative capacity to fall behind</em></strong><em>….</em></p> </blockquote> <p>Vice President Biden, to his credit, has elsewhere <a href="https://joebiden.com/immigration/">supported</a> “expanding the number of high‐​skilled visas and eliminating the limits on employment‐​based visas by country” in order to boost “American innovation and competitiveness.” Hopefully the Team Biden folks writing the campaign’s immigration plans can talk some sense into their colleagues writing the industrial policy plans, and perhaps even explain how freer access to <em>all</em> global resources – whether high‐​skilled labor or essential <a href="https://voxeu.org/article/costs-cascading-trade-protection">goods</a> like steel and machinery – can boost American companies’ innovation, output and global competitiveness while simultaneously denying potential adversaries those same advantages. As Glennon notes, multinational corporations that drive American R&amp;D have other production options abroad, and they’ll use those options when misguided U.S. policies push them to do so.</p> <p>Unfortunately, President Trump’s longstanding aversion to increased immigration or freer trade – and recent Trump administration efforts to restrict those things even further – provide little opportunity for similar liberalization hopes in the coming weeks or during any second Trump term. To paraphrase a&nbsp;great <a href="https://www.youtube.com/watch?v=9X_ViIPA-Gc">American poet</a>, they’ll do anything to boost American innovation (or to counter China’s rise), but they won’t do <strong><em>that</em></strong>.</p> Mon, 20 Jul 2020 19:10:50 -0400 Scott Lincicome https://www.cato.org/blog/well-do-anything-american-innovation-we-wont-do Scott Lincicome discusses his policy analysis, “Testing the “China Shock”: Was Normalizing Trade with China a Mistake?” on Freedom Works with Paul Malloy https://www.cato.org/multimedia/media-highlights-radio/scott-lincicome-discusses-policy-analysis-testing-china-shock-was Fri, 17 Jul 2020 11:08:45 -0400 Scott Lincicome https://www.cato.org/multimedia/media-highlights-radio/scott-lincicome-discusses-policy-analysis-testing-china-shock-was The Local, State, and Federal Rules that Make Your House More Expensive https://www.cato.org/multimedia/cato-daily-podcast/local-state-federal-rules-make-house-more-expensive Scott Lincicome, Caleb O. Brown <div class="mb-3 spacer--nomargin--last-child text-default"> <p>People concerned about housing costs should look to government at every level for regulations and restrictions that contribute to the high cost of housing. Cato’s Scott Lincicome comments.</p> </div> Thu, 16 Jul 2020 18:03:08 -0400 Scott Lincicome, Caleb O. Brown https://www.cato.org/multimedia/cato-daily-podcast/local-state-federal-rules-make-house-more-expensive Scott Lincicome discusses the “China shock” narrative on Carolina Journal Video https://www.cato.org/multimedia/media-highlights-tv/scott-lincicome-discusses-china-shock-narrative-carolina-journal Tue, 14 Jul 2020 10:50:49 -0400 Scott Lincicome https://www.cato.org/multimedia/media-highlights-tv/scott-lincicome-discusses-china-shock-narrative-carolina-journal Determining America’s “Dependence” on China for Essential Medical Goods https://www.cato.org/blog/new-data-show-americas-limited-dependence-china-essential-medical-goods Scott Lincicome <p>The unfortunate onset of COVID-19 has caused many politicians and pundits to proclaim that the United States is distressingly <a href="https://www.theatlantic.com/politics/archive/2020/04/us-britain-dependence-china-trade/610615/" rel="noreferrer noopener" target="_blank">dependent</a> on China for essential medical goods, and to ask whether this “dependence” demands new government programs—in particular, protectionism, subsidies and “Buy American” procurement mandates—to fix the alleged problem.<span> </span>A little‐​noticed <a href="https://usitc.gov/sites/default/files/publications/332/covid-19_related_goods_us_imports_and_tariffs_commission.xlsx">report</a> from United States International Trade Commission (ITC)<span> begins to provide the answer to that question, </span><span>though probably not the answer those same politicians and pundits were expecting.</span></p> <p><span>The June 2020 ITC report on</span> <span>“tariff and trade information for known products related to the response to COVID-19” substantially expands and updates an April report on the same issues. <span> </span>It now covers 203 medical products at the highest level of detail provided in U.S. customs data (the 10‐​digit level of the Harmonized Tariff System of the United States (“HTSUS”)) in six broad categories: (1) COVID-19 test kits/​testing instruments; (2) Disinfectants and sterilization products; (3) Medical imaging, diagnostic, oxygen therapy, pulse oximeters, and other equipment; (4) Medicines (pharmaceuticals); (5) Non‐​PPE medical consumables and hospital supplies; (6) Personal protective equipment (PPE); and (7) Other.<span> </span></span></p> <p><span>The ITC report is useful in several respects.<span> </span>For one thing, it documents the many tariffs that the United States now imposes on these essential imports, thus <a href="https://cei.org/content/repeal-neverneeded-trade-barriers">needlessly</a> reducing supply and increasing prices at the worst possible time.<span> </span></span></p> <p><span>The ITC report also provides the top 5 foreign sources of these “COVID-19” goods in the United States, and in so doing eviscerates the all‐​too‐​common claim that the U.S. market is utterly dependent on China for essential medical goods.<span> </span>In fact, after crunching the numbers for 2019 (full dataset available <a href="https://www.cato.org/sites/cato.org/files/2020-07/USITC%20Medical%20Goods%202.xlsx">here</a>), we see that:</span></p> <ul><li><span>For a majority (103 of 203) of the COVID-19 products in the ITC report, China was an insignificant supplier, representing between 0% and 10% of all imports of such goods in 2019.</span></li> <li><span>For only 32 the 203 items analyzed, did China supply more than half of all imports, and China truly dominates (having, say, more than an 80% import share) only nine import categories – mostly low‐​cost PPE like rubber gloves and hospital gowns.<span> </span>(See Table below.) Moreover, only six (bold italics) of the China‐​majority products are pharmaceuticals or pharmaceutical inputs – what our elected officials seem most worried about:</span></li> </ul><p> <div data-embed-button="embed" data-entity-embed-display="view_mode:media.blog_post" data-entity-embed-display-settings="https://infogram.com/lincicome-table-1-china-imports-1h8n6mxj3kx94xo?live" data-entity-type="media" data-entity-uuid="4ee2491a-92ec-4087-b5a8-171aa092a142" data-langcode="en" class="embedded-entity"><a href="https://infogram.com/lincicome-table-1-china-imports-1h8n6mxj3kx94xo?live="> <div class="embed embed--infogram js-embed js-embed--infogram"> <div class="infogram-embed" data-id="f9da3fb2-ed4b-4cea-854c-cd4bf862236a" data-type="interactive" data-title="Lincicome Table 1: China Imports"></div> </div> </a></div> </p><ul><li><span>Speaking of pharmaceutical goods (found mainly in HTSUS Chapters 29 and 30), the ITC report further shows that China is simply one of many suppliers of these goods, and certainly not a dominant one for almost all of the products at issue.<span> </span>In fact, China was not even a top 5 import source for 34 of 63 pharmaceutical goods on the ITC’s list, and it was only the top foreign supplier for nine of those products (only a few of which could, as noted above, be considered to have a dominant China import share in 2019).<span> </span>At the same time, India</span>—<span>another frequent target of D.C. supply chain anxiety</span>—<span>was a majority foreign supplier of only <strong>one</strong> of these pharmaceutical products (with 72.7% of all imported “Anticonvulsants” under HTSUS 3004.49.0020 in 2019), and had greater than 25% import share for only five others.<span> </span></span></li> <li><span>Overall, the ITC data for imports of pharmaceuticals and all other COVID-19 goods show a wide variety of foreign sources, mostly from allies like Canada, Mexico, Japan, Brazil and the EU — with relatively few items truly dominated by a single country. <span> </span>(Only 21 of 203 products overall had a supplier country with over 80% import share in 2019; only 91 of the products even had a supplier country with a bare majority.)</span></li> </ul><p><span>The ITC report thus reveals that, far from suffering some sort of major “dependence” crisis that demands an immediate, wide‐​ranging overhaul of the U.S. manufacturing sector and U.S. trade and procurement policies, the United States generally imports essential medical goods from a diverse (and ever‐​changing) group of foreign suppliers, and that</span>—<span>at most</span>—<span>there are only a handful of these products (from China or elsewhere) which are so dominated by a single country that they might require the federal government’s attention.</span></p> <p><span>The key word here, of course, is “might” because even products with highly concentrated import shares don’t necessarily demand new government action. As I explained recently in </span><a href="https://www.cato.org/publications/commentary/supply-chain-repatriation-its-buyer-nation-beware"><em><span>National Review</span></em></a><span>, import shares alone (which is all the ITC examined) can’t tell us how “dependent” the United States actually is on the foreign source country at issue:</span></p> <blockquote><p><span>[I]solated import‐​share figures tell us very little about actual “vulnerabilities,” because they omit domestic production and local inventories. According to a new study from the </span><a href="https://www.stlouisfed.org/on-the-economy/2020/april/us-rely-other-countries-essential-medical-equipment"><span>St. Louis Federal Reserve</span></a><span>, China supplied almost 30 percent of all imported “essential medical equipment” (hand sanitizer, masks, personal protective equipment, ventilators, etc.) in 2018 but accounted for only 9 percent of total domestic consumption because <em>American</em> producers supplied the vast majority (more than 70 percent) of these products….</span></p> <p><span>At the same time, we have massive stockpiles of other critical drugs to prepare for crisis‐​related spikes in demand.</span></p> </blockquote> <p><span>Import share figures might also hide other global producers that have substantial capacity but simply didn’t sell to the United States during the period at issue (<em>e.g.</em>, due to long‐​term contracts or geographic considerations), and they don’t tell us about the availability of similar or alternative products (e.g., a different type of antibiotic) in the marketplace or about key inputs or intermediaries in the manufacturing process.<span> </span>Furthermore, all of these figures will need to be updated to account for massive recent changes in the U.S. and global markets for these goods, as manufacturers around the world expanded capacity or adapted their operations to meet the COVID-19 challenge.<span> </span></span></p> <p><span>Finally, even a complete dataset of U.S. and global medical goods production and trade won’t answer more fundamental questions about trade, manufacturing, supply chain “resiliency,” national security, and the proper role of the federal government in addressing these issues – the topic of a new Cato Institute paper on which I’m now working.</span></p> <p><span>Nevertheless, the ITC report is a good starting point for these discussions, as it shows the relatively few COVID-19 products for which more detailed information</span>—<span>on domestic and global production, supply chains, U.S. inventories and stockpiles, etc.</span>—<span>may be needed to advise on optimal U.S. “supply chain” policies going forward.<span> </span>Right now, those additional data are limited to non‐​existent, but they should be improved by a forthcoming report from the National Academies of Sciences, Engineering and Medicine that was commissioned by the </span><a href="https://www.congress.gov/bill/116th-congress/senate-bill/3548/text?q=product+update#toc-idFB06C2870EAA4D09A985E99C0424B70A"><span>CARES Act</span></a><span>.<span> </span></span></p> <p><span>In the meantime, the ITC’s new report should quell policymakers’ immediate concerns that urgent and major government action is needed to fix America’s medical goods “dependency” problem. Judging from recent Trump administration </span><a href="https://www.washingtonpost.com/business/2020/05/19/trump-takes-first-step-toward-returning-medical-supply-chains-us/"><span>actions</span></a><span> and </span>proposals <span>from the </span><a href="https://joebiden.com/supplychains/"><span>Biden campaign</span></a><span> and </span><a href="https://thehill.com/policy/healthcare/495192-senate-dems-unveil-bill-to-federalize-medical-supply-chain-boost-production"><span>Congress</span></a><span>, however, nobody seems to have read it.</span></p> Mon, 13 Jul 2020 16:32:46 -0400 Scott Lincicome https://www.cato.org/blog/new-data-show-americas-limited-dependence-china-essential-medical-goods Ignoring the Recent (and Ignominious) History of “Buy American” https://www.cato.org/blog/ignoring-recent-ignominious-history-buy-american Scott Lincicome <p>Democratic Presidential nominee — and current 2020 front‐​runner — Joe Biden yesterday released a “<a href="https://joebiden.com/madeinamerica/">Made In All of America</a>” plan heavy on “Buy American” mandates, pursuant to which&nbsp;$400 billion in new federal energy and infrastructure projects must use only “American products, materials, and services.” Biden’s plan, it should be noted, is hardly novel:&nbsp;Buy American laws have been around for almost a&nbsp;century, and similar types of procurement restrictions are now quite&nbsp;<em>en vogue</em>&nbsp;among politicians and wonks on both the left and the right.&nbsp;As Cato scholars have argued for <a href="https://www.cato.org/publications/policy-analysis/foreign-manufacturers-united-states-should-they-be-told-buy-american">decades</a>, however, Buy American requirements are bad <a href="https://www.cato.org/blog/false-promise-buy-american">law</a>, bad <a href="https://www.cato.org/blog/buy-american-hurts-most-americans">economics</a>, bad <a href="https://www.cato.org/publications/cato-online-forum/what-can-ttip-accomplish-liberalize-government-procurement">trade policy</a>, and bad <a href="https://www.cato.org/blog/buy-american-politics-usual">politics</a> (well, for <a href="https://www.nwitimes.com/business/local/steel-industry-hails-buy-american-executive-order/article_77608930-7822-589c-99ec-444d9d414386.html">most Americans</a> at least).</p> <p>Yet one needn’t pore over reams of wonkery to understand the problems that Buy American restrictions cause for U.S. companies, workers, taxpayers, and public works projects.&nbsp;Instead, a&nbsp;quick review of what happened the last time these rules were injected into a&nbsp;massive U.S. infrastructure law — way back in 2009 when <em>Biden himself</em> was in the White House <em>and</em> <a href="https://www.npr.org/2020/04/06/828303824/a-look-back-at-how-joe-biden-managed-the-2009-stimulus-package">managing</a> the law’s implementation — may suffice.</p> <p>From the <a href="https://www.wsj.com/articles/SB125306012124114135"><em>Wall Street Journal</em></a> in September 2009:</p> <blockquote><p>On paper, Tom Pokorsky would seem to be a&nbsp;clear beneficiary of the government’s $787 billion economic‐​stimulus package.</p> <p>Mr. Pokorsky runs Aquarius Technologies Inc., a&nbsp;company in Port Washington, Wis., that makes equipment to treat sewage. The stimulus plan earmarks some $6 billion for municipal wastewater projects that are right in his company’s sweet spot.</p> <p>But the bill’s Buy American provisions — meant to give U.S. companies a&nbsp;leg up on foreign competition — are causing Aquarius and other U.S. companies a&nbsp;lot of grief with both suppliers and clients in Canada.</p> <p>Now that grief has boiled over into a&nbsp;major diplomatic row with the largest U.S. trading partner. Canadian communities angered by perceived American chauvinism have started a&nbsp;Buy Canadian campaign to exclude U.S. bidders from municipal contracts.</p> <p>“If that sticks, well, there goes 25% of my business,” said Mr. Pokorsky. “To me, Ontario may as well be Indiana.”</p> <p>Halton Hills, a&nbsp;town of 50,000 people about 25&nbsp;miles west of Toronto, is one of about a&nbsp;dozen Canadian communities forging ahead with plans to amend their procurement policies to freeze out American companies. “We won’t be taking any products from any country that is discriminating against us,” said Mayor Rick Bonnette.</p> <p>Officials in Washington and Ottawa are scrambling to avoid an all‐​out trade war. Even so, Buy American guidelines are complicating life for American companies, muddling municipal bidding procedures and blunting the overall effect of the stimulus.</p> <p>To date, the Environmental Protection Agency has disbursed just $77 million of the $5.9 billion it has for municipal wastewater projects, in part because of Buy American provisions. Overall, the government has either spent or committed about $210 billion in stimulus finds, leaving $370 billion still to be doled out. (The rest of the stimulus is made up of tax cuts.)</p> </blockquote> <p>The <em>WSJ</em> story also shows that the Buy American rules’ problems weren’t just limited to bureaucratic delays or foreign retaliation — they <em>also</em> raised costs for U.S. companies and&nbsp;consumers (in this case, U.S. taxpayers) and were often just plain incompatible with the realities of multinational investment and 21st century&nbsp;global supply chains:</p> <blockquote><p>Aquarius gets a&nbsp;lot of its parts from abroad, particularly from Canada. Such integration became even tighter after the North American Free Trade Agreement in 1994 joined the U.S., Canada and Mexico in a&nbsp;free flow of goods and services.</p> <p>Trojan Technologies Inc. of Ontario, North America’s dominant maker of ultraviolet disinfection equipment for treating sewage, is a&nbsp;key supplier to Aquarius and other companies.</p> <p>Because of the Buy American provisions, Trojan has had to shift production to a&nbsp;plant in Valencia, Calif., a&nbsp;move that has resulted in delays and additional costs being passed on to customers, said Trojan executive Christian Williamson.</p> <p>Trojan is a&nbsp;subsidiary of Danaher Corp., a&nbsp;U.S. conglomerate based in Washington.</p> <p>While some companies have the flexibility to shift production to the U.S., others don’t. General Electric Co. assembles complex wastewater‐​treatment systems in Canada with parts from Europe.…</p> <p>Bob Weese, a&nbsp;spokesman for GE Canada, said the group’s wastewater‐​treatment business was having a&nbsp;tough time bidding for contracts with U.S. municipal governments because of the procurement rules.</p> <p>“The supply chains are so integrated, it is crazy to try to impose a&nbsp;Buy American provision,” he said. “Some components cross the border four or five times” before they are completed.</p> <p>Buy American rules are gumming up the plans of Frederick County, Md., to get $6 million of stimulus money for a $100 million wastewater‐​treatment plant. Long after the project bids and contracts had been signed, the county found itself on the wrong side of the Buy American provisions because their system uses certain membranes made by a&nbsp;GE subsidiary in Canada.</p> </blockquote> <blockquote><p>Kevin Demosky, a&nbsp;county utility official, is applying to the EPA for a&nbsp;waiver to use the GE parts. “<strong>The [Buy American] rules affect a&nbsp;small part of the project but are like a&nbsp;virus infecting the whole thing,” he said. “It’s like they want us to go back in time</strong>.”</p> </blockquote> <p>The Biden plan, it should be noted, actually wants to “<a href="https://joebiden.com/madeinamerica/">crack down</a>” on Buy American waivers, ensuring even <em>less</em> flexibility for American companies, even <em>higher</em>&nbsp;costs for American taxpayers,&nbsp;and even <em>more </em>problems for American infrastructure projects — projects that, let’s face it, aren’t exactly <a href="https://www.politico.com/magazine/story/2018/07/06/gateway-tunnel-new-york-city-infrastructure-218839">models</a>&nbsp;of <a href="https://sanfrancisco.cbslocal.com/2020/02/12/california-high-speed-rail-cost-rises-80-billion/">efficiency</a> already.</p> <p>At least, as the <em>Financial Times</em> <a href="https://www.cato.org/blog/buy-american-destroy-american-jobs">noted</a>&nbsp;in June 2009,&nbsp;<em>one group</em> of Americans clearly benefited from the Stimulus Bill’s&nbsp;Buy American rules:</p> <blockquote><p>Confusion reins. For fear of missing out on contracts, many companies are demanding that all their suppliers are Buy American‐​compliant regardless of any exemptions.<br><br> “Those companies that can comply are of course thrilled and are trumpeting that in their marketing. Those that cannot are in agony and are losing business and cutting workers,” says David Ralston, a&nbsp;government procurement lawyer at Foley &amp;&nbsp;Lardner. “<strong>The many companies that find themselves in the gray areas are calling their lawyers.</strong>”</p> </blockquote> <p>Stimulus, indeed!</p> <p>Libertarians and other free marketers are frequently accused of impractical “fundamentalism” when we express opposition to things like Buy American rules and other types of protectionism and industrial policy.&nbsp;The short history lesson above&nbsp;(which you’d <em>think</em> the Biden Team knows, given the Vice President’s&nbsp;involvement) hopefully shows that, while&nbsp;Biden’s Buy American plan might be good politics, it’s not the <em>free marketers</em> untethered from reality.</p> Fri, 10 Jul 2020 12:11:30 -0400 Scott Lincicome https://www.cato.org/blog/ignoring-recent-ignominious-history-buy-american Scott Lincicome participates in the webinar, “Trade Uncut,” hosted by the World Economic Forum https://www.cato.org/multimedia/media-highlights-tv/scott-lincicome-participates-webinar-trade-uncut-hosted-world Wed, 08 Jul 2020 13:02:20 -0400 Scott Lincicome https://www.cato.org/multimedia/media-highlights-tv/scott-lincicome-participates-webinar-trade-uncut-hosted-world The High Risk of Learning the Wrong China Lessons https://www.cato.org/publications/commentary/high-risk-learning-wrong-china-lessons Scott Lincicome <div class="lead mb-3 spacer--nomargin--last-child text-default"> <p>Everywhere you look in Washington these days, you’ll find a&nbsp;China hawk. Many, however, look upon China’s recent and obvious economic, foreign policy, human rights, and public health offenses and point fingers not at Beijing but inward at U.S. policymakers from decades ago. In particular, a&nbsp;bipartisan chorus of&nbsp;<a href="https://www.reuters.com/article/us-usa-trade-china/trump-administration-says-u-s-mistakenly-backed-china-wto-accession-in-2001-idUSKBN1F82U1" target="_blank">politicians</a>,&nbsp;<a href="https://www.theatlantic.com/ideas/archive/2018/06/normalizing-trade-relations-with-china-was-a-mistake/562403/" target="_blank">think tankers</a>&nbsp;and&nbsp;<a href="https://t.co/cGVGcXjnIp?amp=1" target="_blank">presidential advisers</a>&nbsp;decry the 2000 U.S. law that granted China “permanent normal trade relations” (PNTR) and China’s 2001 entry into the World Trade Organization (WTO), and blame it for both the country’s rise and the now‐​famous “China Shock”—the period between 1999 and 2011 during which a&nbsp;sizeable increase in Chinese imports supposedly destroyed approximately 2.4 million U.S. jobs. They’ve in turn used this “mistake,” to justify grand rethinks of current U.S. foreign and economic policy—including&nbsp;<a href="https://subscriber.politicopro.com/employment-immigration/whiteboard/2020/06/exclusive-senate-can-take-vote-to-withdraw-from-wto-in-july-1956536?source=email" target="_blank">withdrawal</a>&nbsp;from the WTO itself. Since we got China so wrong, critics argue, we clearly must abandon traditional U.S. positions on not only China but also trade agreements, industrial policy, labor policy, and international engagement more broadly.</p> </div> , <aside class="aside--right aside--large aside pb-lg-0 pt-lg-2"> <div class="pullquote pullquote--default"> <div class="pullquote__content h2"> <p>The trendy view of U.S.–China economic engagement lends itself to policy “fixes” that could make things worse, not better, for both the United States and the world. </p> </div> </div> </aside> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>The trendy view of U.S.–China economic engagement&nbsp;<a href="https://www.cato.org/sites/cato.org/files/2020-07/PA-895-doi.pdf" target="_blank">errs repeatedly</a>, and in doing so risks new U.S. policies that “fix” a “problem” of limited actual import and which could make things worse, not better, for both the United States and the world.</p> <p>For starters, a&nbsp;comprehensive economic and historical accounting of China’s WTO accession and the China Shock collapses the hawkish caricature of a&nbsp;naïve U.S. government fueling the destruction of the American workforce in the idealistic hope of Chinese democratization.&nbsp;<a href="https://www.cato.org/publications/policy-analysis/testing-china-shock-was-normalizing-trade-china-mistake?au_hash=z774ovniur6LHCsxXurWjQ5Cl-L44rf0vJY_6ur-kEc#_ednref7">Numerous</a>&nbsp;<a href="https://www.cato.org/publications/policy-analysis/testing-china-shock-was-normalizing-trade-china-mistake?au_hash=z774ovniur6LHCsxXurWjQ5Cl-L44rf0vJY_6ur-kEc#_ednref8">studies</a>&nbsp;<a href="https://www.cato.org/publications/policy-analysis/testing-china-shock-was-normalizing-trade-china-mistake?au_hash=z774ovniur6LHCsxXurWjQ5Cl-L44rf0vJY_6ur-kEc#_ednref9">completed</a>&nbsp;<a href="https://www.cato.org/publications/policy-analysis/testing-china-shock-was-normalizing-trade-china-mistake?au_hash=z774ovniur6LHCsxXurWjQ5Cl-L44rf0vJY_6ur-kEc#_ednref12">since</a>&nbsp;<a href="https://www.cato.org/publications/policy-analysis/testing-china-shock-was-normalizing-trade-china-mistake?au_hash=z774ovniur6LHCsxXurWjQ5Cl-L44rf0vJY_6ur-kEc#_ednref13">the original</a>&nbsp;<a href="https://www.cato.org/publications/policy-analysis/testing-china-shock-was-normalizing-trade-china-mistake?au_hash=z774ovniur6LHCsxXurWjQ5Cl-L44rf0vJY_6ur-kEc#_ednref14">China</a>&nbsp;<a href="https://www.cato.org/publications/policy-analysis/testing-china-shock-was-normalizing-trade-china-mistake?au_hash=z774ovniur6LHCsxXurWjQ5Cl-L44rf0vJY_6ur-kEc#_ednref15">Shock</a>&nbsp;research&nbsp;reveal fewer American jobs lost; significant consumer benefits in terms of lower prices and increased variety; substantial employment gains in services and export‐​oriented industries; and net economic benefits for the U.S. manufacturing sector and the country as a&nbsp;whole. Even if one were to treat the China Shock as economic gospel and pin most job‐​losses on PNTR, moreover, perspective on this damage is sorely needed: the 2&nbsp;million American jobs destroyed over a&nbsp;12‐​year period are less than the average&nbsp;<em>weekly</em>&nbsp;unemployment filings in April through June of this year, and even in normal times, the 1&nbsp;million manufacturing jobs attributable to the China Shock would constitute less than 20 percent of all such losses (and less than 5&nbsp;percent of all job losses) over the same period. Does&nbsp;<em>that</em>&nbsp;demand radical policy changes?</p> <p><a href="https://www.cato.org/publications/policy-analysis/testing-china-shock-was-normalizing-trade-china-mistake?au_hash=z774ovniur6LHCsxXurWjQ5Cl-L44rf0vJY_6ur-kEc#_ednref26" target="_blank">Recent</a>&nbsp;<a href="https://www.cato.org/publications/policy-analysis/testing-china-shock-was-normalizing-trade-china-mistake?au_hash=z774ovniur6LHCsxXurWjQ5Cl-L44rf0vJY_6ur-kEc#_ednref28" target="_blank">analyses</a>&nbsp;also show that U.S. low‐​skill manufacturing employment and “late stage” industries with routine, standardized processes likely would have suffered the same fate in the last two decades,&nbsp;<em>regardless of the China Shock</em>, due to non‐​trade issues like automation and competition from other developing countries. In fact, the data show that manufacturing jobs as a&nbsp;share of the U.S. workforce experienced only a&nbsp;modest change in their downward trend before and after China entered the WTO, and that Chinese imports replaced&nbsp;<em>other imports</em>&nbsp;(particularly those from Asia),&nbsp;<em>not</em>&nbsp;domestic production, between 1990 and 2017.</p> <p>These numbers answer a&nbsp;counterfactual question that economic nationalists and other PNTR critics rarely ask:&nbsp;<em>what would have happened without the China Shock</em>? The data indicate that Chinese import restrictions would not have saved most of the U.S. manufacturing jobs destroyed between 1999 and 2011—they would have simply changed the destroyer to other things, including non‐​China imports. This is precisely what officials in the George W. Bush administration saw in their data at the time, and exactly what happened when the Obama administration blocked Chinese tire imports under the special “safeguard” mechanism agreed as part of China’s WTO accession: instead of China tariffs boosting domestic production, imports simply shifted to non‐​China sources (while prices, of course, increased). This “trade diversion” also resulted from the hundreds of “trade remedy” duties that the U.S. imposed on Chinese imports since 2001.</p> <p>Other facets of China’s WTO accession also defy conventional wisdom. For starters, PNTR did not actually open the United States to Chinese imports: in every year since 1980, China faced no greater trade barriers than other (“most favored”) U.S. trading partners; Chinese imports were already increasing substantially before PNTR; and economic, historical, and anecdotal evidence show the probability of congressional revocation of China’s trade status to have evaporated by the late 1990s. At most, PNTR merely accelerated a&nbsp;bilateral economic integration that was already well underway. (By contrast, China’s WTO accession&nbsp;<em>did</em>&nbsp;open China: average tariffs dropped from around 40 percent in the early ‘90s to less than 9&nbsp;percent in 2006.)</p> <p>It is also a&nbsp;myth that the United States rubber‐​stamped Chinese WTO accession due to its dreams of Chinese democratization. Yes, as Dan Drezner&nbsp;<a href="https://reason.com/2020/04/25/there-is-no-china-crisis/" target="_blank">recently noted</a>&nbsp;on these pages, American policymakers did hope that China’s very real economic liberalization would produce political liberalization as well, but this hope was&nbsp;<em>not</em>&nbsp;the primary motivation for U.S. policy,&nbsp;<em>nor</em>&nbsp;did it cause Washington to go easy on Beijing.&nbsp;Instead, China’s WTO accession took more than 15&nbsp;years and required dozens of intergovernmental meetings, negotiating texts, and Chinese economic reforms (not just the aforementioned tariff reductions)—reforms shown to have been so significant as to have fueled China’s post‐​WTO export competitiveness. The United States, meanwhile, was the final holdout among large industrialized nations to approve China’s WTO accession via bilateral negotiations, demanding ever more concessions from the Chinese government—including the right to impose special duties on Chinese imports—over a&nbsp;contentious 13‐​year negotiation. Key Clinton administration speeches and policy documents also demonstrate that U.S.–Chinese engagement was primarily a&nbsp;pragmatic decision to achieve commercial and foreign policy objectives, not “democratization.”&nbsp;</p> <p>Indeed, based on the facts at the time, Washington policymakers had little choice when deciding whether to pass PNTR. Every other WTO member had done so years earlier; China was a&nbsp;growing, billion‐​person nuclear power reforming economically; annual NTR approvals would have almost certainly continued; and, even with higher U.S. tariffs, globalization (plus U.S. customs law) would have still allowed Chinese goods to enter the United States as parts of “non‐​Chinese” products. Rejecting PNTR would therefore have punished U.S. companies, heightened diplomatic tensions, and denied the U.S. government a&nbsp;new venue to press for reforms—all while failing to prevent China’s rise. Thus, the&nbsp;<em>actual alternatives to PNTR</em>—another counterfactual that critics don’t consider—would have been economically and geopolitically inferior.&nbsp;</p> <p>The current obsession with China’s WTO entry also ignores myriad U.S. policy failures that actually&nbsp;<em>did</em>&nbsp;enable China or harm American companies and workers. Most notably, successive U.S. administrations pursued far too few WTO disputes in response to real Chinese trade infractions, despite the fact that global trade rules discipline key irritants like industrial subsidies and intellectual property, and that aggressive litigation has proven effective in curbing Chinese abuses. Other U.S. policy failures include the United States’ withdrawal from the Trans‐​Pacific Partnership, a&nbsp;treaty that was designed in part to counterbalance China’s economic and geopolitical ambitions; its failure to reform tax, trade, and immigration policies that inhibit American companies’ global competitiveness; its failure to modernize adjustment assistance and worker retraining programs intended to mitigate trade, technological, or cultural disruptions; or its continued imposition of tax, education, occupational licensing, criminal justice, zoning, and other policies that leave American workers unprepared to compete in a&nbsp;global economy or discourage adjustment and recovery when disruptions occur.&nbsp;</p> <p>All of these policies are indeed worthy of criticism and debate, but they have nothing to do with the decisions to pass PNTR, allow China to join the WTO, or otherwise “normalize” trade with China. And blaming China for these policies’ failures relieves them—and their political shepherds—of needed attention and reform, while also risking the wrong answers to complex cultural, economic and geopolitical issues.</p> <p>Such increasingly common “answers” are precisely why it is critical to have an accurate account of long‐​past events (experts uniformly agree that the China Shock ended years ago). China’s rise and the bilateral relationship arguably present this generation’s most pressing geopolitical issue, and the Communist Party’s human rights abuses, territorial expansionism, global health transgressions, and economic reversals deserve American scorn and response. Just as real and important are the seismic labor market and cultural disruptions that have upended many American families and communities. The proposed solutions to these problems, however, should stand on their own merit, not by pretending that they are an essential correction of the “mistakes” of PNTR and economic engagement with China more broadly. Doing so relieves such plans of the scrutiny they deserve, and could lead to truly bad governance: increasing U.S. protectionism and nativism, fomenting armed conflict, ignoring past policy mistakes, and thwarting a&nbsp;political consensus for real policy solutions to very real challenges—including and especially China.</p> </div> Wed, 08 Jul 2020 11:17:26 -0400 Scott Lincicome https://www.cato.org/publications/commentary/high-risk-learning-wrong-china-lessons Was Engagement with China a ‘Mistake’ that Demands a Radical Policy Rethink Today? https://www.cato.org/blog/was-engagement-china-mistake-demands-radical-policy-rethink-today Scott Lincicome <p>It is increasingly common for politicians and pundits in Washington to look upon China’s numerous recent offenses and point fingers not at Beijing but inward at a&nbsp;specific U.S. policy from 20&nbsp;years ago: granting China “permanent normal trade relations” (PNTR) and the country’s subsequent entry into the World Trade Organization (WTO). This event, so the story goes, was an epic American blunder that not only fueled China’s rise and the now‐​famous “China Shock”—the period from 1999 to 2011&nbsp;in which increasing Chinese imports supposedly destroyed approximately millions of jobs – but also today justifies a&nbsp;total rethink of U.S. foreign and economic policy. For example, Senator Josh Hawley (R-MO) recently <a href="https://www.hawley.senate.gov/senator-hawley-gives-floor-speech-reforming-global-economy-preventing-chinas-domination">used</a> this now‐​familiar refrain on the Senate floor to justify his bill withdrawing the United States from the World Trade Organization entirely:</p> <blockquote><p>Since Beijing won Most Favored Nation status and joined the World Trade Organization in 2001, we have lost over three million jobs to China. During the past two decades, as we fought war after war in the Middle East, the Chinese government systematically built its military on the backs of our middle class.</p> <p>We were promised things would be different. We were told that giving China access to our markets and allowing them power in the WTO would reform their behavior, make them more liberal. We were told it would be good for America and for the world.</p> <p>Well, the only nation it was good for was China. And we cannot afford inaction any longer.</p> </blockquote> <p>As I&nbsp;explain in a&nbsp;<a href="https://www.cato.org/publications/policy-analysis/testing-china-shock-was-normalizing-trade-china-mistake">new Cato Institute paper out today</a>, however, the trendy caricature of a&nbsp;naïve U.S. government fueling the destruction of the American worker in the futile hope of Chinese democratization suffers from several flaws that collectively prove fatal for the anti‐​engagement, anti‐​PNTR thesis:</p> <ul> <li>First, numerous studies completed since the original China Shock research reveal its harms, while likely real, to have been overstated and its benefits ignored, and the surrounding issues of import competition and U.S. manufacturing to be far more uncertain and complex than the caricature painted by PNTR/​China critics.</li> <li>Second, the factual record demonstrates that Washington policymakers did <strong>not</strong> first open the US market to China via PNTR; rubber‐​stamp China’s WTO accession; prioritize Chinese democratization over other, more pragmatic and commercial objectives; or have any realistic alternatives to granting PNTR, given the facts at the time the votes were cast.</li> <li>Third, it is a&nbsp;myth that the U.S. government – before, during and after PNTR – simply opened the floodgates to Chinese imports while refusing to protect or otherwise “help” American workers that faced “unfair” foreign competition. In fact, the federal government implemented dozens of measures to restrict Chinese imports, otherwise protect or subsidize U.S. manufacturers, and assist American workers affected by import competition. The <em>real</em> problem was just that these interventions didn’t work very well.</li> <li>Finally, the current obsession with China’s WTO entry also ignores (1) the myriad U.S. policy failures that actually <em>did</em> enable China’s rise or hamstring US companies and workers; (2) the unambiguous benefits of trade and globalization more broadly; (3) the costs, inefficacy and cronyism of past U.S. attempts to block imports, including those from China during the China Shock period; and (4) the majority of American towns that were hit by the China Shock but have long since adjusted and thrived.</li> </ul> <p>Together, these points dismantle now‐​popular assertions from American politicians and pundits that engagement with China in the 1990s and 2000s was an obvious mistake and that denying China admission to the WTO was realistic a&nbsp;policy choice that would have improved U.S. economic and geopolitical standing today.</p> <p>China’s rise could present this generation’s most pressing geopolitical issue, and the Chinese Communist Party’s human rights abuses, territorial expansionism, global health transgressions, and economic reversals certainly deserve criticism and responses from the U.S. government. Proposed solutions to these and related issues, however, should stand on their own merit – not by pretending that they are an essential correction of the “mistakes” of PNTR, China’s WTO accession, and economic engagement more broadly.</p> <p>Doing so would inevitably inhibit better US‐​China policy – and at a&nbsp;time when it’s most needed.</p> Wed, 08 Jul 2020 08:00:03 -0400 Scott Lincicome https://www.cato.org/blog/was-engagement-china-mistake-demands-radical-policy-rethink-today Testing the “China Shock”: Was Normalizing Trade with China a Mistake? https://www.cato.org/publications/policy-analysis/testing-china-shock-was-normalizing-trade-china-mistake Scott Lincicome <div class="lead mb-3 spacer--nomargin--last-child text-default"> <p>There is an emerging consensus among American politicians and many citizens that trade and globalization have undermined America’s working class, resulting in a&nbsp;rise in U.S. populism. This view frequently targets the 2000 U.S. law that granted China “permanent normal trade relations” (PNTR) and China’s 2001 entry into the World Trade Organization (WTO) as key drivers of the country’s rise and the now‐​famous “China Shock”—the period between 1999 and 2011 during which a&nbsp;sizeable increase in Chinese imports supposedly produced the loss of approximately 2.4 million U.S. jobs.</p> </div> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>However, the view that PNTR was an erroneous policy choice that disproportionately benefited political elites and corporations, directly drove the China Shock, and, combined with other allegedly “laissez‐​faire” policies, permanently scarred America’s working class suffers from several flaws that collectively prove fatal for the anti‐​PNTR thesis.</p> <p>As we approach the 20th anniversary of PNTR, criticism of the law and of the WTO more broadly will surely intensify, but a&nbsp;proper accounting of the relevant economics and history reveals most critics to be misguided. Labor market and cultural disruptions in the United States are real and important, as is China’s current and unfortunate turn toward illiberalism and imperialism. But it is a&nbsp;mistake to pretend that there was a&nbsp;better <em>trade policy choice</em> in 2000 than PNTR and engagement with China more broadly. It assumes too much, ignores too much, and demands too much. Worse, it could lead to truly bad governance: increasing U.S. protectionism; forgiving the real and important failures of our policymakers, CEOs, and unions over the past two decades; and preventing a&nbsp;political consensus for real policy solutions. Indeed, these are happening now.</p> </div> , <h2 class="heading"> Introduction </h2> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>Since Donald Trump’s surprising presidential victory in 2016, both conservatives and progressives have debated whether and to what extent “Washington elite” policy choices, in particular international trade liberalization, have systematically (and perhaps nefariously) harmed members of America’s working class, dooming them to lives of drug abuse, isolation, and despair and creating fertile ground for populists like Trump. In this increasingly popular view lies a&nbsp;nugget of truth: Americans today face serious and relatively new problems when forced to adjust to severe economic disruptions, whether those disruptions come from trade, technology, culture, or anything else. These problems are often caused or exacerbated by outmoded government policies in need of reform.<sup><a href="#_ednref1" id="_edn1">1</a></sup></p> <p>However, champions of the emerging consensus that trade liberalization was a&nbsp;mistake err when targeting U.S. trade with China for particular scorn.<sup><a href="#_ednref2" id="_edn2">2</a></sup> The policy choice most commonly criticized in this regard is the 2000 U.S. law to grant China “permanent normal trade relations” (PNTR) and the country’s subsequent entry into the World Trade Organization (WTO) in 2001.<sup><a href="#_ednref3" id="_edn3">3</a></sup> These two events are considered key drivers of the now‐​famous “China Shock,” the period between 1999 and 2011 during which a&nbsp;sizeable increase in Chinese imports caused, according to economists David Autor, David Dorn, and Gordon Hanson, the loss of approximately 2.4 million U.S. jobs.<sup><a href="#_ednref4" id="_edn4">4</a></sup> A&nbsp;related analysis by Justin Pierce and Peter Schott specifically targets PNTR as the China Shock’s root cause, alleging the policy caused concentrated job losses between 2001 and 2007&nbsp;in U.S. industries most exposed to Chinese import competition.<sup><a href="#_ednref5" id="_edn5">5</a></sup></p> <p>Armed with these studies, it has become fashionable, especially on the political right, to blame PNTR and China’s WTO accession for the country’s economic rise and unfortunate recent turn toward illiberalism.<sup><a href="#_ednref6" id="_edn6">6</a></sup></p> <p>However, the view that PNTR was an erro­neous policy choice that disproportionately benefited political elites and corporations, directly drove the China Shock, and, combined with other “laissez‐​faire” policies, permanently scarred America’s working class suffers from several flaws that collectively prove fatal for the anti‐​PNTR thesis. As PNTR approaches its 20th anniversary and as U.S.–Chinese rela­tions have deteriorated during the Trump era, a&nbsp;proper accounting of the economic and historical record is essential. This paper summarizes the flaws in the conventional wisdom on the China Shock. It finds that PNTR and trade with China are generally more benign—and far more complicated—than the story that PNTR critics now repeat.</p> </div> , <h2 class="heading"> U.S.–Chinese Trade: Amplified Costs and Ignored Benefits </h2> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>Perhaps the simplest, yet most substantial, flaw in the PNTR thesis is that it ignores the documented benefits of increased U.S. trade with China over the past two decades—benefits that often accrued to the U.S. working class and manufacturing sector. For starters, even if one were to treat the China Shock literature as gospel, studies have found that trade with China in the 2000s also provided ample benefits for American consumers—a group that includes those directly harmed by the shock.</p> <p>Economists Xavier Jaravel and Erick Sager, for example, found that Chinese import competition between 2000 and 2007—the peak of the “China Shock”—had substantial “pro‐​competitive effects” on U.S. firms and generated over $202 billion in consumer benefits via lower prices. That equals $101,250&nbsp;in benefits to U.S. consumers per manufacturing job lost, as calculated by the China Shock papers.<sup><a href="#_ednref7" id="_edn7">7</a></sup> The following year, Liang Bai and Sebastian Stumpner concluded in the <em>American Economic Review</em> that Chinese imports “significantly reduced inflation,” cutting the price index for consumer goods by 0.19 percentage points per year between 2004 and 2015 as a&nbsp;result of both changes in the prices of existing goods and the entry of new goods—signaling strong pro‐​competitive effects <em>and</em> improved variety.<sup><a href="#_ednref8" id="_edn8">8</a></sup> A&nbsp;study by Mary Amiti and others found similarly impressive consumer gains,<sup><a href="#_ednref9" id="_edn9">9</a></sup> while Christian Broda and John Romalis found that the <a id="_idTextAnchor000"></a>consumer benefits of trade, already tilted toward America’s poor and middle class, were even more so for Chinese imports because those consumers frequently shop at places that carry such goods, such as Target and Walmart.<sup><a href="#_ednref10" id="_edn10">10</a></sup> One can argue that those consumer benefits are cold comfort to someone who lost a&nbsp;job because of Chinese import competition, but they are nevertheless real, widespread, and important.<sup><a href="#_ednref11" id="_edn11">11</a></sup></p> <p>Chinese imports have also been found to generate substantial benefits for American companies, including manufacturers and their workers. Germán Gutiérrez and Thomas Philippon, for example, found that Chinese import competition encouraged many American manufacturing firms to invest and innovate more—another “pro‐​competitive” effect.<sup><a href="#_ednref12" id="_edn12">12</a></sup> Using a&nbsp;general equilibrium model, Lorenzo Caliendo, Maximiliano Dvorkin, and Fernando Parro found net welfare benefits from the China Shock for U.S. manufacturing and nonmanufacturing firms across regions.<sup><a href="#_ednref13" id="_edn13">13</a></sup> Zhi Wang and others, after accounting for manufacturing supply chains and intermediate inputs, found that the overall effect of the China Shock on American jobs and wages has been quite positive.<sup><a href="#_ednref14" id="_edn14">14</a></sup> Simon Galle, Andrés Rodríguez‐​Clare, and Moises Yi found that while the China Shock produced losses for certain groups of Americans, it generated overall gains in social welfare.<sup><a href="#_ednref15" id="_edn15">15</a></sup></p> <p>Meanwhile, researchers with the Federal Reserve Bank of San Francisco have estimated that about 56 cents of every dollar that Americans spent on “Made in China” imports in 2018 actually went to <em>American</em> firms and workers—the highest share of any country.<sup><a href="#_ednref16" id="_edn16">16</a></sup> Such benefits make sense: 2019 U.S. labor market data show millions more “blue collar” American jobs that might benefit from Chinese imports—in transportation, logistics, construction, and maintenance and repair, for example—than in manufacturing.<sup><a href="#_ednref17" id="_edn17">17</a></sup></p> <p>Furthermore, this already benign assessment assumes that Chinese import competition potentially hurts all U.S. manufacturing jobs. That assumption is proven incorrect by the San Francisco Fed study, which found that one‐​third of all Chinese imports were intermediate goods that American companies used to produce globally competitive products. (Hundreds of manufacturing jobs at a&nbsp;Missouri custom hat company, for example, are threatened by President Trump’s tariffs on imported Chinese baseball caps.<sup><a href="#_ednref18" id="_edn18">18</a></sup>) These imports have helped, not hurt, U.S. manufacturing workers. In fact, Pol Antràs, Teresa C. Fort, and Felix Tintelnot found that U.S. manufacturing firms that increased direct imports from China between 1997 and 2007 experienced growing or steady employment, likely because of the importers’ ability to lower prices and raise output (even as nonimporting competitors suffered).<sup><a href="#_ednref19" id="_edn19">19</a></sup> With respect to these types of complex value chains, the WTO estimates that China in 2015 was the third‐​largest user—behind only Mexico and Canada—of “Made In America” manufacturing inputs and the largest source of inputs for American manufacturers.<sup><a href="#_ednref20" id="_edn20">20</a></sup></p> <p>Then there are the benefits that American farmers and workers have derived from exporting to China, still the United States’ third‐​largest export destination.<sup><a href="#_ednref21" id="_edn21">21</a></sup> According to the US‐​China Business Council, exports to China in 2019 supported over 1.1 million American jobs in a&nbsp;wide range of manufacturing, logistics, and services industries.<sup><a href="#_ednref22" id="_edn22">22</a></sup></p> <p>Beyond the benefits of trade with China, a&nbsp;proper accounting of the China Shock also requires proper context. There is evidence, for example, that many U.S. manufacturers adapted during the shock and ended up <em>hiring</em> many Americans and <em>increasing</em> output. Summarizing a&nbsp;2018 paper from Teresa C. Fort, Justin R. Pierce, and Peter K. Schott,<sup><a href="#_ednref23" id="_edn23">23</a></sup> the <em>Financial Times</em>’ Gillian Tett notes:</p> </div> , <blockquote class="blockquote"> <div> <p>Between 1977 and 2012, the number of “manufacturing firm workers” employed in “manufacturing plants” halved from just under 20m to nearer 10m. However, the employees in “non‐​manufacturing plants” that were owned by “manufacturing firms” rose from 13m to 23m, primarily due to an explosion in service sector jobs such as design and IT. As a&nbsp;result, by 2012 the US’s “manufacturing” companies employed slightly more workers than in 1977. Moreover, that was not because of business churn: 75 per cent of the “manufacturing” job losses in this period occurred at companies which remained in business, and it was the incumbents which opened most of the non‐​manufacturing plants. In plain English, this means that as Chinese competition hit, America’s “manufacturing” groups quietly re‐​engineered themselves. Yes, they might call themselves “manufacturers”, and be defined that way in the data. But they increasingly hire service‐​sector workers, as their output soars.<sup><a href="#_ednref24" id="_edn24">24</a></sup> </p> </div> </blockquote> <cite> </cite> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>Nicholas Bloom and others found a&nbsp;similar trend among U.S. workers in “high human‐​capital areas,” such as the West Coast or New England, where manufacturers “remained open but changed to research, design, management or wholesale.”<sup><a href="#_ednref25" id="_edn25">25</a></sup> Low human‐​capital areas, by contrast, lost jobs on net—a regional discrepancy that might indict policies that help Americans gain skills or cope with disruption but <em>not</em> the disruption itself.</p> <p>The evolution of American manufacturing—driven by trade, automation, or other factors—raises further concerns about attempting to isolate the effects of Chinese import competition on low‐​skill American manufacturing employment. Kerwin Charles, Erik Hurst, and Mariel Schwartz, for example, found that the decline in manufacturing employ­ment during the 2000s was a&nbsp;substantial cause of rising American unemployment, especially for less‐​educated prime‐​age workers.<sup><a href="#_ednref26" id="_edn26">26</a></sup> However, they also found that a&nbsp;mix of both import competition <em>and</em> nontrade factors caused these declines. They show that “manufacturing employment declined substantially over the 2000s, even in markets where there was essentially no manufacturing loss because of Chinese imports” and that “shocks to manufacturing that were unrelated to China or trade (including, presumably, things like rising automation) had very similar effects on local labor markets to the Chinese import shock.” As a&nbsp;result, they conclude that “policy efforts to address the adverse labor market effects of trade will not reverse the broader trend in manufacturing employment that has significantly weakened labor market options, particularly for less educated workers.” They further speculate that persistently depressed low‐​skill manufacturing employment in the United States was likely caused by <em>nontrade issues</em> such as a&nbsp;skills mismatch in the U.S. manufacturing sector (which is becoming more skilled compared to other low‐​skill professions such as retail and construction) and declining cross‐​region mobility among U.S. workers during the 2000s compared to earlier periods. As a&nbsp;result, “imposing trade barriers against the rest of the world is unlikely to substantially increase the employment prospects of workers with lower levels of accumulated schooling.”</p> <p>Studies have similarly found it difficult to distinguish the employment effects of trade from those of technology. After documenting the evolution of American manufacturers in their aforementioned paper, for example, Fort, Pierce, and Schott acknowledge that the “data provide support for both trade‐ and technology‐​based explanations of the overall decline of [manufacturing] employment over this period, while also highlighting the difficulties of estimating an overall contribution for each mechanism.”<sup><a href="#_ednref27" id="_edn27">27</a></sup></p> <p>Katherine Eriksson and others provide addi­tional China Shock context. They show that the China Shock was so “shocking” not because of China or PNTR but because of <em>when</em> it hit the United States: during regional shifts in the U.S. production of certain goods.<sup><a href="#_ednref28" id="_edn28">28</a></sup> In particular, “late stage” industries—with now‐​standardized processes and technologies that are susceptible to global competition (particularly in developing countries)—had moved out of higher education/​innovation U.S. regions to places with less education and innovative capacity, thus explaining “why the shock hurt in these areas to the extent that it did.” This timing adds to the uniqueness of the China Shock, as the authors find that previous U.S. trade shocks—involving Japan and the Asian Tigers, for example—had no such dynamic (and thus labor market effects that were far more limited). The analysis also shows that these “late stage” industries were well on their way out of the United States <em>regardless of the China Shock</em>.</p> <p>Many other experts have questioned whether the China Shock literature tells the whole story about Chinese imports, U.S. manufacturing jobs, and related issues. As noted, numerous economists have found substantial net benefits for the United States when more fully accounting (e.g., through a&nbsp;general equilibrium model) for Chinese import competition. The Caliendo, Dvorkin, and Parro model further shows far fewer manufacturing job losses caused by the China Shock (only 15 percent of the observed decline between 2000 and 2007).<sup><a href="#_ednref29" id="_edn29">29</a></sup> Similarly, a&nbsp;pair of papers by lead author Robert Feenstra found offsetting job gains in U.S. manufacturing exports and services,<sup><a href="#_ednref30" id="_edn30">30</a></sup> while Brad DeLong estimated that China’s WTO entry resulted in a&nbsp;net loss of only 300,000 U.S. jobs—just 0.22 percent of nonfarm employment.<sup><a href="#_ednref31" id="_edn31">31</a></sup> Adam Jakubik and Victor Stolzenburg found one‐​third <em>fewer</em> manufacturing job losses and much different regional effects when using value‐​added, instead of gross, trade flows to measure the China Shock (and that the job losses basically ended in 2008),<sup><a href="#_ednref32" id="_edn32">32</a></sup> while Yuan Xu, Hong Ma, and Feenstra found 20–30 percent fewer job losses when accounting for booms and busts in the U.S. housing market.<sup><a href="#_ednref33" id="_edn33">33</a></sup></p> <p>Other experts have voiced skepticism regarding the China Shock findings themselves<sup><a href="#_ednref34" id="_edn34">34</a></sup> (including on cultural effects<sup><a href="#_ednref35" id="_edn35">35</a></sup>). The Cato Institute’s Alan Reynolds notes, for example, that the China Shock’s “microeconomic model designed for local ‘commuting zones’ cannot properly be extended to the entire national economy” and therefore misses important macroeconomic effects of U.S.-Chinese trade liberalization such as increased U.S. exports (to China and other countries).<sup><a href="#_ednref36" id="_edn36">36</a></sup> Reynolds adds that extending the period beyond 2011, during which the U.S. economy was still affected by the Great Recession, causes half of the job loss attributed to the China Shock to “disappear.” Charles Freeman, who ran the Office of the U.S. Trade Representative’s Office of China Affairs during the George W. Bush admin­istration, recalls:</p> </div> , <blockquote class="blockquote"> <div> <p>Among the things that has troubled me about the Autor study is the lack of correlation between [Harmonized Tariff Schedule] level imports from China and US job losses in those sectors. We were deeply attuned to those losses at [the Office of the U.S. Trade Representative] at that time because we had such a&nbsp;powerful tool in the special safeguard in section 421. We just didn’t see any profound direct US job losses in sectors exposed to new direct competition from China. Most of the post PNTR surge in China imports was in sectors that had already shifted overseas. The small blip in accel­eration of manufacturing job losses was actually far below anything any of us could have anticipated. We were ready to be protectionist, but the numbers never justified it. We actually had the [International Trade Commission] prepped to do a&nbsp;study showing the lack of linkage between what were primarily productivity‐​related manufacturing job losses and China trade policy but a&nbsp;political decision was made to blame China rather than domestic [economic] realities.<sup><a href="#_ednref37" id="_edn37">37</a></sup></p> </div> </blockquote> <cite> </cite> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>Phil Levy, a&nbsp;member of the George W. Bush administration’s Council of Economic Advisers, adds that the fungibility of Chinese and other developing country imports undermines the argument that <em>Chinese</em> imports—as opposed to imports more generally—were to blame for some of the manufacturing job losses that occurred during the China Shock period. The proof came in Levy’s personal examination of domestic industry petitions for relief from Chinese imports under the Section 421 special safeguard mechanism:</p> </div> , <blockquote class="blockquote"> <div> <p>In each of the two Section 421 cases I&nbsp;heard, the importers made credible presentations that, were tariffs to be imposed, they would switch their sourcing from China to Vietnam, or to India, or Brazil. In one case, the factory move was estimated to take three weeks. In another, contingent contracts were already in place. Producing in those places cost a&nbsp;bit more than in China, which is why they weren’t the original sourcing countries, but they were cheaper than the United States. So what benefit would U.S. workers have seen in blocking China trade? None. That’s why we recommended against imposing tariffs.<sup><a href="#_ednref38" id="_edn38">38</a></sup> </p> </div> </blockquote> <cite> </cite> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>Levy concludes from this experience that it “calls into question the premise of [the China Shock] analysis. If the alternative to imports from China was imports from other developing nations, then the impact of China on U.S. workers was negligible.”</p> <p>The data tend to corroborate Freeman’s and Levy’s claims. First, Figure 1&nbsp;shows only a&nbsp;modest change in trend for manufacturing jobs as a&nbsp;share of the U.S. workforce before and after PNTR passed and China entered the WTO:<sup><a href="#_ednref39" id="_edn39">39</a></sup></p> </div> , <figure class="figure overflow-hidden figure--default figure--no-caption responsive-embed-no-margin-wrapper"> <div class="figure__media"> <div class="embed embed--infogram js-embed js-embed--infogram"> <div class="infogram-embed" data-id="7917776d-cd63-48fd-a22d-e4281e548e83" data-type="interactive" data-title="20200410_IKENSON_Lincicome_The China Shock_Figure 1"></div>!function(e,i,n,s){var t="InfogramEmbeds",d=e.getElementsByTagName("script")[0];if(window[t]&amp;&amp;window[t].initialized)window[t].process&amp;&amp;window[t].process();else if(!e.getElementById(n)){var o=e.createElement("script");o.async=1,o.id=n,o.src="https://e.infogram.com/js/dist/embed-loader-min.js",d.parentNode.insertBefore(o,d)}}(document,0,"infogram-async"); </div> </div> </figure> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>Second, data indicate, pace Levy, that Chinese imports simply replaced other imports (as opposed to domestic production) during the China Shock. According to the Congressional Research Service, the total share of imports into the United States from Pacific Rim countries between 1990 and 2017 remained constant at 47.1 percent, but “the role of China as a&nbsp;supplier of U.S. manufactured products among Pacific Rim countries increased sharply, while the relative importance of the rest of the Pacific Rim (excluding China) for these products sharply decreased,” (see Figure 2) a&nbsp;result “partly due to many multinational firms shifting their export‐​oriented manufacturing facilities from other countries to China.”<sup><a href="#_ednref40" id="_edn40">40</a></sup></p> </div> , <figure class="figure overflow-hidden figure--default figure--no-caption responsive-embed-no-margin-wrapper"> <div class="figure__media"> <div class="embed embed--infogram js-embed js-embed--infogram"> <div class="infogram-embed" data-id="60948f72-0de2-4d8a-a469-225c12940ff5" data-type="interactive" data-title="WEB: 20200410_IKENSON_Lincicome_The China Shock_Figure 2"></div>!function(e,i,n,s){var t="InfogramEmbeds",d=e.getElementsByTagName("script")[0];if(window[t]&amp;&amp;window[t].initialized)window[t].process&amp;&amp;window[t].process();else if(!e.getElementById(n)){var o=e.createElement("script");o.async=1,o.id=n,o.src="https://e.infogram.com/js/dist/embed-loader-min.js",d.parentNode.insertBefore(o,d)}}(document,0,"infogram-async"); </div> </div> </figure> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>The San Francisco Federal Reserve also found that Americans’ total import consumption, as measured by 2017 personal consumption expenditures, remained relatively steady during the China Shock period. This further signifies that Chinese imports displaced other imports far more than American production. According to the report, “the fact that the overall import content of U.S. consumer goods has remained relatively constant while the Chinese share has increased demonstrates that<em> Chinese gains have come, in large part, at the cost of other exporters, namely Japan.</em>”<sup><a href="#_ednref41" id="_edn41">41</a></sup></p> <p>That economists repeatedly and openly express reservations—supported by various trade and employment data—about blaming China trade for massive declines in U.S. manufacturing employment should foment similar levels of caution among U.S. politicians and pundits.</p> <p>Finally, there is the matter of putting the China Shock’s effects into perspective. For example, Douglas Irwin (citing a&nbsp;2014 Robert Lawrence paper<sup><a href="#_ednref42" id="_edn42">42</a></sup>) notes that “imports from China may have resulted in involuntary displacement of 97,000 manufacturing workers per year (on average, adjusted to account for voluntary separations), but <em>that is less than one‐​fifth of total involuntary job loss in manufacturing and less than 5&nbsp;percent of all involuntary job losses over the same period</em>.”<sup><a href="#_ednref43" id="_edn43">43</a></sup> As previously noted, DeLong estimates that the China Shock resulted in the loss of less than 0.25 percent of all U.S. nonfarm jobs. Autor himself has called his estimate of 2&nbsp;million jobs lost an “upper bound” (the more likely central estimate was about half that number), and it includes around 1&nbsp;million nonmanufacturing jobs. Autor’s more recent paper on China trade and U.S. marriage trends, moreover, acknowledges that the “analysis does not imply that surging import competition from China over the last two decades has been the sole or primary driver of these [marriage and childbirth] trends” but only a “plausible contributor.”<sup><a href="#_ednref44" id="_edn44">44</a></sup> These analyses should make us skeptical of the claimed benefits of recent proposals for government to remake the U.S. economy because of the China Shock.</p> <p>That said, the numerous academic studies discussed above are not intended to argue that Chinese import competition in the decade following China’s WTO accession was purely beneficial to the United States or that the U.S. labor market and certain communities are problem free. Instead, they reveal that the claims of harm from Chinese trade are likely wildly overstated while the substantial economic benefits are usually ignored. These studies also reveal that the China Shock issues are more uncertain and complex than the caricature painted by PNTR/​China critics.<sup><a href="#_ednref45" id="_edn45">45</a></sup></p> </div> , <h2 class="heading"> The Reality of China’s WTO Accession and Export Competitiveness </h2> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>Critics also often distort the circumstances of China’s WTO accession and the effects of PNTR. First, PNTR did not actually open the United States to Chinese imports: China had previously held “most favored nation” (MFN) trade status, renewed on an annual basis, since 1980, meaning the country faced no greater trade barriers than most other (“favored”) U.S. trading partners. MFN status was even renewed right after the Tiananmen Square protests and the presidential election of Bill Clinton, who ran against MFN, which was subsequently renamed “normal trade relations” (NTR).<sup><a href="#_ednref46" id="_edn46">46</a></sup> Only once between 1990 and 2001 was China’s MFN/NTR status truly in doubt: in 1992, when a&nbsp;presidential veto was needed to maintain it. As a&nbsp;result, Chinese imports to the United States increased more than six‐​fold in the decade preceding PNTR, and by the late 1990s the rational expectation of most U.S. importers was more of the same. Indeed, a&nbsp;1998 Congressional Research Service analysis of congressional votes and the broader annual MFN/NTR renewal debate concluded that, by the late 1990s, MFN/NTR was “a largely settled issue” in Congress:</p> <blockquote>In 1993, newly elected President Clinton announced he would link China’s MFN status to human rights progress beginning in 1994. Although ultimately the President reversed himself, the 1993 decision appears to have been a&nbsp;pivotal catalyst in the declining importance of MFN status as a&nbsp;tool with which to influence China policy. Neither the House nor the Senate has passed MFN‐​related legislation during the Clinton Administration. Instead, Members have turned to legislative alternatives, most of which have included more specific, more targeted sanctions on China’s activities.<sup><a href="#_ednref47" id="_edn47">47</a></sup></blockquote> <p>The run‐​up to the PNTR vote in 2000 permits the same conclusion. In 1999, the House vote to deny MFN/NTR for China was defeated by a&nbsp;170–260 margin; the Senate vote was an even more lopsided 12–87. As former Office of the U.S. Trade Representative staffer Erin Ennis recalls: “I was part of the Clinton administration’s annual efforts to ensure that MFN was continued each year. We never took it for granted and contacted every House office each time a&nbsp;vote was in order, but the outcome was rarely in doubt—particularly since there was only one vote in the Senate during that time and it failed by a&nbsp;wide margin.”<sup><a href="#_ednref48" id="_edn48">48</a></sup> Table 1&nbsp;lists these votes.</p> </div> , <figure class="figure overflow-hidden figure--default figure--no-caption responsive-embed-no-margin-wrapper"> <div class="figure__media"> <div class="embed embed--infogram js-embed js-embed--infogram"> <div class="infogram-embed" data-id="ffe361d1-877b-494a-9ea7-c93066b2a116" data-type="interactive" data-title="20200327_IKENSON_Lincicome_The China Shock_table 1"></div>!function(e,i,n,s){var t="InfogramEmbeds",d=e.getElementsByTagName("script")[0];if(window[t]&amp;&amp;window[t].initialized)window[t].process&amp;&amp;window[t].process();else if(!e.getElementById(n)){var o=e.createElement("script");o.async=1,o.id=n,o.src="https://e.infogram.com/js/dist/embed-loader-min.js",d.parentNode.insertBefore(o,d)}}(document,0,"infogram-async"); </div> </div> </figure> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>Nevertheless, there <em>is</em> evidence that the certainty of “permanent” trade relations accelerated the growth of Chinese imports into the United States. The most well‐​known paper on the effect of PNTR’s certainty on Chinese imports and U.S. manufacturing jobs, from Pierce and Schott, found a&nbsp;substantial connection among PNTR, Chinese imports in sectors that would have faced high tariffs in the absence of MFN/NTR, and U.S. jobs.<sup><a href="#_ednref49" id="_edn49">49</a></sup> Kyle Handley and Nuno Limão found similar results (along with substantial consumer gains) in their 2017 paper.<sup><a href="#_ednref50" id="_edn50">50</a></sup> Other experts, however, question the magnitude of the PNTR “uncertainty driver.” For example, George Allesandria, Shafaat Khan, and Armen Khederlarian in 2019 found that the annual MFN/NTR votes <em>actually increased</em> Chinese imports into the United States as a&nbsp;result of importers’ increasing shipments in advance of any potential tariff increases.<sup><a href="#_ednref51" id="_edn51">51</a></sup> They also found, consistent with the aforementioned congressional and anecdotal evidence, that the probability of NTR denial averaged only about 5.5 percent between 1990 and 2001, reaching a&nbsp;mere 1.4 percent in 2001 right before China joined the WTO. Based on these data, they found the trade‐​dampening effects of MFN/NTR uncertainty to have evaporated by the late 1990s.</p> <p>Regardless of which expert is correct, the congressional record and Chinese trade flow data contradict the popular assertion that an isolated U.S. policy choice in 2000 first exposed the U.S. market and U.S. workers to Chinese import competition. At most, PNTR merely accelerated a&nbsp;bilateral economic integration that was already well underway.</p> <p>More importantly, there is ample evidence that PNTR was <em>not</em> the only, and perhaps not even the main, driver of the China Shock that occurred in United States. Handley and Limão, for example, found that a&nbsp;reduction in trade policy uncertainty accounted for only about <em>one‐​third</em> of the growth in Chinese exports to the United States between 2000 and 2005.<sup><a href="#_ednref52" id="_edn52">52</a></sup> Amiti and others found similar results, attributing approximately two‐​thirds of the effect of China’s WTO entry on U.S. manufacturing not to PNTR but to <em>China’s own tariff reductions resulting from WTO entry</em>.<sup><a href="#_ednref53" id="_edn53">53</a></sup> As shown in Figures 3&nbsp;and 4, average Chinese import tariffs went from about 15 percent in 2000 to less than 9&nbsp;percent in 2006, and even lower on a&nbsp;trade‐​weighted scale.</p> </div> , <figure class="figure overflow-hidden figure--default figure--no-caption responsive-embed-no-margin-wrapper"> <div class="figure__media"> <div class="embed embed--infogram js-embed js-embed--infogram"> <div class="infogram-embed" data-id="401d17e2-f2a1-4dec-b391-cfce4cafbf2b" data-type="interactive" data-title="WEB: 20200410_IKENSON_Lincicome_The China Shock_Figure 3"></div>!function(e,i,n,s){var t="InfogramEmbeds",d=e.getElementsByTagName("script")[0];if(window[t]&amp;&amp;window[t].initialized)window[t].process&amp;&amp;window[t].process();else if(!e.getElementById(n)){var o=e.createElement("script");o.async=1,o.id=n,o.src="https://e.infogram.com/js/dist/embed-loader-min.js",d.parentNode.insertBefore(o,d)}}(document,0,"infogram-async"); </div> </div> </figure> , <figure class="figure overflow-hidden figure--default figure--no-caption responsive-embed-no-margin-wrapper"> <div class="figure__media"> <div class="embed embed--infogram js-embed js-embed--infogram"> <div class="infogram-embed" data-id="8866ff17-7389-498f-ac9a-cba9b64967db" data-type="interactive" data-title="WEB: 20200410_IKENSON_Lincicome_The China Shock_Figure 4"></div>!function(e,i,n,s){var t="InfogramEmbeds",d=e.getElementsByTagName("script")[0];if(window[t]&amp;&amp;window[t].initialized)window[t].process&amp;&amp;window[t].process();else if(!e.getElementById(n)){var o=e.createElement("script");o.async=1,o.id=n,o.src="https://e.infogram.com/js/dist/embed-loader-min.js",d.parentNode.insertBefore(o,d)}}(document,0,"infogram-async"); </div> </div> </figure> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>The Autor, Dorn, and Hanson China Shock papers even emphasize that China’s internal reforms—on privatization, trading rights, and (again) import liberalization, often in response to new WTO commitments—were major contributors to China’s export competitiveness in the late 1990s and 2000s.<sup><a href="#_ednref54" id="_edn54">54</a></sup> Jakubik and Stolzenburg subsequently confirmed this view.<sup><a href="#_ednref55" id="_edn55">55</a></sup> Several papers have shown significant, though often different, effects of Chinese import competition on firms and workers across Europe, which was obviously not affected by PNTR (and had granted China MFN status years earlier).<sup><a href="#_ednref56" id="_edn56">56</a></sup> In other words, PNTR probably accelerated Chinese exports to the United States, but China’s own reforms—far beyond the control of Washington policymakers—also fueled the China Shock.</p> <p>Furthermore, China’s WTO accession was not “shocking” for anyone paying attention to U.S. trade policy in the 1990s (a group that presumably included U.S. manufacturers, unions, and politicians). China first applied to join the WTO (under its predecessor, the General Agreement on Tariffs and Trade) in 1985, then reapplied in 1995 when the WTO came into being, and finally acceded to the body in 2001.<sup><a href="#_ednref57" id="_edn57">57</a></sup> As shown in Table 2&nbsp;and Table 3, China’s accession over this time involved dozens of bilateral and multilateral (“working party”) meetings, negotiating texts, disclosures, and—as previously noted—internal reforms. China’s final accession package—a “Working Party Report” and “Protocol of Accession,” plus liberalization schedules for goods and services—contained hundreds of pages of commitments (by far the most of any acceding member to that point and considered still today to be some of the deepest ever). This included many “WTO‐​plus” commitments that the United States and other members dictated (via bilateral accession agreements) and have since been used, for example, to challenge Chinese laws through dispute settlement or to restrict Chinese imports.<sup><a href="#_ednref58" id="_edn58">58</a></sup></p> </div> , <figure class="figure overflow-hidden figure--default figure--no-caption responsive-embed-no-margin-wrapper"> <div class="figure__media"> <div class="embed embed--infogram js-embed js-embed--infogram"> <div class="infogram-embed" data-id="168c5f44-1da4-4b28-9d2f-1da2d8fb702f" data-type="interactive" data-title="20200410_IKENSON_Lincicome_The China Shock_Table 2"></div>!function(e,i,n,s){var t="InfogramEmbeds",d=e.getElementsByTagName("script")[0];if(window[t]&amp;&amp;window[t].initialized)window[t].process&amp;&amp;window[t].process();else if(!e.getElementById(n)){var o=e.createElement("script");o.async=1,o.id=n,o.src="https://e.infogram.com/js/dist/embed-loader-min.js",d.parentNode.insertBefore(o,d)}}(document,0,"infogram-async"); </div> </div> </figure> , <figure class="figure overflow-hidden figure--default figure--no-caption responsive-embed-no-margin-wrapper"> <div class="figure__media"> <div class="embed embed--infogram js-embed js-embed--infogram"> <div class="infogram-embed" data-id="d002a081-3619-41f4-9be5-c8e0e10ea796" data-type="interactive" data-title="20200410_IKENSON_Lincicome_The China Shock_Table 3"></div>!function(e,i,n,s){var t="InfogramEmbeds",d=e.getElementsByTagName("script")[0];if(window[t]&amp;&amp;window[t].initialized)window[t].process&amp;&amp;window[t].process();else if(!e.getElementById(n)){var o=e.createElement("script");o.async=1,o.id=n,o.src="https://e.infogram.com/js/dist/embed-loader-min.js",d.parentNode.insertBefore(o,d)}}(document,0,"infogram-async"); </div> </div> </figure> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>Notably, the United States was the final holdout among large industrialized nations to approve China’s WTO accession via bilateral negotiations, demanding ever more concessions from the Chinese government over a&nbsp;contentious 13‐​year negotiation.<sup><a href="#_ednref59" id="_edn59">59</a></sup> Contrary to allegations from President Trump and others, the United States did not simply “rubber‐​stamp” China’s WTO accession or base it on Pollyannaish dreams of Chinese democratization. In an interview about his book <em>Schism: China, America, and the Fracturing of the Global Trading System</em>, journalist Paul Blustein describes his research into the U.S.–Chinese bilateral accession negotiations:</p> <blockquote>I did a&nbsp;lot of research on the negotiations leading to China’s entry into the WTO, interviewing many of the key players on both sides. I&nbsp;found that both sides played extreme hardball—if anything, it was the Chinese who felt bruised and humiliated by the way the talks were conducted. The Americans … were usually the ones to walk away from the table.… China had to agree to open its economy and reform in ways that exceeded the requirements imposed on other countries. For example, China had to promise that it would reduce its tariffs on [manufactured] goods to an avg of about 9% in 2005. China had to lower its tariffs to less than 1/3 the comparable figures for Brazil &amp;&nbsp;other comparable countries. China also had to agree that its trading partners could use several unusual mechanisms that could restrict the inflow of Chinese products. All in all, it’s hard to imagine how the US could have driven a&nbsp;harder bargain on [economic] issues and still gotten a&nbsp;deal. Chinese officials are resentful to this day; they feel China was forced to accept 2nd class citizenship on a [number] of issues.<sup><a href="#_ednref60" id="_edn60">60</a></sup></blockquote> <p>Beyond driving a&nbsp;hard bargain, U.S. trade representatives for multiple presidents from each major party also frequently consulted with Congress and the private sector, including labor unions, at every step (as required by U.S. law).<sup><a href="#_ednref61" id="_edn61">61</a></sup></p> <p>With respect to the supposed U.S. dream of Chinese democratization, the Paulson Institute’s Neil Thomas has shown that creating a&nbsp;liberal democracy in China was not a&nbsp;primary reason for the U.S. government’s approval of China’s WTO accession. Instead, key Clinton administration speeches and policy documents demonstrate that U.S.–Chinese engagement “was a&nbsp;balancing act with multiple objectives”—most of them pragmatic—including “increasing bilateral dialogues, preventing [weapons of mass destruction] nonproliferation in East and South Asia, preventing the nuclearization of the Korean Peninsula, cooperating on disease and environmental issues, better market access [for U.S. companies] and intellectual property rules, fighting organized crime, ensuring stability in the Taiwan Strait, and WTO accession on ‘commercial terms,’ among others.” Democratization, on the other hand, was mentioned rarely. Thomas shows that the Clinton administration’s engagement policy with China was “neither a&nbsp;triumphant celebration of inevitable democratization nor a&nbsp;credulous declaration of China subsuming itself to American leadership,” and instead comported with “the dominant argument used by PNTR advocates to sway legislators” (i.e., that “engagement with China was not primarily aimed at <em>changing China</em>, but rather focused on <em>benefitting America</em>”).<sup><a href="#_ednref62" id="_edn62">62</a></sup></p> <p>Thus, from a&nbsp;simple legal and historical perspective, there was nothing really “shocking” or “naïve” about PNTR and the China Shock.</p> <p>It is also a&nbsp;stretch to assert that <em>based on the facts at the time</em> that Washington policymakers had much of a&nbsp;choice when deciding whether to grant PNTR to China (a move that every <em>other</em> WTO member had done years earlier). As Levy wrote in 2018, the two alternatives to PNTR—letting China in the WTO but continuing the annual NTR process (or even raising tariffs on Chinese goods) or keeping China from the WTO entirely—were inferior, in terms of both the economics and geopolitics, to granting PNTR:</p> <blockquote>A policy of denying MFN … would have forsaken the benefits of Chinese membership while having retained all the costs that accompanied low barriers toward Chinese goods. Further, this move would have divided the international community on China, given most [Organisation for Economic Co‐​operation and Development] countries supported its accession at the time. This split would have dramatically weakened the WTO in its early stages, thus undermining a&nbsp;major U.S. foreign policy goal to strengthen the global trading system. …<br><br>[Raising tariffs] would have not only hurt U.S. consumers and businesses that benefited from those imports, but would have also been interpreted as an act of enmity by Beijing. And on top of this, it would likely have been ineffective in stopping China’s rise. As China drove down the prices of toys and t‐​shirts in other global markets, it would have been very difficult for the United States to insulate itself from the effects. Further, China has ultimately emerged as a&nbsp;major global economic player by tapping into global value chains. Since China is the last stage in the chain, a&nbsp;finished product can appear to have come from China, even if Chinese value‐​added is relatively small. Since U.S. tariffs are applied based on where a&nbsp;good is finished, not based on value‐​added, China could have easily affected U.S. markets by performing earlier‐​stage tasks and then having the goods finished in Malaysia or some other neighboring country. This is the problem with conducting bilateral policy in a&nbsp;multilateral world. In sum, this second alternative is no better than the first, and decidedly worse than the current policy.<br><br>[Excluding China from the WTO entirely] appears dangerous, implausible, and infeasible: dangerous because trying to isolate China with the open intent of blocking Chinese growth would likely have elicited a&nbsp;hostile response; implausible because the United States was, in late 2001, trying to rally the world to respond to terrorism emerging from the Middle East; and infeasible because the United States has had a&nbsp;difficult time trying to isolate countries with much smaller economies, such as Iran and North Korea. Trying to isolate China would have been orders of magnitude more difficult.<sup><a href="#_ednref63" id="_edn63">63</a></sup></blockquote> <p>The Iran and North Korea examples are especially relevant to the current debate, given today’s foreign policy justifications for opposing PNTR. Neither country is a&nbsp;WTO member, but each has continued to militarize and progress toward nuclearization, even in the face of economic sanctions and isolation that would never have been applied to 1990s China (or to China today for that matter). Perhaps more importantly, China—unlike those rogue regimes—at the time of WTO accession had possessed nuclear weapons for decades. Though its recent military actions are concerning, it beggars belief that—given recent experience with Iran and North Korea (as well as other targets of U.S. sanctions such as Cuba)—unilateral attempts to isolate a&nbsp;massive nuclear power would have produced a&nbsp;better geopolitical outcome than did engagement.</p> <p>Indeed, marshalling the necessary WTO‐​wide consensus to deny more than a&nbsp;billion people in a&nbsp;modernizing economy access to an open multilateral trade organization—one that already included communist Cuba and for decades had tolerated Eastern Bloc command‐​and‐​control economies and “socialist” countries with pervasive state‐​owned industries—was not realistic, <em>especially</em> given what U.S. policymakers could have known at the time about China’s relatively liberal leadership and impressive economic reforms. This last point bears emphasis: as previously noted, the reforms that China undertook during its WTO accession—along with additional reforms made shortly after accession—often in direct response to WTO require­ments (and member demands), were so substantial as to drive China’s incredible export competitiveness. To assert that U.S. policymakers in the 1990s should have somehow known that these reforms would cease or reverse a&nbsp;decade later under different Chinese political leadership, and thus either convince over 140 other WTO members to deny a&nbsp;nuclear China entry into the WTO or reject PNTR (becoming the only WTO member to do so), is applying an impossible standard.</p> </div> , <h2 class="heading"> China’s Backsliding since Accession Cannot Be Blamed on PNTR or the WTO </h2> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>PNTR critics also ignore the missed oppor­tunities <em>since </em>China’s WTO accession, especially the unused checks on Chinese trade abuses that were among China’s allegedly weak WTO commitments. As previously noted, China undertook substantial trade and economic liberalization before and shortly after WTO accession and made dozens of “WTO‐​plus” commitments to become a&nbsp;member. Since then, problems have undoubtedly arisen, but as Cato’s James Bacchus, Simon Lester, and Huan Zhu have documented, most of those problems—for example, on industrial subsidies and intellectual property—are covered by WTO rules and can be litigated through dispute settlement.<sup><a href="#_ednref64" id="_edn64">64</a></sup> Moreover, such litigation has proven effective. According to the Peterson Institute for International Economics’ Jeffrey Schott and Euijin Jung, for example, the United States was undefeated at the WTO when challenging Chinese trade practices between 2002 and 2018.<sup><a href="#_ednref65" id="_edn65">65</a></sup> Four other cases were pending at the time of that paper’s publication, but the United States has since won two more—one on agricultural subsidies and one on barriers to U.S. imports of wheat, rice, and corn.<sup><a href="#_ednref66" id="_edn66">66</a></sup></p> <p>Furthermore, Bacchus, Lester, and Zhu demonstrate that when China loses WTO disputes, it tends to comply with the decisions:</p> <blockquote>Of the 27 matters litigated against China, 5&nbsp;are still pending, 12 were litigated all the way through, and 10 were resolved through some kind of settlement, or not pursued after the measure was modified. These cases addressed a&nbsp;wide range of issues: export restrictions, subsidies, intellectual property protection, discriminatory taxes, trading rights, services, and trade remedies. In all 22 completed cases, with one exception where a&nbsp;complaint was not pursued, China’s response was to take some action to move toward greater market access.<sup><a href="#_ednref67" id="_edn67">67</a></sup></blockquote> <p>Chinese compliance is not perfect (nor is any other WTO member’s), but it is arguably better than that of the United States, which has famously shirked WTO rulings on subsidies, antidumping rules, and internet gambling.</p> <p>The refusal of the United States and other WTO members to pursue more disputes against China—or open “compliance proceedings” when China does not fully comply—is a&nbsp;policy choice worth criticizing, but this says nothing about the original decision to admit China to the WTO. Indeed, it is either mistaken or misleading to claim that China’s WTO accession terms were weak and that the WTO has utterly failed to discipline China’s unfair trade practices when the sole means of imposing such discipline—dispute settlement—and the “WTO‐​plus” rules that China accepted have never been fully utilized. This is declaring defeat before ever firing a&nbsp;shot.<sup><a href="#_ednref68" id="_edn68">68</a></sup></p> <p>Other U.S. policy choices since the passage of PNTR also deserve scrutiny. Among these are the United States’ withdrawal from the Trans‐​Pacific Partnership, a&nbsp;treaty that was designed in part to counterbalance China’s economic and geopolitical ambitions; its failure to reform tax, trade, and immigration policies that inhibit American companies’ global competitiveness;<sup><a href="#_ednref69" id="_edn69">69</a></sup> its failure to modernize adjustment assistance and worker retraining programs intended to mitigate trade, technological, or cultural disruptions;<sup><a href="#_ednref70" id="_edn70">70</a></sup> or its continued imposition of tax, education, occupational licensing, criminal justice, zoning, and other policies that discourage labor adjustment and economic dynamism.<sup><a href="#_ednref71" id="_edn71">71</a></sup> Such policies are indeed worthy of criticism and debate, but they have <em>nothing</em> to do with the decisions to pass PNTR, allow China to join the WTO, or otherwise “normalize” trade with China. And blaming China for these policies’ inevitable failures relieves the policies—and the American politicians who implemented them—of the scrutiny that they deserve.</p> </div> , <h2 class="heading"> The Curious Failure to Note the Problems with U.S. Market Interventions </h2> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>Those wishing to blame the problems of the American working class on PNTR and freer markets more broadly often ignore the United States’ own long history of market inter­ventions and their failures to help companies and workers. A&nbsp;core tenet of the current populist backlash against trade, and particularly trade with China, is that American “elites” opened the floodgates to Chinese imports with only a&nbsp;timid threat of the WTO dispute process to protect American workers from “unfair” competition. This ignores the mountain of government interventions that have been used—at the federal level alone—to restrict Chinese imports, otherwise protect or subsidize American manufacturers, and assist American workers.</p> <p>On trade, the United States still maintains significant tariffs and tariff‐​rate quotas on imports of “sensitive” products such as trucks, apparel, footwear, and food.<sup><a href="#_ednref72" id="_edn72">72</a></sup> Moreover, according to <em>Global Trade Alert</em>, the United States has been one of the most frequent users of “harmful” nontariff government trade interventions—ones that far outnumber its “liberalizing” measures over the same period.<sup><a href="#_ednref73" id="_edn73">73</a></sup> This includes, as of late 2019, almost 190 special duties (“trade remedies” such as antidumping and antisubsidy measures) on a&nbsp;variety of Chinese imports, two‐​thirds of which (127 of 187) use a&nbsp;special “non‐​market economy” antidumping methodology that practically ensures prohibitive duty rates on those goods (a “WTO‐​plus” accession commitment special to China and a&nbsp;few others).<sup><a href="#_ednref74" id="_edn74">74</a></sup> These duties target “unfair” trade and subsidies that injure U.S. manufacturers and workers, and—as the numbers indicate—American companies and unions have been successful in petitioning for them. (There are around 500 duty orders in place overall.)</p> <p>Dozens of other Chinese imports are barred from the U.S. market as a&nbsp;result of Section 337 actions that remedy intellectual property rights violations.<sup><a href="#_ednref75" id="_edn75">75</a></sup> Chinese investment in U.S. industries, meanwhile, can be (and has been) restricted by the Committee on Foreign Investment in the United States, and U.S. technology exports to China are often blocked on national security grounds.<sup><a href="#_ednref76" id="_edn76">76</a></sup></p> <p>The U.S. government also has long provided financial and other support to favored industries and workers, for example through auto bailouts, steel industry bailouts, alternative energy subsidies, manufacturing tax credits, Export–Import Bank loans and other export assistance, procurement preferences such as the Buy American Act and the Davis–Bacon Act, shipping restrictions such as the Jones Act and the Passenger Vessel Services Act,<sup><a href="#_ednref77" id="_edn77">77</a></sup> and the billions of other taxpayer dollars that the United States has doled out to “blue collar” industries and workers over the past few decades at the federal level alone. As I&nbsp;documented in a&nbsp;2012 paper on global subsidies and antisubsidy disciplines, “despite the obvious economic, legal, and political problems associated with domestic subsidies, the United States remains one of the world’s largest subsidizers.”<sup><a href="#_ednref78" id="_edn78">78</a></sup></p> <p>The U.S. government has also repeatedly tried to fund and retrain workers, most notably through the Trade Adjustment Assistance (TAA) program, which offers generous subsidies to U.S. workers affected by import competition. Unfortunately, TAA has proven to be a “notorious failure”: as I&nbsp;noted in a&nbsp;2016 article, “multiple studies commissioned by the Labor Department have found that TAA participants are worse off, as measured by future wages and benefits, than similarly situated jobless individuals outside the program.”<sup><a href="#_ednref79" id="_edn79">79</a></sup> The <em>Wall Street Journal</em>’s Eric Morath in December 2018 noted additional research into the failure of TAA to help workers allegedly displaced by trade in 2018 and a&nbsp;move by certain states to “de‐​emphasize programs such as TAA in favor of getting workers back into jobs more quickly.”<sup><a href="#_ednref80" id="_edn80">80</a></sup> Other federal job‐​training programs have been found to be similarly inefficacious, and related reform efforts have thus far been underwhelming.<sup><a href="#_ednref81" id="_edn81">81</a></sup></p> <p>These and other government programs raise serious concerns when it comes to helping American workers adjust to trade and other shocks, and they need to be reformed. <em>But that does not change the simple fact that these programs do exist and have for decades</em>. These policies refute the claim that U.S. policymakers simply passed PNTR and walked away from the American working class out of some sort of “market fundamentalism” or rigid adherence to “laissez faire ideology.”</p> <p>The <em>real problem</em> was that these interventions did not work very well. A&nbsp;classic example is the U.S. steel industry, whose companies and workers since the 1970s have arguably received more government assistance than any industry in the country. This includes hundreds of import restrictions; tens of billions of dollars in state, local, and federal subsidies and bailouts; exemptions from environmental regulations; special “Buy American” rules; federal pension benefit guarantees; and even its own caucus in Congress.<sup><a href="#_ednref82" id="_edn82">82</a></sup> The result: dramatic historical declines in employment and capitalization, numerous bankruptcies, and of course, continued demands for even more government protection (as the current Section 232 tariffs make clear).</p> <p>The steel industry certainly is not alone. As a&nbsp;2013 Congressional Research Service report concluded about the state of American manufacturing, “Although Congress has established a&nbsp;wide variety of tax preferences, direct subsidies, import restraints, and other federal programs with the goal of retaining or recapturing manufacturing jobs, only a&nbsp;small proportion of US workers is now employed in factories.”<sup><a href="#_ednref83" id="_edn83">83</a></sup></p> <p>In short, there is scant evidence that Washington elites abandoned the American working class after liberalizing trade with China. The government’s interventions may have failed, but they were interventions nonetheless.</p> </div> , <h2 class="heading"> Trade and Globalization Bring Unambiguous Benefits </h2> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>If the China Shock’s disruptions are unique to that country and time period, the debate over PNTR and China trade is academic. Most economists believe that the China Shock ended years ago and that if its effects are unlikely to happen again, then the historical analysis is not instructive regarding future trade policies. As Jakubik and Stolzenburg recently concluded:</p> <blockquote>The literature on the local labour market effects of Chinese import competition has been cited extensively as an argument for limiting trade with China despite the fact that the results do not support this conclusion.… Even if policy were narrowly focused on direct import competition effects ignoring price and indirect effects, there is no case for limiting trade with China [because] US local labour market adjustment to the China Shock has largely concluded.<sup><a href="#_ednref84" id="_edn84">84</a></sup></blockquote> <p>Put another way, if there will never be an “India Shock” or a “Vietnam Shock,” then there is no reason to reset American trade and labor policy or to reorganize the U.S. economy more broadly in preparation for such a&nbsp;moment.</p> <p>On the other hand, if the supposed lessons from PNTR are, as some intend, a&nbsp;guide for future U.S. decisionmaking on trade and global­ization writ large—pundits such as Tucker Carlson seem to aim wider<sup><a href="#_ednref85" id="_edn85">85</a></sup>—then the debate must consider the many factors supporting freer trade and opposing protectionism. Those factors include the following:</p> <ul> <li>the wide body of research showing significant economic gains from import liberalization and multilateral trade—even trade “shocks”—and the overwhelming support for these policies from economists on the political left, right, and center;<sup><a href="#_ednref86" id="_edn86">86</a></sup></li> <li>the unseen benefits of import competition on American economic dynamism, providing Americans with not merely cheaper goods and services but better (and once unimaginable) ones, as well as better jobs, better companies, and better lives;<sup><a href="#_ednref87" id="_edn87">87</a></sup></li> <li>the morality of freer trade—both for Americans and the global poor—and the political problems that arise from government putting the desires of favored producers above those of all consumers;<sup><a href="#_ednref88" id="_edn88">88</a></sup></li> <li>the fact that much of “globalization” is driven not by elite policy choices such as free trade agreements but by seismic changes in communications and technology, such as shipping containers, that are far beyond the control of any policymaker;<sup><a href="#_ednref89" id="_edn89">89</a></sup></li> <li>the extensive research showing that trade complaints through the WTO are more effective than unilateralism in bringing about trade reforms;<sup><a href="#_ednref90" id="_edn90">90</a></sup></li> <li>the longstanding geopolitical benefits of trade, including the WTO’s role in preventing world war and the strong connection between trade and peace;<sup><a href="#_ednref91" id="_edn91">91</a></sup></li> <li>the unique position of American manufacturing and workers post–World War II, when much of the rest of the world was either recovering from war or descending into communism;<sup><a href="#_ednref92" id="_edn92">92</a></sup></li> <li>the fact that, historically, productivity shocks such as automation have been just as disruptive as trade (if not more so) in terms of low‐ and middle‐​skill manufacturing job losses and that U.S. production occupations are today among the most vulnerable to future automation‐​led disruptions;<sup><a href="#_ednref93" id="_edn93">93</a></sup> and</li> <li>that trade economists have for decades acknowledged that adjustment to trade shocks “may be neither quick nor easy.”<sup><a href="#_ednref94" id="_edn94">94</a></sup></li> </ul> <p>A fuller accounting of these points is beyond the scope of this paper, but each has ample support. For example, a&nbsp;2019 International Monetary Fund cross‐​country analysis of trade and technology shocks found that while both can have adverse regional employment effects (raising unemployment and lowering labor force participation), only <em>automation</em> has long‐​lasting harms and that regions hit by trade shocks actually ended up <em>better off</em> a&nbsp;couple years later. That same paper also found that national policies encouraging more flexible labor markets can improve both adjustment in regional labor markets <em>and</em> their resilience to shocks and that countries with less stringent product market regulation, lower administrative costs for starting a&nbsp;business, and <em>greater trade openness</em> had lower regional inequality.<sup><a href="#_ednref95" id="_edn95">95</a></sup></p> <p>These points do not prove that free trade is seamless or that economists accurately predicted regional labor market frictions in response to large‐​scale trade disruptions, but—unless the China Shock is truly <em>sui generis</em> (and in that case, again, the historical and economic analyses are not instructive)—the broader economic and geopolitical benefits of trade and globalization are essential to any discussion of trade liberalization, elite policy choices, and the American working class. Unfortunately, these points always seem to be missing.</p> </div> , <h2 class="heading"> Protectionism Keeps Failing </h2> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>When critics decry “normalized trade” as an elite policy “choice,” they necessarily imply—but rarely state—a trade policy alternative. The only apparent alternative is some form of protectionism (i.e., government restrictions on imports of goods and services), and it has repeatedly proven a&nbsp;failure. For example, International Monetary Fund economists in 2018 examined data for 151 countries over 51&nbsp;years (1963–2014) and found that “tariff increases lead, in the medium term, to economically and statistically significant declines in domestic output and productivity” as well as more unemployment and higher inequality.<sup><a href="#_ednref96" id="_edn96">96</a></sup> The same is true for American protectionism, which has repeatedly been shown to impose immense economic harms that far outweigh any possible benefit to protected workers; to fail to protect American firms and workers over the longer term; and to breed elite corruption, cronyism, and political dysfunction.<sup><a href="#_ednref97" id="_edn97">97</a></sup> Two instances warrant mention in this regard:</p> <ul> <li>Using the Section 421 safeguard mechanism tied to China’s WTO accession, President Obama in 2009 imposed 35 percent tariffs on Chinese tires. The result was, even under the best assumptions, a&nbsp;handful of jobs saved at an annual cost to U.S. consumers of over $900,000 per job, plus a&nbsp;substantial increase in non‐​Chinese imports instead of new U.S. production.<sup><a href="#_ednref98" id="_edn98">98</a></sup> Today, the industry’s prospects are no better.<sup><a href="#_ednref99" id="_edn99">99</a></sup> (Such inefficacy is precisely what Levy predicted because of the interchangeability of Chinese and other imports.<sup><a href="#_ednref100" id="_edn100">100</a></sup>)</li> <li>A 2017 review of all U.S. antidumping investigations against Chinese imports between 1998 and 2006 revealed that the duties reduced Chinese imports and increased prices of subject merchandise in the U.S. market.<sup><a href="#_ednref101" id="_edn101">101</a></sup> However, these effects “dissipate approximately 2&nbsp;years after the antidumping decision,” and imports from other countries simply increased to replace the declining Chinese imports. Such results “cast doubt on the effectiveness of antidumping actions against China as mechanisms for protecting US producers.” Specific case studies, such as Daniel Ikenson’s review of antidumping measures on wooden bedroom furniture from China, show similar results: “Instead of preserving or returning domestic jobs … import restrictions will cause a&nbsp;shift in sourcing from China to places like the Philippines, Indonesia, Brazil, and Vietnam—places from which many of the petitioners have begun or are poised to begin importing themselves.”<sup><a href="#_ednref102" id="_edn102">102</a></sup></li> </ul> <p>These studies reveal both the futility and cronyism surrounding past U.S. attempts to stop Chinese imports <em>during the China Shock period</em>. Thus, if one looks to restrict trade to solve the problems facing America’s working class, the “solution” will most likely be worse than the alleged problem.</p> <p>Those who object to “normalizing” trade with China (i.e., removing U.S. restrictions on Americans’ consumption of Chinese imports) must also acknowledge that liberalization was not merely an economic and geopolitical decision but also a&nbsp;<em>moral</em> one that removed inequities in the previous, more protectionist system. The now‐​eliminated trade restrictions typically resulted from political “elites” seeking to support certain industries and workers at most Americans’ (especially poor ones) expense.<sup><a href="#_ednref103" id="_edn103">103</a></sup> American footwear workers, for example, benefited from a&nbsp;political decision (dating back to the Smoot–Hawley Tariff Act) to protect footwear jobs through hidden restrictions on the voluntary commercial decisions of other, unknowing Americans—restrictions that forced these citizens to subsidize U.S. footwear jobs by paying more for shoes.<sup><a href="#_ednref104" id="_edn104">104</a></sup> Today, former “big steel” lawyers and executives, now in the Trump administration, dole out tariff protection to their former colleagues who lobbied for it; those well‐​connected colleagues, in turn, get to decide the fate of their American customers’ requests for steel‐​tariff relief, even though the steel‐​consuming customers are a&nbsp;far larger share of the U.S. economy and workforce than is the steel industry. Trade‐​related lobbying expenditures over the past two years of “trade populism” have unsurprisingly skyrocketed.</p> <p>Trade liberalization cures this malady, whether intended or not, while also improving the living standards of most Americans. And though it is legitimate to ask after government removes import protection whether it owes the affected workers more in terms of adjustment welfare or job training, removing the protection was clearly the <em>right</em> thing to do.</p> </div> , <h2 class="heading"> Why Did Some Places “Move On”? </h2> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>Finally, those seeking to blame PNTR or Chinese imports for the current plight of the American working class ignore the many places in the United States that were affected by Chinese import competition but <em>did</em> adjust and have thrived economically—often with the help of trade and foreign investment. Indeed, the fact that the longer‐​term effects of Chinese import competition vary dramatically from place to place—even in states or regions that face intense competition<sup><a href="#_ednref105" id="_edn105">105</a></sup>—undermines the notion that the China Shock was a&nbsp;<em>national trade</em> problem (necessitating national protectionism) as opposed to a&nbsp;<em>local adjustment</em> problem (necessitating local solutions).</p> <p>Many cities and towns in America that were once known for low‐​skill manufacturing and faced intense import competition in the 1990s and 2000s have since adapted and thrived. As previously noted, several studies show that most U.S. regions ended up better off following the China Shock, though some areas—particularly those with low human capital—struggled. A&nbsp;2018 Brookings Institution report, moreover, finds that 115 of the 185 U.S. counties identified as having a&nbsp;disproportionate share of manufacturing jobs in 1970 had “transitioned successfully” from manufacturing by 2016 and that of the remaining 70 “older industrial cities,” 40 exhibited “strong” or “emerging” economic performance between 2000 and 2016.<sup><a href="#_ednref106" id="_edn106">106</a></sup> The “strong” localities, achieving high marks for growth, prosperity, and inclusion, include not only well‐​known success stories such as Pittsburgh and cities close to Boston and Manhattan but also smaller places such as Beaumont, Texas; Waterloo, Iowa; and Bethlehem, Pennsylvania.</p> <p>Anecdotal evidence reiterates these findings: towns that once depended on low‐​skill manufacturing, such as Greenville–Spartanburg, South Carolina; Hickory, North Carolina; Warsaw, Indiana; and Danville, Virginia, are now home to thriving companies that succeeded by adapting to the market, including through international trade and investment.<sup><a href="#_ednref107" id="_edn107">107</a></sup> Journalist James Fallows has documented many of these lesser‐​known success stories in his 2018 book, <em>Our Towns: A&nbsp;100,000-Mile Journey into the Heart of America</em>, and in a&nbsp;regular column for <em>The Atlantic</em>.<sup><a href="#_ednref108" id="_edn108">108</a></sup></p> <p>Anyone still doubting such successes need only drive down Interstate 85 from Charlotte, North Carolina, to Montgomery, Alabama, to see the multinational factories firsthand.<sup><a href="#_ednref109" id="_edn109">109</a></sup> The Federal Reserve Bank of New York emphasized this region in its examination of the recent surge in U.S. manufacturing jobs:</p> <blockquote>While job losses during the 2000s were fairly widespread across the country, manufacturing employment gains since then have been concentrated in particular parts of the country. Indeed, these gains were especially large in “auto alley”—a narrow motor vehicle production corridor stretching from Michigan south to Alabama—while much of the Northeast continued to shed manufacturing jobs.<sup><a href="#_ednref110" id="_edn110">110</a></sup></blockquote> <p>The contrast between now‐​thriving American towns and those still reeling from a&nbsp;trade shock that ended a&nbsp;decade ago again indicates that the problem the shock revealed was not import competition but—as Autor, Dorn, and Hanson themselves concede—many communities’ inability to adjust to seismic economic changes. The International Monetary Fund study on trade shocks, labor market policies, and regional adjustment reiterate these conclusions at a&nbsp;cross‐​country level. Thus, commentators and politicians who blame China trade for the difficulties of the American working class should stop asking, “Why did elites normalize trade with China in the 1990s?” and instead ask, “What did many American towns, companies, and workers <em>do right</em> in the face of intense import competition, and how can local, state, and federal policies encourage that important improvement?”</p> </div> , <h2 class="heading"> Conclusion </h2> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>The historical record before and after PNTR and the numerous academic analyses of the “China Shock” provide a&nbsp;straightforward explanation for the past 20‐​plus years of U.S. trade policy toward China: engagement and liberalization, exemplified by PNTR and China’s WTO accession, were a&nbsp;pragmatic and bipartisan policy choice made in the face of nonexistent or inferior alternatives, especially given the information when the choice was made. Engage­ment, moreover, produced real economic benefits for most Americans while bolstering the multilateral trading system and removing historical inequities under the previous, more protectionist U.S. trade policy regime.</p> <p>The resulting economic disruption and adjust­ment were difficult for some U.S. regions and workers—more difficult than many experts expected—and certainly post‐​liberalization policy mistakes were made (though often in the direction of <em>less</em> liberalization, not more). With the benefit of two decades of hindsight, one can legitimately claim that certain specific “WTO‐​plus” rules should have been drafted differently during China’s accession.</p> <p>That said, the facts simply do not support popular assertions from American politicians and pundits that engagement with China in the 1990s and 2000s was an obvious mistake and that denying China admission to the WTO was realistic a&nbsp;policy choice that would have improved U.S. economic and geopolitical standing today or that the real labor and cultural issues in America today are the fault of “Washington elites” who blithely pursued normalized trade with China to benefit corporate donors and democratize communist China while dogmatically refusing to support—through trade, labor, or any other policies—the working class. Such narratives are unsupportable.</p> <p>Labor market and cultural disruptions in the United States are real and important, as is China’s current and unfortunate turn toward illiberalism and imperialism. But pretending today that there was a&nbsp;better <em>trade policy choice</em> in 2000 than PNTR and engagement more broadly is misguided. It assumes too much, ignores too much, and demands too much. Worse, it could lead to truly bad governance: increasing U.S. protectionism; forgiving the real and important failures of our policymakers, CEOs, and unions over the past two decades; and preventing a&nbsp;political consensus for real policy solutions. Indeed, these things are happening now.</p> </div> , <h2 class="heading"> Citation </h2> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>Lincicome, Scott. “Testing the ‘China Shock’: Was Normalizing Trade with China a&nbsp;Mistake?” Policy Analysis No. 895, Cato Institute, Washington, DC, July 8, 2020. <a href="//www.cato.org/publications/policy-analysis/testing-china-shock-was-normalizing-trade-china-mistake">https://​doi​.org/​1​0​.​3​6​0​09/PA.</a>891.</p> </div> Wed, 08 Jul 2020 03:00:00 -0400 Scott Lincicome https://www.cato.org/publications/policy-analysis/testing-china-shock-was-normalizing-trade-china-mistake If Housing Affordability Is a National Priority, Then Why Does the Government Tax Almost Everything You Need to Build a Home? https://www.cato.org/blog/housing-affordability-national-priority-then-why-does-government-tax-almost-everything-you Scott Lincicome <p>A few weeks ago, Cato hosted <a href="https://www.cato.org/events/build-or-build-out-solving-housing-crisis">an event</a> on rising home prices and the resulting housing crises in many US cities. It’s an issue that has enjoyed much media attention and widespread calls for reform – even the 2019 <a href="https://www.whitehouse.gov/briefings-statements/president-donald-j-trump-tearing-red-tape-order-build-affordable-housing/">creation</a> of a White House Council on Eliminating Barriers to Affordable Housing Development “to identify and remove obstacles that impede the development of new affordable housing.” <span> </span>Most of the Cato event was—much like the broader public discussion on US housing reform—spent debating the merits and effects of single‐​family zoning and other land use regulations. Less discussed, however, were the <a href="https://www.cato.org/sites/cato.org/files/documents/powerpoints/lincicome-build-or-build.pdf">many ways</a> in which federal, state and local regulations inflate construction costs, which—as the White House press release notes—often drive home prices (and affordability) in many US localities.</p> <p>Among those regulations (yet unlikely to be mentioned by this administration!) are US import restrictions on almost everything you need to build a house, from the foundation to the roof and in between:</p> <p> <div data-embed-button="embed" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="c6df7b66-ee70-41d5-b537-5230b0de526d" class="align-center embedded-entity" data-langcode="en"> <div class="embed embed--infogram js-embed js-embed--infogram"> <div class="infogram-embed" data-id="9e3d00cf-b30a-44cb-83dd-5a8506b80635" data-type="interactive" data-title="Trade and Housing"></div> </div> </div> </p><p>As the chart above shows, these import barriers primarily take the form of tariffs on imports, especially from China, implemented pursuant to various US trade laws.<span> </span>Duty rates can range from a few percent to well over 100 percent – an effective ban on the product at issue.</p> <p>Some of these measures and their economic harms for US consumers—in this case, American home-builders/buyers—have been widely‐​reported (<em>e.g.</em>, President Trump’s “Section 232” tariffs on steel and aluminum or “Section 301” tariffs on Chinese imports).<span> </span>On the other hand, others—especially those implemented under US “trade remedy” (antidumping, countervailing duty or safeguard) laws—are less known, even though they can result in much higher duty rates (often using rather <a href="https://www.cato.org/blog/anti-trade-barbarians-gate">dubious</a> <a href="https://www.cato.org/publications/commentary/congress-must-fix-americas-unconstitutional-trade-laws">methodologies</a>) and can have similar economic effects.</p> <p>Speaking of those effects, numerous studies show that these tariffs (1) are <a href="https://www.nber.org/digest/may19/w25672.shtml">mostly</a> <a href="https://www.nber.org/papers/w26610">borne</a> by US consumers, not foreign governments or exporters; (2) increase <a href="https://www.wsj.com/articles/consumers-bore-cost-for-u-s-tariffs-on-washing-machines-paper-finds-11555936276#:~:text=President%20Trump&#039;s%20tariffs%20on%20imported,of%20washing%20machines%20by%2012%25.">domestic prices</a>—regardless of <a href="https://www.washingtonpost.com/business/2019/05/07/trumps-steel-tariffs-cost-us-consumers-every-job-created-experts-say/">origin</a>—for the goods subject to the tariffs (indeed, eliminating low‐​priced imports’ “adverse” effects is often the whole point); and (3) in the case of essential housing inputs <a href="https://www.cato.org/publications/trade-policy-analysis/nailing-homeowner-economic-impact-trade-protection-softwood-lumber-industry">like lumber</a>, can inflate construction costs and end up pushing tens of thousands of Americans out of the housing market altogether. (They also <a href="https://www.latimes.com/politics/story/2019-10-29/steel-industry-faces-a-bleaker-future-than-when-trump-moved-to-rescue-it">aren’t very good</a> at <a href="https://www.cato.org/publications/policy-analysis/doomed-repeat-it-long-history-americas-protectionist-failures">saving</a> the protected US workers/​industries, either, but that’s a story for another time.)</p> <p>At a time when affordable housing has become a <a href="https://www.whitehouse.gov/briefings-statements/president-donald-j-trump-tearing-red-tape-order-build-affordable-housing/">national priority</a>, you’d think that US law (or at least the Trump administration’s implementation thereof) might allow the agencies administering the long list of “housing taxes” above to prioritize the consumer harms that they impose or the broader national economic interests that they might undermine.<span> </span>Unfortunately, you’d mostly be wrong.<span> </span>The blanket Section 232 and Section 301 tariffs allow US importers to obtain narrow exclusions, but the process is costly, opaque and usually unsuccessful (especially when a domestic competitor opposes the exclusion). Our <a href="https://www.cato.org/blog/us-antidumping-regime-restrains-us-export-growth">AD/CVD laws</a>, meanwhile, expressly prohibit agencies from considering duties’ consumer harms, and – unlike other jurisdictions – lack any test for choosing the “public interest” over domestic industry pleas for import protection.</p> <p>As a result, these housing taxes will likely remain in place for years to come, regardless of the affordability crises to which they contribute.</p> Mon, 06 Jul 2020 13:43:51 -0400 Scott Lincicome https://www.cato.org/blog/housing-affordability-national-priority-then-why-does-government-tax-almost-everything-you Trump’s China Trade Deal Was Designed to Fail https://www.cato.org/publications/commentary/trumps-china-trade-deal-was-designed-fail Scott Lincicome <div class="lead mb-3 spacer--nomargin--last-child text-default"> <p>The last few weeks have not been good for Donald Trump’s “Phase One” China trade deal.</p> </div> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>First, John Bolton told the world—and the president then partially confirmed—what keen trade observers had long suspected: Trump prioritized a&nbsp;superficial‐​but‐​politically‐​useful agreement over systemic Chinese economic reforms and serious human rights concerns. Then, U.S. Trade Representative Robert Lighthizer&nbsp;<a href="https://insidetrade.com/daily-news/ustr-trade-data-not-best-way-track-china%E2%80%99s-phase-one-compliance" target="_blank">lashed out</a>&nbsp;at data showing Chinese purchases of U.S. exports to be far below the deal’s negotiated targets&nbsp;<em>and</em>&nbsp;historical averages, while still acknowledging that China is well behind schedule (much to Trump’s very public chagrin). Finally, senior White House adviser Peter Navarro told Fox News that, given those same data and rising U.S.-China tensions (something the Phase One deal was supposed to temper!), the agreement and any hopes for “Phase Two” were “over”—a gaffe he immediately walked back following a&nbsp;presidential tweet to the contrary. These and other developments have elicited some surprise from the Washington commentariat and lead many to conclude that Trump’s much‐​heralded agreement, while perhaps&nbsp;<a href="https://www.youtube.com/watch?v=Jdf5EXo6I68" target="_blank">not‐​dead‐​yet</a>, sure seems to be headed that way.</p> </div> , <aside class="aside--right aside--large aside pb-lg-0 pt-lg-2"> <div class="pullquote pullquote--default"> <div class="pullquote__content h2"> <p>The entire deal rested on China’s willingness to fulfill its commitments, and that’s a&nbsp;problem. </p> </div> </div> </aside> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>Any such surprise, however, is wholly unwarranted. While it is still possible that China somehow meets its commitments and stops acting out, the Phase One deal’s eventual collapse would be anything but surprising. In fact, the agreement was designed to fail, though perhaps not intentionally.</p> <p>Before we get to that, however, some essential background: on January 15, 2020, President Trump and Chinese Vice Premier Liu He signed “Phase One” of an economic and trade agreement between the United States and China. The deal contains two main parts:</p> <ul> <li>In terms of substantive commitments, the Phase One agreement was very one‐​sided: China committed to purchase fixed amounts of U.S. goods and services and to abide by various rules on agriculture, currency, financial services, and intellectual property rights protection, while the United States committed to&nbsp;<em>almost nothing</em>—not even the limited reduction in the U.S. tariffs on Chinese imports that supposedly achieved the agreement. Instead, that small tariff cut occurred separately, while the vast majority of U.S. tariffs—covering hundreds of billions of dollars in Chinese imports (essentially everything we import from China except the most politically sensitive stuff like iPhones)—remained in place, as did China’s retaliatory tariffs.</li> <br> <li>The Phase One deal also contains a&nbsp;novel enforcement mechanism: Each party may determine unilaterally 1) whether the other has violated the agreement’s terms and 2) what “proportionate” measures it will take in response, including suspending certain commitments or additional tariffs on the other country’s products. Because U.S. commitments in the deal are so minor, any U.S. retaliation under the dispute resolution provisions would almost certainly entail new tariffs. If China found that action to be illegitimate, the only response expressly authorized would be withdrawal from the Agreement itself. There is no other alternative.</li> </ul> <p>Trade experts’ immediate response to the Phase One deal’s substantive commitments was surprise and mostly optimistic support. Leaving aside the principled (and warranted) economic concerns regarding the deal’s managed trade purchase commitments, the general view was that China’s substantive commitments were more extensive and detailed than expected. Most, if not all, were reforms China had already promised or wanted to do anyway, and the hardest stuff—on subsidies and state‐​owned enterprises, for example—was left for Phase Two, but, still, not bad (and certainly better than the initial rumors about the deal just a&nbsp;few weeks earlier).</p> <p>One critical issue, however, was mostly overlooked at the time: Given the way the agreement was structured, the entire deal rested on China’s willingness to fulfill its commitments—and that’s always been the big problem with China. For example, there is plenty in the World Trade Organization (WTO) agreements to police Chinese financial services restrictions or intellectual property rights abuses, but China would just disregard them when convenient. Indeed, it’s this history that Lighthizer has cited to justify his unilateral approach.</p> <p>The problem, however, is that the Phase One Deal does little to actually encourage Chinese compliance and might actually put the United States in a&nbsp;weaker position going forward than those agreements that China had already (supposedly) shirked.</p> <p>Because traditional trade deals like the WTO Agreement or NAFTA have no power to force participating sovereign nations to comply with their terms, they work because parties to the agreement have three important incentives to comply voluntarily. First, because these agreements are always balanced with benefits (e.g., new market access) and “concessions” (e.g., lower tariffs) for each party, a&nbsp;violator might gain politically or economically from reneging on a&nbsp;concession&nbsp;<em>but</em>&nbsp;it stands to lose an agreement benefit if/​when that violation occurs—a benefit to which noisy or politically powerful constituents have become accustomed.</p> <p>Second, and relatedly, trade agreement parties comply because they want the other parties to do the same. Trade agreement negotiations usually involve a&nbsp;lot of domestic political discomfort, eased by the promise of future benefits for various core constituencies (e.g., soybean farmers). While occasional noncompliance might be forgivable (or disciplined via the aforementioned suspension of concessions), repeated noncompliance encourages similar bad behavior from other parties to the agreement and can eventually collapse the entire deal—thus ruining those hard‐​fought gains (and incurring the inevitable domestic blowback). Third, parties comply with their trade agreements for reputational reasons—basically to be viewed by other countries as upstanding members of the global community instead of global scofflaws. This is not just about touchy‐​feely poll numbers: a&nbsp;good international reputation can provide a&nbsp;nation with important economic (e.g., new trade deals or tourism) or foreign policy benefits, and a&nbsp;bad one can do just the opposite. These reputational effects are compounded by trade agreements’ typical use of independent arbiters to adjudicate disputes among the parties—a country’s noncompliance looks even worse when an unbiased expert confirms it misbehaved.</p> <p>We see these three incentives play out in trade agreements all the time. For example, when the United States banned Mexican trucks from U.S. roads in violation of NAFTA, Mexico suspended certain NAFTA market access benefits for U.S. exporters, and this pain eventually caused the United States to relent (at least for a&nbsp;while). The risk of such retaliation often can deter violations from ever happening. It and the other (institutional and reputational) incentives, moreover, are frequently cited as reasons why the WTO system has proven so effective over the years, and why countries, even China, have a&nbsp;good record of voluntary compliance after losing a&nbsp;WTO dispute. Of course, these agreements aren’t perfect, but—in terms of compliance and dispute resolution, at least—they’ve held up pretty well over the years.</p> <p>The U.S.-China Phase One deal, however, lacks all three of these incentives, at least in any significant capacity. First, because the agreement is so one‐​sided, China—the party making all of the concessions—has very little incentive to comply in order to maintain its agreement benefits (there are none) or encourage U.S. compliance (there’s nothing for the U.S. to comply with). Sure, the American market is valuable, and avoiding the deal’s collapse or potentially more tariff pain is an incentive, but most of the U.S. tariffs are still in place, and the ones that aren’t cover goods that the U.S. was, for economic, political and now public health reasons, desperately trying to avoid hitting in the first place.</p> <p>Meanwhile, there are little to no reputational benefits for China to maintain the deal. U.S.-China tensions are approaching all‐​time highs, so noncompliance and retaliation wouldn’t likely move the needle much at this point—especially since the other team is the one calling foul. There’s also little chance that other trading partners like the EU, Australia or Japan would care if the deal fell apart. In fact, they’d probably welcome it due to the deal’s radical rejection of international legal norms and the multilateral trading system (which most countries still vocally support), as well as its beggar‐​thy‐​neighbor terms that actually harm U.S. competitors in the Chinese market. (In fact, then‐​EU trade honcho Celia Malmstrom criticized the agreement when it was signed, and a&nbsp;new&nbsp;<a href="https://www.nber.org/papers/w27383" target="_blank">economic analysis</a>&nbsp;shows that the deal “would divert [Chinese] agricultural imports away from other countries” such as Australia, Canada, and Brazil.)</p> <p>Thus, whether the Phase One Deal was worth all the&nbsp;<a href="https://twitter.com/scottlincicome/status/1215323606210830337?s=20" target="_blank">very</a>&nbsp;<a href="https://twitter.com/scottlincicome/status/1175751239881170944?s=20" target="_blank">real</a>&nbsp;<a href="https://twitter.com/scottlincicome/status/1260174794533867520?s=20" target="_blank">damage</a>&nbsp;that Trump’s tariffs (and related uncertainty) caused the U.S. economy will come down to compliance and enforcement of China’s commitments, but the deal’s structure and terms provide China with almost no incentive to comply. The United States has only one bad option to force that compliance—more tariffs on politically sensitive products (in an election year!),&nbsp;<em>and</em>&nbsp;the Chinese purchase commitments actually make U.S. exporters—especially those Great Patriot Farmers whom Trump needs for re-election—more dependent on the Chinese market (and, therefore, the Chinese government). So, the only party who might actually&nbsp;<em>need</em>&nbsp;this deal right now—the one with stuff to lose, especially in a&nbsp;recession—is&nbsp;<em>Trump</em>, not China.</p> <p>None of this is to say that the deal&nbsp;<em>will</em>&nbsp;collapse, but trade agreements are designed the way they’re designed for a&nbsp;reason—to encourage voluntary compliance by sovereign nations with their own, often‐​countervailing domestic political interests. We shouldn’t be shocked when a&nbsp;deal specifically rejecting that design achieves the opposite result—or if Trump and his advisers, despite Chinese noncompliance, keep straining to rescue it.</p> </div> Fri, 26 Jun 2020 09:49:24 -0400 Scott Lincicome https://www.cato.org/publications/commentary/trumps-china-trade-deal-was-designed-fail Build Up or Build Out? Solving the Housing Crisis https://www.cato.org/multimedia/events/build-or-build-out-solving-housing-crisis Scott Beyer, Randal O&#039;Toole, Scott Lincicome, Vanessa Brown Calder <div class="mb-3 spacer--nomargin--last-child text-default"> <p>Rising prices have created housing crises in many urban areas, particularly in the Northeast and on the West Coast. Experts agree that government regulations are the problem, but which regulations should be relaxed or repealed to make housing more affordable? Scott Beyer argues that restrictive zoning within cities is the problem and that such zoning should be lifted to allow developers to build up—that is, build more high‐​density housing. Randal O’Toole argues that restrictive zoning in rural areas outside the cities is the problem and that such zoning should be abolished to allow developers to build out—that is, build more low‐​density housing. Scott Lincicome argues that restrictive zoning in all areas should be relaxed, as should local, state, and federal regulations that needlessly inflate housing construction costs. Join us for a&nbsp;lively debate about property rights, housing demand, and housing supply.</p> <p><strong>Event Resources:</strong></p> <ul> <li><a href="https://www.cato.org/publications/policy-analysis/new-feudalism-why-states-must-repeal-growth-management-laws" target="_blank">The New Feudalism: Why States Must Repeal Growth‐​Management Laws</a></li> <li><a href="https://www.cato.org/publications/policy-analysis/planning-tax-case-against-regional-growthmanagement-planning" target="_blank">The Planning Tax: The Case against Regional Growth‐​Management Planning</a></li> <li><a href="https://catalyst.independent.org/2020/02/19/census-figures-show-statistical-case-for-building-more-housing/" target="_blank">Census Figures Show Statistical Case for Building More Housing</a></li> <li><a href="https://www.cato.org/books/american-nightmare-how-government-undermines-dream-homeownership" target="_blank"><em>American Nightmare: How Government Undermines the Dream of Homeownership</em></a></li> </ul> </div> Wed, 17 Jun 2020 07:03:50 -0400 Scott Beyer, Randal O'Toole, Scott Lincicome, Vanessa Brown Calder https://www.cato.org/multimedia/events/build-or-build-out-solving-housing-crisis Scott Lincicome discusses undervaluing free trade on the Saving Elephants podcast https://www.cato.org/multimedia/media-highlights-radio/scott-lincicome-discusses-undervaluing-free-trade-saving Fri, 05 Jun 2020 11:59:25 -0400 Scott Lincicome https://www.cato.org/multimedia/media-highlights-radio/scott-lincicome-discusses-undervaluing-free-trade-saving Scott Lincicome discusses modern China‐​hawkishness on the Remnant podcast with Jonah Goldberg https://www.cato.org/multimedia/media-highlights-radio/scott-lincicome-discusses-modern-china-hawkishness-remnant Sat, 16 May 2020 12:47:22 -0400 Scott Lincicome https://www.cato.org/multimedia/media-highlights-radio/scott-lincicome-discusses-modern-china-hawkishness-remnant