20 (Author at Cato Institute) https://www.cato.org/ en The Bipartisan Consensus to Destroy U.S. Trade Policy https://www.cato.org/blog/bipartisan-consensus-destroy-us-trade-policy Daniel J. Ikenson <p>On June 17, U.S. Trade Representative Robert Lighthizer testified before the <a href="https://waysandmeans.house.gov/legislation/hearings/2020-trade-policy-agenda">House Ways and Means</a> and <a href="https://www.finance.senate.gov/hearings/the-presidents-2020-trade-policy-agenda">Senate Finance</a> committees. The hearings were billed as opportunities for Congress to raise questions and air concerns about the Trump administration’s trade policy actions and priorities. Instead, through more than seven hours of statements and discussion, lawmakers from both chambers and both sides of the aisle confirmed a&nbsp;general harmony with the administration’s trade policy performance.</p> <p>How else to explain the dearth of probing inquiry and push back? With a&nbsp;few limited exceptions, the day featured a&nbsp;series of softball questions from lawmakers showing deference&nbsp;to Lighthizer, praising him for focusing on enforcement rather than liberalization in the United States‐​Mexico‐​Canada Agreement, and appearing to be squarely on board with the prosecutorial, mercantilist, zero‐​sum approach that has defined trade policy in the Trump era.</p> <p>Given the administration’s abrupt U‐​turn from eight decades of trade policy continuity through 13 presidencies and 42 congresses to take actions that have left Americans much less free to trade and that have weakened U.S. standing in the world, the absence of serious questioning and substantive disagreement is, if not an endorsement, a&nbsp;dereliction of duty. The fact that media and others haven’t found newsworthy this congressional acquiescence to the president’s policies or this general comity between the branches may be further confirmation that it’s been, well, an eventful few years. Just consider some of the administration’s deeply controversial trade actions and where they have taken us since 2017.</p> <p>On his third day in office, President Trump withdrew the United States from the Trans‐​Pacific Partnership—<a href="https://www.cato.org/publications/commentary/tpp-rip">arguably the most important trade agreement in a&nbsp;generation</a>—for the robust reason that the TPP was an accomplishment of the Obama administration.</p> <p>Over the ensuing two years, Trump imposed new tariffs on close to $400 billion of imports, resulting in a <a href="https://www.cato.org/blog/whos-bearing-burden-tariff-boom">$38 billion tax increase on importers</a>, which was passed down through supply chains, raising costs of production across the manufacturing sector and consumer prices across the country. Of course, those tariffs also invited retaliation from foreign governments against close to $200 billion of U.S. exports, which hit the agricultural sector particularly hard. To try to smooth things over with the farmers, Trump showered them with <a href="https://www.washingtonpost.com/business/2020/02/21/all-caps-tweet-president-trump-vows-new-farm-bailouts-china-purchases-appear-weaker-than-promised/">$28 billion of taxpayer funds</a> and—<a href="https://reason.com/2020/06/18/bolton-trumps-tough-on-china-stance-was-a-campaign-strategy-not-a-trade-policy/">if John Bolton is to be believed</a>—begged Xi Jinping to buy their soya beans.</p> <p>Meanwhile, the United States and China have been embroiled in a&nbsp;divorce which began as a&nbsp;trade war but has escalated into a&nbsp;broader process of economic, financial, technological, and cultural decoupling. Whether confronting China as the administration did was a&nbsp;good idea or not, there is no evidence the architects of that approach have—or even considered—a plausible plan for U.S. success in the world, post‐​divorce.</p> <p>A case in point is that in the midst of the meltdown with China, the administration has gone out of its way to pick fights with as many other countries as possible, hitting allies with national security tariffs on steel and aluminum, threatening similar tariffs on automobiles, allowing (<a href="https://www.politico.com/tipsheets/morning-trade/2017/04/commerce-takes-unprecedented-step-in-trade-case-219738">in fact, encouraging</a>) wholesale abuse of the antidumping law to punish foreign (especially Korean) producers, and <a href="https://ustr.gov/about-us/policy-offices/press-office/press-releases/2019/october/ustr-announces-gsp-enforcement">withdrawing tariff preferences</a> granted to products from poor countries. We should be wooing, not screwing these countries.</p> <p>The administration has routinely menaced allies and other trade partners with threats of tariff hikes and other economic sanctions to pressure them into caving to Trump’s demands. For example, just days ahead of today’s entry into force of the USMCA, the administration began threatening to re‐​impose tariffs on Canadian aluminum and to file formal complaints against Mexico for alleged non‐​compliance with various terms of the new North American trade deal. Disputes and more disputes mark today’s commencement of the USMCA.</p> <p>Now, a&nbsp;trade war with Europe over digital taxes, aircraft subsidies, and other matters is looking increasingly likely. Certainly, some of the EU’s policies are problematic and warrant cogent, coherent policy responses, but the Trump administration has gone out of its way to demonize Europe, even calling it a&nbsp;bigger threat to the trading system than China.</p> <p>The administration’s war of attrition on the World Trade Organization shows no signs of abating. By blocking its capacity to render formal adjudication, failing to participate constructively in the process of debating prospective reforms, and perpetuating myths to foment antipathy ahead of what looked like possible votes in both chambers on the question of U.S. withdrawal from the WTO (until House Speaker Nancy Pelosi invoked a&nbsp;procedural privilege last week to prevent a&nbsp;vote on the subject in this Congress, which could go down as the most, <em>if not the only</em>, pro‐​trade action taken by this Congress), the United States has become an international scofflaw under the Trump administration.</p> <p>As if picking fights with the rest of the world weren’t enough, the administration continues to flout the powers Congress errantly ceded to the executive branch by abusing trade laws passed with too few conditions attached. The administration has demonstrated contempt for the rule of law in its exercise of authorities under several statutes, as if daring Congress to do something about it. But Congress doesn’t really want to do anything about it because most members are perfectly happy allowing the president to make politically consequential decisions about tariffs, while they remain on the sidelines cheering for the measure if it’s popular, and criticizing it if it’s not. That’s not exactly a&nbsp;profile in courage.</p> <p>So, what does the administration have to show for all its posturing, chest‐​thumping, and bullying? Approximately zero trade liberalization—no new agreements that meaningfully reduce trade barriers—has been accomplished under this administration. The USMCA may succeed, <a href="https://www.cato.org/blog/protectionist-love-child-labor-left-nationalist-right">but that bureaucratic bundle of restrictions and rules was never intended to liberalize trade. It was intended to reduce U.S. imports from Mexico and Canada and to incentivize the repatriation of supply chains. And it will make North America poorer</a>. The mini‐​deal with Japan salvaged a&nbsp;tiny portion of the benefits of the TPP, but on net we are far less free to trade with Japan than would have been the case under TPP. The revisions to the Korea-U.S. (KORUS) free trade agreement, which the administration touts, were so superficial that Congress didn’t even need to sign off on it. What about the U.S-UK and the U.S.-Kenya Free Trade Agreements, you ask? Please. Neither stands a&nbsp;chance of coming to fruition with any meaningful terms during the Trump administration.</p> <p>Yet, despite all these unorthodox actions (and inactions), which amount to the destruction of trade policy as a&nbsp;tool to promote economic growth and to channel U.S. soft power, Congress couldn’t muster the will to ask why.</p> <p>At the recent hearings, there were no substantive objections; no challenges of the administration’s logic; no repudiation of the president’s disdainful treatment of allies or the frivolity of his national security tariffs; no queries about the corrupt <a href="https://www.oig.doc.gov/OIGPublications/OIG-20-003-M.pdf">tariff‐​exemption racket run out of the U.S. Commerce Department</a>; no expressions of concern that the president’s contempt for decorum, his aversion to decency, and his departure from history have come at great expense to the country’s reputation—a public asset that the administration wantonly squandered. There were no eyebrows raised over the administration’s trivializing the rule of law and brazenly asserting the law of the jungle. There were no reprimands for taxing U.S. businesses with tariffs and redistributing the booty to the constituencies more likely to support the president’s reelection. There was only silence; gleeful silence.</p> <p>The failure of Congress to muster up any genuine resistance to this long list of abusive, destructive executive actions reveals ineptitude, cowardice, and/​or complicity in America’s retreat into protectionism. After all, the administration’s effort to re‐​purpose trade policy from a&nbsp;tool that harnesses economic dynamism and creates opportunities into a&nbsp;shield that aims to protect Americans from the effects of that dynamism, which many congressional Republicans now support, has long been the objective of congressional Democrats.</p> <p>At long last, that vaunted bipartisanship has returned to Washington in the form of an insular, mean‐​spirited, grievance‐​propelled trade policy. It shouldn’t be surprising that politicians agree that the causes of America’s woes are foreign born. It’s a&nbsp;safe, slam‐​dunk position to take. But it’s also dangerous and wrong and very likely to accelerate the country’s isolation and decline.</p> Wed, 01 Jul 2020 11:36:15 -0400 Daniel J. Ikenson https://www.cato.org/blog/bipartisan-consensus-destroy-us-trade-policy Congress Must Fix America’s Unconstitutional Trade Laws https://www.cato.org/publications/commentary/congress-must-fix-americas-unconstitutional-trade-laws Daniel J. Ikenson <div class="lead mb-3 spacer--nomargin--last-child text-default"> <p>The Supreme Court soon will decide whether to hear a&nbsp;case challenging the constitutionality of Section 232 of the Trade Expansion Act of 1962, the “national security” statute&nbsp;President Trump&nbsp;invoked to impose his sweeping steel and aluminum tariffs. The main argument is that—by giving the president carte blanche regarding when to act, what actions to take, against whom, and for how long—the law is an unconstitutional delegation of legislative authority.</p> </div> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>A ruling that the law is unconstitutional would end the Commerce Department’s capricious tariff scheme and its opaque tariff‐​exemption process under Section 232, helping to restore some balance to the separation of powers. It could also open the door to similar challenges of other routinely abused trade statutes, such as the antidumping law.</p> <p>The antidumping law is like Section 232&nbsp;in several respects. It bestows boundless discretion on Commerce to do almost anything it wishes, raising similarly serious constitutional questions. It provides the veneer of legal legitimacy behind which Commerce routinely imposes tariffs for political ends. And it’s a&nbsp;major irritant between the United States and its trade partners.</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 Supreme Court soon will decide whether to hear a&nbsp;case challenging the constitutionality of Section 232 of the Trade Expansion Act of 1962, the “national security” statute President Trump invoked to impose his sweeping steel and aluminum tariffs. </p> </div> </div> </aside> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>Dumping is defined as the sale of a&nbsp;commodity by a&nbsp;foreign company in the United States at a&nbsp;price less than “normal value”—an average usually based on the foreign company’s home market price or the cost of production. Although the law is presumed to protect U.S. companies from “unfairly low” foreign prices, its sordid procedural details and methodological sleights of hand rig the process to ensnare companies engaged in perfectly legitimate commercial practices.</p> <p>Consider “Enforcement and Compliance,” the Commerce Department agency that administers the law. Its mission is to “<a href="https://legacy.trade.gov/enforcement/" target="_blank">safeguard and enhance the competitive strength of U.S. industries against unfair trade</a>.” Carrying out that mission requires the agency to conduct “investigations and administrative reviews to determine if imports are being sold at less than fair value,”&nbsp;<em>while simultaneously</em>&nbsp;“counseling U.S. industries on how to petition the U.S. government to seek relief from injurious and unfairly traded imports.” Conflict? You bet.</p> <p>According to the Commerce Department’s own Inspector General, Commerce officials regularly meet with and:</p> <p>[H]ave shared advance draft investigation results with the congressional Steel Caucus well before they were announced in final form, allowing the Steel Caucus to “comment” on them. Time and again high‐​level officials within the agency have exerted pressure on lower level Department of Commerce staff conducting investigations of foreign steel producers to rerun calculations and alter methodologies, resulting in increased AD/CVD tariffs.</p> <p>Changes to the law in the 1970s and 1980s, making affirmative findings more likely and more lucrative, transformed antidumping into a&nbsp;commercial weapon used primarily by U.S. producers of industrial inputs to assert advantages over U.S. producers that consume those inputs—their customers.</p> <p>In 2015, at the urging of the Congressional Steel Caucus, Congress amended the antidumping statute more aggressively than ever before, abandoning any remaining pretenses of objectivity and crossing into the realm of lawlessness. The most corrosive change authorizes Commerce—for purposes of calculating antidumping duty rates—to reject foreign producers’ submitted production cost data and to use, instead,&nbsp;<em>whatever it wants to use</em>. Section 773(e) of the Trade Preferences Extension Act reads:</p> <p>“[I]f a&nbsp;particular market situation exists such that the cost of materials and fabrication or other processing of any kind does not accurately reflect the cost of production in the ordinary course of trade, the administering authority may use another calculation methodology under the subtitle&nbsp;<strong>or any other calculation methodology</strong>.”</p> <p>That promiscuous language seems to permit the president license to be a&nbsp;king. In April 2017, for the first time under the new law, Commerce monarchically used the “particular market situation” rule to reject the submitted cost data of South Korean steel tube manufacturers even though South Korea is a&nbsp;market economy and even though the producers’ cost data reconciled to their audited financial statements.</p> <p>Unsurprisingly, a&nbsp;few months earlier, in the preliminary determination of the same case, Commerce had rejected the domestic industry’s argument that a “particular market situation” existed in South Korea and proceeded to calculate relatively low antidumping rates. But when word of this outcome reached Capitol Hill and the White House, Commerce came under pressure—most emphatically from Peter Navarro, the president’s director of trade and manufacturing policy—to take full advantage of the new antidumping provisions.</p> <p>Submitting to that pressure, Commerce reversed its decision, found a “particular market situation,” and significantly inflated the cost values, which produced substantially higher antidumping duty rates on imports from Korea. Commerce since has found a “particular market situation” in 12 more antidumping cases involving six other countries, giving it license to produce dumping margins out of thin air.</p> <p>Arguably, the antidumping law and Section 232 are both unconstitutional. Unarguably, they are both bad laws that confer too much unconstrained discretion on the executive branch. It’s time for Congress to act to restore the rule of law.</p> </div> Fri, 29 May 2020 09:10:55 -0400 Daniel J. Ikenson https://www.cato.org/publications/commentary/congress-must-fix-americas-unconstitutional-trade-laws Beware the Costs of a Technology Trade War https://www.cato.org/blog/beware-costs-technology-trade-war-attrition Daniel J. Ikenson, Huan Zhu <p>In a&nbsp;<a href="https://www.cato.org/blog/us-china-tech-battle-threatens-pandemic-containment-more">post</a> last month, we raised concerns about the unforeseen and underappreciated costs of expanding export controls on U.S. technology. Either those concerns fell on deaf ears or the administration did its due diligence and determined that the expected benefits outweigh the expected costs because—earlier this week—the Commerce Department published <a href="https://www.federalregister.gov/documents/2020/05/19/2020-10856/export-administration-regulations-amendments-to-general-prohibition-three-foreign-produced-direct">new rules</a> further restricting Huawei’s access to U.S. technology.</p> <p>U.S. exports to Huawei have been tightly controlled since Huawei and its affiliates were placed on the <a href="https://www.bis.doc.gov/index.php/policy-guidance/lists-of-parties-of-concern/entity-list">Entity List</a> in 2019 for national security reasons. However, because of the design of U.S. export regulations and the nature of technology supply chains, Huawei and its affiliates were still able to import semiconductors from foreign producers that use U.S. chipmaking equipment and software. The new rules are intended to close this loophole and completely cut off Huawei from U.S. technology.</p> <p>Explaining the purpose of those new rules, Commerce Secretary Wilbur Ross—betraying naïve expectations that Huawei would have just thrown in the towel and shut down its operations after last year’s U.S. sanctions—<a href="https://www.commerce.gov/news/press-releases/2020/05/commerce-addresses-huaweis-efforts-undermine-entity-list-restricts">offered</a>:</p> <blockquote><p>Despite the Entity List actions the Department took last year, Huawei and its foreign affiliates have stepped‐​up efforts to undermine these national security‐​based restrictions through an indigenization effort. However, that effort is still dependent on U.S. technologies. This is not how a&nbsp;responsible global corporate citizen behaves. We must amend our rules exploited by Huawei and HiSilicon and prevent U.S. technologies from enabling malign activities contrary to U.S. national security and foreign policy interests.</p> </blockquote> <p>Although we have been skeptical from the start that this is the right way to proceed with China, the die most definitely has been cast and the technology trade war is moving ahead at full speed. Of course, the U.S. government (many in the Trump administration and many in the Congress) has its reasons (some factual; some presumptive; some political) for this course of action. So, instead of rehashing concerns already raised, we offer (in convenient bullet point fashion) the most relevant facts and assumptions culminating in the current policy, as well as the expected benefits and likely costs of that policy. Unfortunately, the list of likely costs is long.</p> <p><strong>Facts</strong></p> <ul> <li>The U.S. government sees the Chinese government as a&nbsp;bad actor.</li> <li>The U.S. government sees Huawei as an adjunct of the Chinese government.</li> <li>The U.S. government sees Huawei as the leader in 5G technology.</li> <li>The U.S. government sees Huawei’s leadership in 5G technology as a&nbsp;threat to U.S. national security.</li> <li>The U.S. government sees a&nbsp;vulnerability to Huawei’s 5G leadership in Huawei’s dependence on U.S. semiconductors and semiconductor technology.</li> <li>The U.S. government seeks to exploit that vulnerability by depriving Huawei of the technology it needs to continue to dominate 5G.</li> </ul> <p><strong>Assumptions</strong></p> <ul> <li>Targeting Huawei with export controls and entity list restrictions to deprive it of needed inputs will slow or stop Huawei’s progress.</li> <li>U.S. sanctions on Huawei from the supply side will compliment U.S. efforts to compel other governments to forego purchasing Huawei gear on the demand side.</li> <li>Slowing or stopping Huawei’s progress will enhance U.S. national security.</li> <li>U.S. national security will be enhanced because U.S. or U.S.-backed 5G companies will emerge and fill the void as standard‐​setters and dominant suppliers of 5G network gear and consumer products.</li> <li>Leadership in 5G begets leadership in the next generation of communications technology and other technologies; followership consigns to more followership.</li> <li>The expected benefits of the U.S. government’s approach outweigh its expected costs.</li> </ul> <p><strong>Benefits</strong> (if the assumptions are accurate)</p> <ul> <li>The Chinese government’s ability to control or have disproportionate influence over global information and communications networks (and whatever other currently unforeseen powers that control or influence would bestow upon Beijing) will be reduced.</li> <li>Reducing Beijing’s power is—in this context and with certain caveats—akin to enhancing U.S. national security.</li> <li>Impeding Huawei’s success (albeit, through compulsion of other governments and laws restricting private companies from engaging in commerce or research and development with Huawei) could buy time for U.S. companies or U.S.-backed companies to emerge and take leadership in 5G and 6G technology space, providing U.S. economic and security benefits that might not otherwise manifest.</li> </ul> <p><strong>Costs</strong></p> <ul> <li>Cutting off Huawei from U.S. semiconductors, semiconductor equipment, and software will expedite China’s development of indigenous semiconductor production capabilities and, ultimately, put the world’s largest market for semiconductors out of reach of U.S. producers within a&nbsp;few years.</li> <li>Cutting off Huawei from semiconductors made with U.S equipment in third countries will compel chipmakers in those third countries to purchase non-U.S. equipment, ultimately drying up current U.S. export markets.</li> <li>Cutting off Huawei will inject even more uncertainty into global information and communication technology (ICT) markets, which likelywill slow the process of standards setting, which likely will retard product development schedules, which likely will deter investment in new technologies, and which likely will be resolved only by bifurcation or even greater splintering of global technology standards.</li> <li>Bifurcation or splintering of technology standards would significantly limit scope for economies of scale in production, as firms all along the ICT supply chain would be producing for fewer customers or producing in separate production runs for customers that follow different sets of standards.</li> <li>U.S. supply chain warfare could prove contagious, encouraging Chinese restrictions on exports of rare earth minerals or other inputs and&nbsp;Chinese retaliation against U.S. technology companies, while&nbsp;opening the door to all countries to treat trade as a&nbsp;strategic weapon rather than as a&nbsp;tool of cooperation and economic betterment.</li> <li>Technology decoupling will inspire a&nbsp;cold‐​war style competition between the United States and China to win the hearts and minds of third countries through the offering of carrots and the threats of sticks.</li> </ul> Thu, 21 May 2020 16:36:15 -0400 Daniel J. Ikenson, Huan Zhu https://www.cato.org/blog/beware-costs-technology-trade-war-attrition Josh Hawley’s New Smoot‐​Hawley https://www.cato.org/publications/commentary/josh-hawleys-new-smoot-hawley Halie Craig, Clark Packard, Daniel J. Ikenson, Simon Lester, Bryan Riley, Brandon Arnold <div class="lead mb-3 spacer--nomargin--last-child text-default"> <p>Since the end of World War II, the United States has exerted outsized influence to shape the rules of global commerce. Recognizing the economic and strategic benefits of a&nbsp;rules‐​based trading system, every president from Harry Truman to Barack Obama supported U.S. leadership and engagement with the World Trade Organization (WTO) and its&nbsp;<a href="https://en.wikipedia.org/wiki/General_Agreement_on_Tariffs_and_Trade" target="_blank">predecessor institution</a>. Though imperfect, this system has paid enormous dividends for the United States.</p> </div> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>The current global trading system has its origins in the reaction to the infamous Smoot‐​Hawley tariff—named after its congressional sponsors. President Herbert Hoover was ambivalent about the final legislation, but with his party strongly backing it as a&nbsp;measure to fight the Depression, he signed it in June 1930. The disastrous impact of these tariffs on global trade and domestic economies ushered in an era of international trade agreements designed to limit protectionism.</p> <p>Now a&nbsp;new Hawley has entered the scene to bring protectionism back. With nationalism on the rise amidst the outbreak of a&nbsp;global pandemic, Senator Josh Hawley (R‐​Missouri) is advocating that the United States walk away from the WTO. That would hurt American families and businesses, undermine our strategic interests, and be counted as an economic and diplomatic victory for China.</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 potentially costly folly of the Missouri senator’s call to ‘abolish’ the WTO. </p> </div> </div> </aside> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>On May 7, two days after publishing a&nbsp;<a href="https://www.nytimes.com/2020/05/05/opinion/hawley-abolish-wto-china.html" target="_blank"><em>New York Times</em></a><a href="https://www.nytimes.com/2020/05/05/opinion/hawley-abolish-wto-china.html" target="_blank">&nbsp;op‐​ed</a>&nbsp;calling for the abolishment of the WTO, Senator Hawley&nbsp;<a href="https://www.hawley.senate.gov/senator-hawley-introduces-joint-resolution-withdraw-wto" target="_blank">introduced</a>&nbsp;a&nbsp;joint resolution in Congress to terminate U.S. membership in the organization.</p> <p>Fortunately,&nbsp;<a href="https://www.forbes.com/sites/beltway/2020/05/06/senator-hawleys-case-for-nationalism-strong-on-propaganda-weak-on-the-facts/" target="_blank">Congress can’t unilaterally abolish the WTO</a>: It is an international organization created by a&nbsp;treaty that has been ratified by its state members and observers. But Congress can end the United States’&nbsp;<em>participation in</em>&nbsp;the WTO. The&nbsp;<a href="https://www.congress.gov/103/bills/hr5110/BILLS-103hr5110enr.pdf" target="_blank">implementing law</a>&nbsp;that codifies U.S. participation in the WTO permits Congress to consider a&nbsp;joint resolution to terminate U.S. membership in the global trading body every five years, which is to be informed by the findings in&nbsp;<a href="https://ustr.gov/sites/default/files/2020_Trade_Policy_Agenda_and_2019_Annual_Report.pdf" target="_blank">a&nbsp;report</a>&nbsp;from the U.S. Trade Representative (USTR). If introduced, such a&nbsp;joint resolution is unamendable, does not require committee approval, and cannot be filibustered. In other words, Hawley’s resolution is not a&nbsp;messaging bill. It is a&nbsp;serious procedural mechanism that will––if it reaches the Senate floor within 90 legislative days after the submission of USTR’s February 28 report—force a&nbsp;Senate referendum on the merits of the United States remaining in the WTO.</p> <p>It is worth noting that USTR Robert Lighthizer, in&nbsp;<a href="https://www.finance.senate.gov/imo/media/doc/ARL%20Finance%20Testimony%20March%202019%203.12.2019%20FINAL.pdf" target="_blank">testimony</a>&nbsp;before a&nbsp;Senate Finance Committee hearing last year, wrote that “the WTO is a&nbsp;valuable institution, and offers many opportunities for the United States to advance our interests on trade. As I&nbsp;have said before, if we did not have the WTO, we would need to invent it.” Lighthizer is hardly a&nbsp;cheerleader for globalization—he has been the point man for President Trump’s trade war with China—but he is correct about the WTO. If the United States were to withdraw from the organization, the economic and diplomatic fallout would be devastating.</p> <p>The WTO has undoubtedly increased quality of life for Americans: In 2017, it&nbsp;<a href="https://www.piie.com/system/files/documents/pb17-16.pdf" target="_blank">was estimated</a>&nbsp;that global trade facilitated by the WTO increases the size of the U.S. economy by $2.1 trillion annually, the equivalent of about $7,000 per person. And if the WTO were to be eliminated entirely, the&nbsp;<a href="http://pages.iu.edu/~alashkar/BL2020_Production_Networks.pdf" target="_blank">result</a>&nbsp;could be a&nbsp;drastic $2.7 trillion loss in global GDP.</p> <p>The WTO includes 164 member states and its rules cover a&nbsp;staggering 95 percent of global trade. WTO members afford equal tariff treatment to all other members, which ensures that American exports can compete on a&nbsp;level playing field. But they also agree to the same set of legally binding measures, such as commitments on intellectual property rights. Unilateral withdrawal from the WTO would forfeit these benefits and put U.S. interests at a&nbsp;serious disadvantage.</p> <p>First, withdrawal from the WTO could result in higher U.S. tariffs, which would burden families and businesses that rely on foreign products. As&nbsp;<a href="https://www.nytimes.com/2020/01/06/business/economy/trade-war-tariffs.html" target="_blank">numerous studies</a>&nbsp;have confirmed, American consumers are paying for President Trump’s tariffs. Moreover, new tariffs likely would trigger foreign retaliation against American exports, the costs of which America’s farmers and ranchers well know. Under WTO rules, the United States is required to apply the same tariff rates to all WTO members (excepting those who are U.S. free trade agreement partners and eligible for preferential tariff treatment). Those uniformly applied tariffs are known as “most‐​favored nation” (MFN) tariffs. As trade economists Chad Bown and Doug Irwin&nbsp;<a href="https://www.piie.com/system/files/documents/pb18-23.pdf" target="_blank">have observed</a>, the average applied U.S. MFN tariff in 2017 was 3.3 percent, but the average applied non‐​MFN U.S. tariff (those applied to non‐​WTO members) was 32.3 percent. Absent WTO commitments, the&nbsp;<a href="https://www.piie.com/system/files/documents/pb18-23.pdf" target="_blank">president would be free to raise tariffs</a>&nbsp;to rates not seen since the disastrous Smoot‐​Hawley tariffs in the 1930s, hurting taxpayers and damaging American competitiveness in the global economy.</p> <p>Second, membership in the WTO entitles the U.S. government to bring complaints for resolution through consultation or adjudication if it believes other members are not living up to the commitments they’ve made. Although some modification to the dispute‐​settlement rules may be in order, the United States has benefited disproportionately from WTO arbitration:&nbsp;<a href="https://www.whitehouse.gov/wp-content/uploads/2018/02/ERP_2018_Final-FINAL.pdf" target="_blank">According to the White House,</a>&nbsp;the United States has won more than 85 percent of the cases it has initiated since 1995 (compared with China’s success rate of 67 percent). Notably, U.S. agricultural interests have been well served under the WTO dispute‐​settlement system, prevailing on major claims in a&nbsp;<a href="https://www.fas.usda.gov/newsroom/united-states-wins-wto-dispute-finding-china-provides-excessive-government-support-its" target="_blank">recent case</a>&nbsp;involving Chinese subsidies for grain production.</p> <p>Finally, Ambassador Lighthizer has also&nbsp;<a href="https://www.finance.senate.gov/imo/media/doc/SFC%20WTO%20Hearing%2003.12.19%20QFRs%20Responses%20FINAL.pdf" target="_blank">correctly noted</a>&nbsp;that “the WTO provides the United States with a&nbsp;platform to export its views on trade policy.” If the United States were to abdicate its seat at the table, it would play directly into China’s hands. A&nbsp;spokesman for Senate Finance Committee Chairman Charles Grassley (R‐​Iowa)&nbsp;<a href="https://twitter.com/sdonnan/status/1258556810497310720?s=20" target="_blank">put it succinctly</a>: “Withdrawing from the WTO would only leave a&nbsp;vacuum for China to fill and diminish America’s position of strength.” Moreover, if the United States were to depart from the 164 member‐​strong WTO, it would join the ranks of only 13 countries that are neither WTO members nor seekers of WTO membership, including North Korea and a&nbsp;handful of tiny countries like Turkmenistan, Eritrea, and Kiribati.</p> <p>Past congressional attempts to abrogate U.S. membership in the WTO&nbsp;<a href="https://twitter.com/snlester/status/1258513566748954624?s=20" target="_blank">failed by wide margins</a>, but Senator Hawley’s resolution should still be treated as live fire. The Hawley resolution, if adopted, won’t address the Senator’s&nbsp;<a href="https://www.hawley.senate.gov/senator-hawley-introduces-joint-resolution-withdraw-wto" target="_blank">legitimate grievances</a>&nbsp;about Chinese trade malpractice or the dire economic straits currently faced by millions of Americans as a&nbsp;result of COVID-19. Instead, it will voluntarily shut the United States out of the world’s largest trade agreement and will be remembered as one of the greatest economic missteps in modern history.</p> </div> Tue, 19 May 2020 09:31:06 -0400 Halie Craig, Clark Packard, Daniel J. Ikenson, Simon Lester, Bryan Riley, Brandon Arnold https://www.cato.org/publications/commentary/josh-hawleys-new-smoot-hawley Senator Hawley’s Muddled Case against the World Trade Organization https://www.cato.org/multimedia/cato-daily-podcast/senator-hawleys-muddled-case-against-world-trade-organization Daniel J. Ikenson, Caleb O. Brown <div class="mb-3 spacer--nomargin--last-child text-default"> <p>Senator Josh Hawley of Missouri wants the U.S. to exit the World Trade Organization, but it’s not clear how Americans would benefit. Dan Ikenson comments.</p> </div> Wed, 13 May 2020 11:55:53 -0400 Daniel J. Ikenson, Caleb O. Brown https://www.cato.org/multimedia/cato-daily-podcast/senator-hawleys-muddled-case-against-world-trade-organization Let’s Have That Much Needed Debate About the World Trade Organization https://www.cato.org/publications/commentary/lets-have-much-needed-debate-about-world-trade-organization Daniel J. Ikenson <div class="lead mb-3 spacer--nomargin--last-child text-default"> <p>In the&nbsp;<em>New York Times</em>&nbsp;on Tuesday, Senator Josh Hawley (R-MO)&nbsp;<a href="https://www.nytimes.com/2020/05/05/opinion/hawley-abolish-wto-china.html?smid=nytcore-ios-share" target="_blank" rel="nofollow noopener" data-ga-track="ExternalLink:https://www.nytimes.com/2020/05/05/opinion/hawley-abolish-wto-china.html?smid=nytcore-ios-share">proposed</a>&nbsp;abolishing the World Trade Organization. On Wednesday came a&nbsp;<a href="https://www.forbes.com/sites/beltway/2020/05/06/senator-hawleys-case-for-nationalism-strong-on-propaganda-weak-on-the-facts/#2ab7e6975e18" target="_blank" data-ga-track="InternalLink:https://www.forbes.com/sites/beltway/2020/05/06/senator-hawleys-case-for-nationalism-strong-on-propaganda-weak-on-the-facts/#2ab7e6975e18">flood</a>&nbsp;of fact&nbsp;<a href="https://www.cato.org/blog/senator-hawleys-many-misunderstandings-wto" rel="nofollow noopener" data-ga-track="ExternalLink:https://www.cato.org/blog/senator-hawleys-many-misunderstandings-wto">corrections</a>&nbsp;from trade experts exposing the senator’s idea as the spawn of fallacies. Then, on Thursday, conceding only that the United States can’t “abolish” the WTO, Hawley submitted a&nbsp;<a href="https://www.hawley.senate.gov/senator-hawley-introduces-joint-resolution-withdraw-wto" target="_blank" rel="nofollow noopener" data-ga-track="ExternalLink:https://www.hawley.senate.gov/senator-hawley-introduces-joint-resolution-withdraw-wto">joint resolution</a>&nbsp;to Congress calling for a&nbsp;formal withdrawal.</p> </div> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>Withdrawing from the WTO would be a&nbsp;monumental mistake. But that doesn’t mean we shouldn’t have a&nbsp;robust debate on the matter. In a&nbsp;press release announcing the resolution yesterday, Senator Hawley gave his opening statement:</p> <p>“The coronavirus pandemic has exposed deep, long‐​standing flaws in our global economic system that demand reform. International organizations like the W.T.O. have enabled the rise of China and benefitted elites around the globe while hollowing out American industry, from small towns to once‐​thriving urban centers. We need to return production to America, secure critical supply chains, and encourage domestic innovation. Pulling out of the W.T.O. is a&nbsp;good first step.”</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>Withdrawing from the WTO would be a&nbsp;monumental mistake. But that doesn’t mean we shouldn’t have a&nbsp;robust debate on the matter. </p> </div> </div> </aside> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>It’s a&nbsp;mystery how WTO withdrawal would resolve any of the alleged problems Hawley mentions or facilitate implementation of his prescriptions. But he does scratch the surface of some valid points.</p> <p>Indeed, the WTO isn’t perfect. It is flawed in several respects. It is an institution built on post‐​war economic and geopolitical realities, which have changed considerably over the past couple of decades. Those changes have made the WTO’s mission—to facilitate global trade liberalization by encouraging its members to establish rules and to abide by those rules—more difficult.</p> <p>When the United States accounted for a&nbsp;larger share of global GDP and before it began to tire of its global leadership role, the rules of the trading system were shaped largely by U.S. input. Today, those rules remain at the heart of the WTO. But in an organization that responds to the consensus of its members, it is difficult to establish new rules when a&nbsp;growing number of its 164 members have become weighty enough to insist on their own demands, while resisting those of others.</p> <p>There has been very little multilateral trade liberalization since the WTO’s creation in 1995. As a&nbsp;result, large and important swaths of the global economy—most services trade, digital trade, many of the market distortions caused by state‐​owned enterprises, for example—remain outside WTO rules. Meanwhile, the existing rules haven’t helped discipline some of China’s egregious mercantilism. That’s not to say the rules don’t exist, but that the United States has been reluctant to use them more aggressively, opting instead for the vigilantism of unilateral trade wars.</p> <p>When Hawley says the WTO enabled China’s rise, he’s not wrong. China’s long march to join the WTO required it to deliver massive economic reforms. When Beijing demonstrated that it was serious about reforms and that the Chinese economy and some of its government’s practices would become subject to the rules of the global trading system, the rest of the world responded by investing in China and cultivating deeper economic ties. That legitimacy contributed importantly to the development of China. But that was the plan, and it succeeded.</p> <p>That conferred legitimacy, presumably, is how Hawley stretches to connect the WTO and the demise of industries across America’s cities and towns. Certainly, trade contributed to U.S. job churn. Jobs were lost, but many more were created. To pin blame on the WTO for the share of job losses attributable to imports from China two decades ago because it presided over implementation of the rules created largely at U.S. behest lacks all credibility.</p> <p>Likewise, the pandemic may have exposed vulnerabilities in supply chains that are insufficiently diversified. But the WTO didn’t force any business to put all its eggs in one basket. The WTO facilitated the reduction of administrative barriers to trade, which—in conjunction with revolutionary innovations in transportation and communications—rendered the diversification of production along cross‐​border supply chains plausible and, for some businesses in some industries, optimal.</p> <p>Trade liberalization helped make global supply chains possible, but the WTO didn’t force anyone to do anything. Moreover, the WTO is in no way preventing companies from repatriating, decoupling, or otherwise diversifying some or all their supply chains.</p> <p>Hawley is scapegoating the WTO for whatever he believes is ailing America. His suggestion that “pulling out of the W.T.O. is a&nbsp;good first step” to remedying those ills ignores the massive costs that that action would impose on U.S. businesses, consumers, investors, and workers.</p> <p>WTO rules provide reasonable assurances that U.S. exporters have access to foreign market on conditions no less favorable than those granted exporters from other countries. Unilaterally eschewing those benefits would subject U.S. companies to higher tariffs and greater uncertainty. Many other costs—including those associated with abdicated leadership—can be tallied, but the cost of the discrimination exporters would face in foreign markets alone would negate any short‐​term benefits Hawley can possibly expect to gain.</p> <p>The question of WTO withdrawal was put to votes in the House of Representatives in 2005 and 2010. Both times the measure was defeated overwhelmingly. The Senate has never voted on the question. Given the rise in nationalist sentiment and the recent tendency of Republican leadership to stare at its shoes as the president erects trade barriers, a&nbsp;debate on the Senate floor would be illuminating. The debate we deserve would produce a&nbsp;consensus not for WTO withdrawal, but for WTO reform.</p> </div> Fri, 08 May 2020 16:13:33 -0400 Daniel J. Ikenson https://www.cato.org/publications/commentary/lets-have-much-needed-debate-about-world-trade-organization Senator Hawley’s Case for Nationalism Is Strong on the Propaganda but Weak on the Facts https://www.cato.org/blog/senator-hawleys-case-nationalism-strong-propaganda-weak-facts Daniel J. Ikenson <p>Over at <em>Forbes</em>, I&nbsp;follow up on Simon Lester’s insightful <a href="https://www.cato.org/blog/senator-hawleys-many-misunderstandings-wto">analysis</a> of what Senator Hawley gets wrong about the World Trade Organization. Here are the first couple of paragraph:</p> <blockquote><p>On the opinion page of the <em>New York Times</em> yesterday, Senator Josh Hawley (R-MO) <a href="https://www.nytimes.com/2020/05/05/opinion/hawley-abolish-wto-china.html?smid=nytcore-ios-share">proposed</a> the abolition of the World Trade Organization (WTO). Fair enough. For those concerned about the United States, its future, and the nature of its relationship with the wider world, Hawley’s idea is worth considering. After all, nowhere is it set in stone that the post‐​war economic institutions established under U.S. tutelage would or should endure forever, impervious to evolving politics, geopolitics, and economic conditions.</p> </blockquote> <blockquote><p>But if we are going to have an honest debate about this important issue, those offering their views should rely on facts and truth, not on propaganda and dog whistles. Senator Hawley violates those conventions in his op‐​ed, which amounts mostly to a&nbsp;string of slogans intended more to inflame than inform.</p> </blockquote> <p>If you’re so inclined, you can read it in full right <a href="https://www.forbes.com/sites/beltway/2020/05/06/senator-hawleys-case-for-nationalism-strong-on-propaganda-weak-on-the-facts/#359021f75e18">here</a>.</p> Wed, 06 May 2020 16:27:51 -0400 Daniel J. Ikenson https://www.cato.org/blog/senator-hawleys-case-nationalism-strong-propaganda-weak-facts Senator Hawley’s Case for Nationalism: Strong on Propaganda, Weak on the Facts https://www.cato.org/publications/commentary/senator-hawleys-case-nationalism-strong-propaganda-weak-facts Daniel J. Ikenson <div class="lead mb-3 spacer--nomargin--last-child text-default"> <p>On the opinion page of the&nbsp;<em>New York Times</em>&nbsp;yesterday, Senator Josh Hawley (R-MO)&nbsp;<a href="https://www.nytimes.com/2020/05/05/opinion/hawley-abolish-wto-china.html?smid=nytcore-ios-share" target="_blank" title="https://www.nytimes.com/2020/05/05/opinion/hawley-abolish-wto-china.html?smid=nytcore-ios-share" data-ga-track="ExternalLink:https://www.nytimes.com/2020/05/05/opinion/hawley-abolish-wto-china.html?smid=nytcore-ios-share">proposed</a>&nbsp;the abolition of the World Trade Organization (WTO). Fair enough. For those concerned about the United States, its future, and the nature of its relationship with the wider world, Hawley’s idea is worth considering. After all, nowhere is it set in stone that the post‐​war economic institutions established under U.S. tutelage would or should endure forever, impervious to evolving politics, geopolitics, and economic conditions.</p> </div> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>But if we are going to have an honest debate about this important issue, those offering their views should rely on facts and truth, not on propaganda and dog whistles. Senator Hawley violates those conventions in his op‐​ed, which amounts mostly to a&nbsp;string of slogans intended more to inflame than inform.</p> <p>Hawley’s assertion that “we should abolish” the WTO indicates that he is unfamiliar with his subject, which should raise flags about the argumentation to follow. “We” cannot “abolish” the WTO. The United States can quit the WTO, which would free us from rules shaped largely by U.S. negotiators that have helped protect U.S. exporters and importers from the costs of what otherwise would be the whimsical, unpredictable, and often unaccountable trade policies of hundreds of foreign governments.</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>Blaming foreigners for homemade woes is a&nbsp;staple of the nationalist’s diet and ditching the WTO—especially on the bases of the false pretenses Hawley offers—will serve to isolate further the United States and render what Hawley considers “the single greatest threat to American security in the 21st century, Chinese imperialism,” more difficult to counter. </p> </div> </div> </aside> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>Should we decide to take that leap, we can forswear the benefits of the rule of international trade law and consign ourselves to second‐​class status when it comes to assurances of market access. And, of course, we have every right to forfeit our seat at the center of the table where many important decisions will be made that shape the global economy for years to come.</p> <p>Yes, we can do all that unilaterally, as the senator seems to be advocating. But we cannot “abolish” the WTO. That would require convincing the WTO’s other 163 members to follow us over the cliff. Considering the economic losses associated with that outcome—just this week, two trade economists at Indiana University&nbsp;<a href="http://pages.iu.edu/~alashkar/BL2020_Production_Networks.pdf" target="_blank" title="http://pages.iu.edu/~alashkar/BL2020_Production_Networks.pdf" data-ga-track="ExternalLink:http://pages.iu.edu/~alashkar/BL2020_Production_Networks.pdf">estimated</a>&nbsp;that dissolving the WTO would erase 30 percent of the overall gains from trade, or $2.7 trillion in global GDP—withdrawal would be a&nbsp;lonely act of self‐​sabotage.</p> <p>Hawley’s summary of the founding and purpose of the WTO is a&nbsp;hodgepodge of clichés, slogans, and misinformed nationalist grievances. Notice the highlighted buzzwords (my emphasis) from Hawley’s first few paragraphs:</p> <p>“The W.T.O. was created in 1995 as the crown jewel of a&nbsp;new global market, a&nbsp;system designed by&nbsp;<strong>ambitious</strong>&nbsp;Western policymakers after the fall of the Soviet Union.&nbsp;<strong>Their aim was to create one giant, liberal international economy to support a&nbsp;new liberal international order</strong>.</p> <p>The reformers wanted all the world to follow the same economic rules, so that capital, products, and people could move easily across national boundaries.<strong>&nbsp;Nation‐​states themselves would become less important in setting economic policy and new, multilateral institutions, like the W.T.O., would take on the role of managing the global economy.</strong></p> <p>It was a&nbsp;bold vision, and&nbsp;<strong>a&nbsp;major departure</strong>.&nbsp;<strong>The economic system it replaced</strong>&nbsp;had been created by America and its allies at the close of the Second World War and pursued more modest aims.&nbsp;<strong>The Cold War system</strong>&nbsp;sought to build up the free nations’ economies and to contain the Soviet Union.&nbsp;<strong>It took the independent nation‐​state as its basic building block, and encouraged trade and investment between nations as equal sovereigns. This system allowed each country to set its own internal economic policy and control its borders and trade.</strong></p> <p>But in the early 1990s,<strong>&nbsp;with America’s principal adversary gone, Western policymakers were in a&nbsp;messianic frame of mind</strong>. President George H.W. Bush promised a “<strong>new world order” of “open borders, open trade … and open minds</strong>,” a&nbsp;new international system based on liberal values to bring peace to the world. He and other internationalists wanted a&nbsp;new economic system to match.”</p> <p>The senator’s portrayal of the WTO’s creation as the product of the conscious, collective striving of ambitious policymakers (read: opportunistic globalists) seeking to subvert the sovereignty of nation‐​states by empowering some monolithic, faceless bureaucracy of world government is a&nbsp;stock right wing trope of zero analytical utility. Juxtaposing what he implies are the questionable motives of the ideologically wayward, globalist, post‐​Cold War policymakers against those of the noble cold‐​warriors, Hawley romanticizes the pre‐​WTO trade architecture as though it were from a&nbsp;distinct era where deference to sovereign nation‐​states on trade policy was unique and that hewing to that norm summoned the national greatness necessary to bury the Soviet Union. It’s a&nbsp;riveting good‐​versus‐​evil narrative, fit for a&nbsp;Show‐​Me state drama like&nbsp;<em>Ozark</em>. But it’s not even&nbsp;<em>based</em>&nbsp;on a&nbsp;true story.</p> <p>Hawley’s claim that there were two distinct trade “systems”—one strong and heroic; one weak and villainous—is a&nbsp;fallacy. The modern trade system from its founding as the General Agreement on Tariffs and Trade (GATT) in 1947 through eight successful rounds of multilateral negotiations over five decades under the auspices of the GATT, culminating in the creation of the WTO in 1995, progressed along a&nbsp;continuum of deepening and broadening liberalization of trade barriers. Throughout that half century, the negotiators’ task was to commit nation‐​states to rein in their own protectionism without compelling them to do so. The task was to thread the needle with rules that encouraged governments to honor their commitments to trade liberalization without usurping national sovereignty.</p> <p>The creation of the WTO was not a&nbsp;departure, but a&nbsp;continuation of the GATT. Like the GATT, the WTO has no power to act outside the consensus of its members. It is a&nbsp;member‐​driven organization that cannot force its members to do anything. Like the GATT, the WTO enshrines the principles of “most‐​favored nation” (all trade liberalization by a&nbsp;member country should apply on a&nbsp;nondiscriminatory basis to all other members) and “national treatment” (foreign entities and their products and services should be accorded the same treatment under law as domestic entities and their products and services are accorded). And like the GATT, the WTO is deferential to its members.</p> <p>While it is true that under the WTO, the dispute resolution process was strengthened, that strengthening did not translate into an encroachment on the sovereignty of member governments. The furthest the WTO can go to “discipline” a&nbsp;member whose policy or practice has been found to be out of conformity with its commitments is to excuse the complaining member from honoring the concessions it has made (the lower tariffs or other market openings it committed to) with respect to the offending member, if the offending member’s policies are found be damaging to the complaining member and if those policies haven’t come into conformity with the commitments made within a&nbsp;reasonable period of time after the finding is rendered.</p> <p>Findings of the Dispute Settlement Body don’t command members to do anything. Rather, they&nbsp;<em>recommend</em>&nbsp;that members bring their policies or practices into conformity with their commitments under a&nbsp;specific agreement. To this day, the GATT/WTO has never compelled a&nbsp;member to do anything.</p> <p>Hawley continues:</p> <p>“Take the World Trade Organization. Its [<strong>WTO’s] mandate was to promote free trade, but the organization instead allowed some nations to maintain trade barriers and protectionist workarounds, like China, while preventing others from defending themselves, like the United States</strong>… Meanwhile,&nbsp;<strong>the W.T.O. required American workers to compete against Chinese forced labor but did next to nothing to stop Chinese theft of American intellectual property and products</strong>.”</p> <p>The WTO promotes free trade, but its member governments never fully embraced it. Protectionism endures because governments, such as our own, are always tempted to dole out favors to politically important domestic industries. In other words, it is precisely because the WTO has no powers of compulsion and that its members maintain their full sovereignty that protectionism persists.</p> <p>That said, tariffs and other trade barriers are much lower today than they were in 1947, as a&nbsp;result of the hard work of national governments cooperating under GATT/WTO architecture. There are asymmetries to the tariffs applied by WTO members—some members have higher tariffs on certain products and other members have lower tariffs. Hawley and other trade skeptics are always quick to identify the higher tariffs in China or Europe on imported automobiles, or the protectionist rules that prevail in other industries (and those are problems, to be sure!), but they never mention the higher U.S. tariffs on clothing, footwear, and pickup trucks, for example. Nor do they mention the steel industry’s out‐​of‐​control abuse of the U.S. antidumping law, trade‐​distorting subsidies lavished on U.S. farmers, or the Jones Act, which restricts foreign ships and shipping in the United States.</p> <p>Existing asymmetries are—to a&nbsp;large extent—vestiges of the GATT’s founding ethos. In order to attract as many members as possible and get those governments into the habit of constraining their protectionism, the GATT asked less of some countries than others. The idea was to get them to join the club by asking them to do what they could in terms of their own tariff reductions. In the subsequent rounds of multilateral liberalization over the decades, tariffs typically were slashed formulaically (reduced by certain percentages), which worked to preserve and, in some cases, accentuate the asymmetries.</p> <p>These matters of “<a href="https://www.cato.org/publications/policy-analysis/development-dimension-what-do-about-differential-treatment-trade" target="_blank" title="https://www.cato.org/publications/policy-analysis/development-dimension-what-do-about-differential-treatment-trade" data-ga-track="ExternalLink:https://www.cato.org/publications/policy-analysis/development-dimension-what-do-about-differential-treatment-trade">special and differential treatment</a>,” which have excused developing countries from implementing their commitments in a&nbsp;timely manner and from liberalizing at the same pace as developed countries, are important concerns that the WTO is trying to grapple with presently.</p> <p>But, contrary to Hawley’s assertion, the WTO has not prevented the United States from defending itself against Chinese practices that violate China’s WTO commitments. The United States has brought about two dozen cases against China in the WTO and&nbsp;<a href="https://www.cato.org/publications/policy-analysis/disciplining-chinas-trade-practices-wto-how-wto-complaints-can-help" target="_blank" title="https://www.cato.org/publications/policy-analysis/disciplining-chinas-trade-practices-wto-how-wto-complaints-can-help" data-ga-track="ExternalLink:https://www.cato.org/publications/policy-analysis/disciplining-chinas-trade-practices-wto-how-wto-complaints-can-help">obtained a&nbsp;favorable outcome</a>&nbsp;nearly every time.</p> <p>But instead of building on that success by filing more cases in areas where concerns about violations remain—and, perhaps, enlisting the support of other WTO members whose exporters face similar problems in China—the United States went rogue in 2018, casting the WTO’s rule of law aside, and applied tariffs on imports from China unilaterally.</p> <p>Hawley continues:</p> <p><strong>“That new order’s universal peace never quite arrived. Instead, the internationalists embroiled America in one foreign war after another</strong>. And their liberal economic order fared little better.&nbsp;<strong>It sent American production overseas, compromised American supply chains, and cost American jobs, all while enriching Communist China</strong>.”</p> <p>It seems a&nbsp;stretch to blame the WTO for George W. Bush’s invasion of Iraq and the residual wars in Syria and North Africa, but Hawley seems to want to conflate every institution that isn’t American and every event that happens outside the United States as the workings of some internationalist cabal.</p> <p>It’s tough to argue that U.S. job churn didn’t accelerate over the past few decades with millions of jobs created and lost each month. But that churn is the consequence of a&nbsp;confluence of factors, which includes trade but also—more explanatorily—the decline in demand for manufactured goods relative to services and increasing automation. It’s an article of faith among protectionists that sending “production overseas” resulted in U.S. job losses. Of course, that is an obvious consequence. Less obvious, but essential to the analysis, is that outsourcing frees up resources to create jobs in the United States (yes, outsourcing is typically a&nbsp;complement to domestic production, not a&nbsp;substitute for it) and, over this same period, millions of Americans gained employment with foreign headquartered companies through the process of&nbsp;“insourcing.”</p> <p>Hawley concludes:</p> <p>“Abandoning the W.T.O. is a&nbsp;start. The United States must seek new arrangements and new rules, in concert with other free nations,&nbsp;<strong>to restore America’s economic sovereignty and allow this country to practice again the capitalism that made it strong.</strong>&nbsp;It means building a&nbsp;new network of trusted friends and partners to resist Chinese economic imperialism.</p> <p>We must face facts. The only sure way to confront&nbsp;<strong>the single greatest threat to American security in the 21st century, Chinese imperialism</strong>, is to rebuild the U.S. economy and to build up the American worker. And that means reforming the global economic system.”</p> <p>There’s nothing objectionable about the United States building relationships with “a network of trusted friends and partners.” The WTO expressly acknowledges that some members may want to achieve deeper liberalization than is possible within the WTO. As long as certain core conditions are met—especially that the liberalization between or among the countries party to the agreement applies to substantially all of their trade and that the agreement does not raise barriers to external trade—these preferential (bilateral or regional) agreements won’t run afoul of WTO commitments. So, building these alliances in no way requires ditching the WTO.</p> <p>As sovereign people in a&nbsp;sovereign nation, Americans are free to decide whether and to what extent their government should be involved with international institutions, such as the WTO. Blaming foreigners for homemade woes is a&nbsp;staple of the nationalist’s diet and ditching the WTO—especially on the bases of the false pretenses Hawley offers—will serve to isolate further the United States and render what Hawley considers “the single greatest threat to American security in the 21st century, Chinese imperialism,” more difficult to counter.</p> <p>Whether or not one thinks Chinese imperialism is a&nbsp;priority scourge, taking on that challenge alone—as an isolated, international pariah—would significantly diminish the likelihood of success. Just ask President Trump, who launched a&nbsp;trade war against China after alienating our trade partners with steel and aluminum tariffs and other threats. He’d surely agree…in private.</p> </div> Wed, 06 May 2020 09:27:51 -0400 Daniel J. Ikenson https://www.cato.org/publications/commentary/senator-hawleys-case-nationalism-strong-propaganda-weak-facts Trump Grudgingly Concedes That Certain Tariffs Are Paid by U.S. Importers https://www.cato.org/blog/trump-grudgingly-concedes-certain-tariffs-not-ones-he-imposed-course-which-are-paid-china-are Daniel J. Ikenson <p>Yesterday, to help businesses stay afloat and keep workers on payrolls, President Trump <a href="https://www.cbp.gov/document/rulings/temporary-postponement-time-deposit-certain-estimated-duties-taxes-and-fees-during?mod=article_inline">authorized</a> the deferral of tariff payments on imports of <em>certain</em> products by <em>certain</em> companies for a&nbsp;<em>certain</em> amount of time. Before you smile broadly and, perhaps, engage in a&nbsp;few moments of gloating over the fact that, in this gesture, the president has finally conceded that U.S. importers pay the tariffs, first be reminded that Trump sees no cost too big for others to bear and no collateral damage too catastrophic for the economy to endure to ensure he doesn’t have to admit to a&nbsp;mistake.</p> <p>Trump’s action will provide a&nbsp;little breathing room for some businesses, but many, many more will asphyxiate at the altar of “China Pays the Tariffs.” Here’s what happened.</p> <p>The United States, like nearly every other country, imposes MFN (most‐​favored nation) tariffs on imported goods. The U.S. MFN tariff rate for a&nbsp;particular product is the same, regardless of which WTO‐​member country the product comes from. For example, the duty applied to imported automobiles is 2.5 percent ad valorem. China, the European Union, South Korea, and every other WTO member have their own MFN tariff rate for imported automobiles. The rates charged by each country may differ from each other’s (and they do), but the MFN rate each applies to every other country is the same.</p> <p>Now, to add a&nbsp;layer of complexity, the duty rates applied to imports from countries with which the United States has a&nbsp;separate free trade agreement can be—and typically are—lower. For example, under NAFTA, auto imports come in duty‐​free (provided the auto meets the necessary rules of origin—that it qualifies as originating in North America). So, there are MFN rates and preferential rates of duty. (There is also something called “Column 2” rates, which are the duties that apply to imports from countries that do not enjoy “normal trade relations” status with the United States. That list, today, includes only North Korea and Cuba.)</p> <p>Finally, sometimes imports from particular countries are subject to additional and conditional tariff rates because those imports have been found to be dumped (under the Antidumping Law), subsidized (under the Countervailing Duty Law), otherwise “unfair” (under Section 301 of the Trade Act of 1974), not necessarily “unfair,” but “injurious” (under Section 201 of the Trade Act of 1974) or a&nbsp;threat to national security (under Section 232 of the Trade Expansion Act of 1962).</p> <p>In the years preceding Trump up through 2017, duties collected were in the neighborhood of $30–36 billion per year (~1.4% of import value). Those were all MFN and preferential FTA duties, as well as about $1–2 billion of duties collected on imports subject to antidumping and countervailing duty orders.</p> <p>Then, in early 2018, Trump imposed safeguard tariffs (Section 201) on solar panel components and large washing machines from most countries. Later that year, the president imposed “national security” tariffs (under Section 232) on steel and aluminum from most countries. Then, in the summer of 2018, he began imposing (in phases) tariffs on imports from China under Section 301.</p> <p>The duties collected by Customs and Border Protection doubled from $36 billion in 2017 to $72 billion in 2019. So, about half of that $72 billion are tariffs collected from Trump’s noted protectionist measures, as well as antidumping and countervailing duty orders imposed during and before Trump’s presidency.</p> <p>That brings us to yesterday’s executive order. Trump’s decision to grant a&nbsp;3‐​month reprieve on tariff collections extends only to the MFN and preferential FTA duties in effect before Trump came into office. The duties from his protectionist actions (solar components, large residential washers, steel, aluminum, China, and the numerous AD/CVD orders) do not qualify for the deferral. Why? This is presumably to inoculate Trump from having to concede that his duties on China (and the other duties that he so wisely and strategically deployed) are actually paid by U.S. importers. The burden on importers, according to this Trump contortion (if logic’s not your strong suit or you’re just willfully ignorant) is caused by the MFN and FTA tariffs, and not by the tariffs associated with Trump’s protectionist actions.</p> <p>To qualify for the 90‐​day tariff deferral, which applies only to imports made in March and April, companies must demonstrate that they’ve suffered financial hardship and meet other opaque requirements. My back of the envelope estimate is that this action would put up to $6 billion back into the cash flow of businesses for 90&nbsp;days, giving them some room to continue operating and keeping workers on payroll. But this is no more than a&nbsp;cosmetic, political gesture being taken when doing something more meaningful—such as deferring payment of all tariffs for one year and scrapping the corrupting conditions—would be possible, but for Trump’s obsession about winning the argument about who pays the tariffs.</p> Mon, 20 Apr 2020 15:35:40 -0400 Daniel J. Ikenson https://www.cato.org/blog/trump-grudgingly-concedes-certain-tariffs-not-ones-he-imposed-course-which-are-paid-china-are Trade in a Pandemic: Traditional Issues, New Concerns, and Optimal Policy Responses https://www.cato.org/multimedia/events/trade-pandemic-traditional-issues-new-concerns-optimal-policy-responses Daniel J. Ikenson, Simon Lester, Inu Manak <p>Eliminating trade barriers is essential to the task of containing the COVID-19 pandemic and minimizing its human and economic costs. Yet dozens of governments have imposed restrictions on exports, and others appear to be taking steps toward “repatriating” medical supply chains to achieve self‐​sufficiency in critical items. These actions are compounding a&nbsp;time‐​to‐​market problem caused by preexisting policies such as tariffs on medical goods, divergences between governments in regulatory requirements, and rigid intellectual property protections of medicines and devices.</p> <p>Please join us for a&nbsp;conversation and learn how the strategic stockpiling of medical supplies, the World Trade Organization and other international bodies, the easing of regulatory restrictions through mutual recognition, and fresh approaches to encouraging medical innovation can all play important roles in the effort to rein in the crisis.</p> Wed, 15 Apr 2020 16:21:09 -0400 Daniel J. Ikenson, Simon Lester, Inu Manak https://www.cato.org/multimedia/events/trade-pandemic-traditional-issues-new-concerns-optimal-policy-responses U.S.-China Tech Battle Threatens Pandemic Containment and More https://www.cato.org/blog/us-china-tech-battle-threatens-pandemic-containment-more Daniel J. Ikenson, Huan Zhu <p><em><a href="https://www.reuters.com/article/us-usa-china-technology-exclusive/exclusive-u-s-officials-agree-on-new-ways-to-control-high-tech-exports-to-china-sources-idUSKBN21K007">Reuters</a></em> reports that the Trump administration is planning to tighten export controls “to prevent China from obtaining advanced U.S. technology for commercial purposes and then diverting it to military use.” That sounds unobjectionable. After all, one purpose of U.S. export control laws is to ensure that dual‐​use items—articles that have both commercial and military applications—are exported for commercial use only, unless explicitly licensed for military use. But closer scrutiny of the fine print is needed to assess whether the expected national security benefits of these new rules will be significantly outweighed by their commercial, geopolitical, and human costs.</p> <p>The Export Control Reform Act of 2018 (“ECRA”) grants the administration broad jurisdiction over “the export, reexport, and in‐​country transfer” of dual‐​use items, such as “accelerometers,” which are devices that measure the movement of objects and are used in commercial aircraft navigation systems, as well as in missile guidance systems. The ECRA requires the secretary of commerce to establish and maintain a&nbsp;list of controlled items, and a&nbsp;list of foreign persons and end uses deemed threatening to national security.</p> <p>Under the law, licenses are required to export those items and to export to those persons, but exceptions apply under certain conditions. Some of those exceptions are on the chopping block. According to <a href="https://www.reuters.com/article/us-usa-china-technology-exclusive/exclusive-u-s-officials-agree-on-new-ways-to-control-high-tech-exports-to-china-sources-idUSKBN21K007"><em>Reuters</em></a>, three major changes are in store:</p> <blockquote><p><span>One change would do away with the civilian or “civ” exemption, which allows for the export of certain U.S. technology without a&nbsp;license, if it is for a&nbsp;non‐​military entity and use…</span> <span>Another change would stop China’s military from obtaining certain items without a&nbsp;license even if they were buying them for civilian use, such as scientific equipment like digital oscilloscopes, airplane engines and certain types of computers…A final change would force foreign companies shipping certain American goods to China to seek approval not only from their own governments but from the U.S. government as well.</span></p> </blockquote> <p>Forestalling the Chinese military’s access to advanced technology seems like a&nbsp;legitimate aim of U.S. policy, and the first two rule changes identified above might help achieve that outcome at an acceptable cost. It seems reasonable that U.S. exporters of certain advanced technology to non‐​military entities in China should require licenses so that elicit channels of technology transfer can be better monitored and shut down. Likewise, given Beijing’s own blurring of lines between military and civilian activities—President Xi speaks of a “civil‐​military” fusion in the area of technology adoption—why should that distinction be preserved under U.S. export control laws?</p> <p>It’s prudent to require U.S. exporters of dual‐​use items to the Chinese military to have a&nbsp;license—even when those items are designated for civilian use. Of course, those changes would make exporting to China more burdensome. But most of the added costs would be borne by the parties to the transaction—U.S. exporters and Chinese importers—and would probably justify the national security benefit obtained.</p> <p>The last measure (or set of measures) under consideration, however, is problematic because it is less surgical than the others and threatens collateral damage to the technology ecosystem, U.S. commercial interests, broader relations with China and other countries, and international efforts to contain and defeat a&nbsp;global pandemic.</p> <p>U.S. export controls apply directly to products made in the United States, but also extra‐​territorially to products made in third countries with “controlled” U.S. equipment, which contain a&nbsp;certain minimum percentage of controlled U.S. content. Exporters of these products from third countries require U.S. approval. The new rule would lower (and maybe eliminate) the content threshold so that licenses would be required by more&nbsp;producers&nbsp;in third countries, including all foreign companies producing semiconductors with U.S. chip‐​making equipment that are sold to China’s Huawei Technologies.</p> <p>Sales of U.S.-made goods to Huawei have been restricted since last May, when the company was put on a&nbsp;Commerce Department <a href="https://www.cato.org/publications/commentary/blacklisting-huawei-could-cost-trillions-so-lets-look-we-leap">blacklist</a> for reasons of national security. But up until now, foreign suppliers of U.S. technology to Huawei have been beyond the full reach of U.S. authorities. The new rule would extend that reach, giving the U.S. government veto power over sales of even basic commodity semiconductors to Huawei from producers in Taiwan, South Korea, and elsewhere, wreaking havoc, in the near term, on Huawei’s capacity to plan, produce, and profit.</p> <p>It isn’t hard to believe these new rules are intended primarily to thwart Huawei’s success—an objective many policymakers in Washington seem to support. But before pulling the pin, the administration should solicit stakeholder feedback and conduct an honest analysis of the likely costs and broader impact of the rule changes on the technology ecosystem, which includes industries up and down the supply chain from companies doing research to commercial innovation to semiconductor manufacturing to the production of everything called information and communications technology.</p> <p>What might they learn? The following, if this U.S. technology industry <a href="https://www.semiconductors.org/wp-content/uploads/2020/04/April-6-Multi-Assn-Letter.pdf">coalition letter</a> is a&nbsp;guide:</p> <blockquote><p>Abrupt changes to the export controls regulations for semiconductors will create uncertainty for the entire technology industry. Semiconductors are the foundation of modern electronics, information technology, cloud services, critical infrastructure and the defense industrial base. In addition to playing a&nbsp;critical role in sectors throughout the economy, semiconductors play an essential role addressing the COVID-19 public health emergency. Semiconductors drive the functionality in advanced medical equipment used by health professionals to treat the public, and they enable the products and services that allow telework, remote learning, telemedicine, and other aspects of our economy and daily life. Semiconductors will also play a&nbsp;pivotal role in driving the industries of the future and the economic recovery once the public health emergency is defeated.</p> </blockquote> <blockquote><p>Changes to the export control regulations under consideration have the potential to result in significant impacts on the semiconductor industry, its global supply chain, and the broader technology sector that relies on predictable access to semiconductors. Given the importance of this industry – and in light of the unprecedented public health crisis and economic disruption – it is imperative that any regulatory changes be narrowly tailored and minimize damage to industry. Subjecting such regulatory changes to public comment would help ensure that Commerce benefits from the industry’s views and avoids unintentionally exacerbating an already difficult economic situation.</p> </blockquote> <p>A letter to President Trump by the president of SEMI, an association representing&nbsp;the semiconductor and electronics manufacturing supply chain, warned that the new rules would “serve as a&nbsp;disincentive for further investments and innovation in the U.S. and lead to the design‐​out of U.S. technology and components.” Indeed, companies such as Taiwan Semiconductor Manufacturing Corporation, a&nbsp;long‐​time consumer of U.S. chip‐​making equipment and the world’s largest producer of commercial chips, which obtains 17 percent of its revenue from sales in China, will look to other countries for their capital equipment needs.</p> <p>Likewise, the move would encourage China to expedite&nbsp;development of its own chip‐​making capacity and to source more semiconductors from South Korea, which would&nbsp;hasten a&nbsp;decline in revenues and market shares&nbsp;of&nbsp;U.S. chip&nbsp;and chip‐​making equipment firms.&nbsp;The damage to U.S. commercial interests would go beyond the semiconductor supply chain, as Beijing looked to deploy retaliatory measures to frustrate the efforts of&nbsp;U.S. businesses in China and elsewhere.&nbsp;Ultimately,&nbsp;disruptions in semiconductor supply chains could impede&nbsp;production and increase the costs of various kinds of smart medical equipment and devices relied upon by health professionals in the battle against COVID-19&nbsp;and other diseases.&nbsp;</p> <p>Controlling exports of cutting‐​edge technologies that have military or intelligence applications is probably a&nbsp;prudent aim of policy. But the new export controls go beyond that and seem unnecessarily provocative, especially during a&nbsp;time when U.S.-China cooperation&nbsp;is sorely needed. Most concerning is&nbsp;that the accumulated&nbsp;weight of the measures and countermeasures that have burdened relations&nbsp;for several years may soon prove too hard to bear, resulting in a&nbsp;total collapse in the bilateral relationship. The specter of the world’s two largest economies refusing to cooperate to contain the pandemic and repair the global economy is a&nbsp;worry to take very seriously.</p> Mon, 13 Apr 2020 19:16:30 -0400 Daniel J. Ikenson, Huan Zhu https://www.cato.org/blog/us-china-tech-battle-threatens-pandemic-containment-more A Quick and Dirty Lesson about the Trade Deficit https://www.cato.org/blog/quick-dirty-lesson-about-trade-deficit Daniel J. Ikenson <p>The trade balance is calculated as the difference between the value of U.S. exports and the value of U.S. imports. The United States “runs a trade deficit” when Americans purchase more goods and services from foreigners than foreigners purchase from Americans.</p> <p>To be more precise, the trade deficit is the amount by which the total value of purchases of U.S. consumers, businesses, and governments from foreign suppliers exceeds the total value of purchases of foreign consumers, businesses, and governments from U.S. suppliers.</p> <p>The trade deficit gets a lot of negative attention. It’s got a bad reputation—probably because it’s called a “deficit.” Sounds like something that needs fixing. But the truth is that the trade deficit has a lot going for it. It’s just, well, misunderstood.</p> <p>Over the years, <a href="https://www.cato.org/blog/us-trade-deficit-problem-solve">my colleagues and I have written extensively</a> about the real meaning of the trade deficit; that it is not a reflection of trade policy; that it is to be expected for a country whose government issues the world’s primary reserve currency; and that the dollars that go abroad to purchase imports find their way back into the U.S. economy in the form of investment in equities, real estate, factories, other structures, equipment, and corporate and government debt; and that the only portion of that capital inflow from foreigners that current and future taxpayers need to repay is the principal and interest on government debt (which implicates fiscally irresponsible government, not trade).</p> <p>President Trump, Commerce Secretary Wilbur Ross, White House adviser Peter Navarro, and others in the administration don’t seem to get this. They see trade a zero sum game, with exports as Team America’s points, imports as the foreign team’s points, and the trade account as the scoreboard. The deficit on that scoreboard (the trade deficit) means that Team America is losing at trade and it’s losing because the foreign team—much like the Houston Astros—cheats.</p> <p>The misguided objective of trade policy for the past three years has been to minimize imports and maximize exports. And the tools deployed in pursuit of these objectives—sweeping tariffs, withdrawal from a major trans‐​pacific trade agreement, wanton subversion of the international rule of trade law, and compelling partners into renegotiations of trade agreements under the barrel of a gun—have failed to eliminate (or even reduce) that trade deficit. In fact, between 2016 and 2019, the goods deficit increased from $735 billion to $853 billion. That said, the administration is likely to make progress toward that goal this year because U.S. trade deficits decline during economic contractions. </p> <p>But there’s a better way to think of the meaning of the trade deficit. Milton Friedman liked to point out that exports are things we produce but don’t get to consume, while imports are things we consume without having to produce. Yet, when Americans get more stuff from foreigners than foreigners get from Americans, it’s called a “deficit.” Go figure!</p> <p>If you happen to use toilet paper, the following example may resonate.</p> <p> </p><div data-embed-button="image" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="86029447-f18e-4bf2-adc4-ce060acda80b" class="align-center embedded-entity" data-langcode="en"> <img srcset="/sites/cato.org/files/styles/pubs/public/2020-04/TP%20Trade_0.png?itok=iELFtWKC 1x, /sites/cato.org/files/styles/pubs_2x/public/2020-04/TP%20Trade_0.png?itok=7kidvZZq 1.5x" width="700" height="394" src="/sites/cato.org/files/styles/pubs/public/2020-04/TP%20Trade_0.png?itok=iELFtWKC" alt="Toilet Paper and Trade" typeof="Image" class="component-image" /></div> <p>In 2019, U.S. producers exported over 72 million kilograms (about 802 million rolls) of the supple utensil to be deployed by people in other countries. WHAT? HOW COULD THEY? DON’T THEY KNOW HOW MUCH WE LOVE TP IN AMERICA? Indeed, we do (no pun)!</p> <p>According to Sta​tista​.com, the United States <a href="https://www.statista.com/chart/15676/cmo-toilet-paper-consumption/">leads the world in toilet paper consumption</a>, averaging 141 rolls of the fluffy stuff per person per year. So, the precious supply that U.S. producers exported last year could have sated the derrieres of some 5.7 million Americans. Juxtapose that stat against the wrestling matches you’ve witnessed in your grocer’s paper products aisle.</p> <p>But here’s the thing. In 2019, not only was toilet paper shipped abroad. It was also imported—and in vastly more significant sums. Volumes of over 194 million kilograms or nearly 2.2 billion rolls were imported last year, satisfying the demands of approximately 15.6 million Americans. In other words, international trade in 2019 produced a net surplus of about 1.4 billion rolls of toilet paper (2.2 billion rolls imported minus 0.8 billion rolls exported) for people in the United States. Trade helped meet the toilet tissue demands of a net 10 million Americans. That’s 10 million fewer people poised to rumble in the aisles of Target and Walmart.</p> <p>Unfortunately, the trade statistics aren’t recorded in a way that illustrates the facts that Milton Friedman shared with us. They record the dollars that changed hands, not the number of rolls put to good use. But at the end of the day (and, throughout the day), we know which paper ultimately serves the purpose we demand. </p> Sat, 04 Apr 2020 14:01:22 -0400 Daniel J. Ikenson https://www.cato.org/blog/quick-dirty-lesson-about-trade-deficit Protectionism Kills https://www.cato.org/blog/protectionism-kills Daniel J. Ikenson <p>Some people talk about trade as though it were an end in itself. It’s not. Trade is a&nbsp;means to an end.</p> <p>We trade so that we can specialize. We specialize so that we can produce more. We produce more so that we can consume and save more. That is how we create wealth and raise living standards. Just like electricity or machinery or expertise, trade is a&nbsp;tool we use to leverage our physical, mental, and creative abilities to obtain more efficiently more of the things we need and want. When we remove barriers to trade, we create greater scope for specialization, which means we can produce more value.</p> <p>Why would anyone want to throw sand into the gears of these machines? Before the Trump presidency, that would have been a&nbsp;rhetorical question. But this administration is hellbent on repatriating supply chains and exterminating imports&nbsp;and, like the Luddites before them, the Trump administration and its enablers are doing their best to destroy the machinery of trade. But before addressing some of the pressing life or death issues surrounding&nbsp;trade policy in the midst of this pandemic,&nbsp;let me borrow a&nbsp;passage about “why we trade” from a&nbsp;chapter I&nbsp;contributed to a&nbsp;cool new Cato Institute book titled <em><a href="https://www.cato.org/books/visions-liberty">Visions of Liberty</a></em>, which was originated, organized,&nbsp;and edited by Aaron Ross Powell and Paul Matzko:</p> <blockquote><p>Imagine life without trade. Imagine a&nbsp;life of solitude. To attend to your own subsistence, you wake each morning before sunrise to make your clothes, build and repair your meager shelter, hunt and harvest your food, concoct rudimentary salves for what ails you, and toil in other difficult and tedious tasks. Forget luxuries. Forget leisure. All of your time would be consumed trying to produce basic necessities merely to subsist. Life would be nasty, brutish, and short.</p> <p>Fortunately, most members of modern societies choose not to live that way. In fact, one of the defining features of modern society is that most of its members recognize—actively or tacitly—the benefits of institutions, such as cooperation. Most of us don’t attempt to make everything we wish to consume. Instead, we specialize in a&nbsp;few, or a&nbsp;couple, or just one value‐​added endeavor—one profession. What makes specialization possible is our commitment to the concept of exchange, which is the ultimate expression of cooperation.</p> <p>The purpose of exchange is to enable each of us to focus our productive efforts on what we do best. Rather than allocate small portions of our time to the impossible task of producing everything we need and want, we specialize in what we do best, produce more of it than we need, and exchange that surplus for other things we need or want but haven’t produced.</p> <p>The law of comparative advantage explains why this arrangement enables us to produce, and thus consume, more output than would be the case in the absence of specialization and trade. If Aaron can produce $100 worth of venison in eight hours but only $50 worth of clothing in eight hours, he has a&nbsp;comparative advantage producing venison. By specializing in venison production, Aaron forgoes $1 worth of clothing to obtain $2 worth of meat. But to forgo production of clothing, Aaron needs some assurances that he can obtain clothing by exchanging surplus venison.</p> <p>Because Paul, who lives nearby, is more efficient at producing clothing than venison—he can make $40 of clothing but only $30 of venison in an eight‐​hour day—he specializes in clothing production and forgoes producing venison at all, knowing he can obtain it through exchange with Aaron. Paul has a&nbsp;comparative advantage producing clothing.</p> <p>How do we know Aaron and Paul are better off by specializing and exchanging? By specializing, their combined output is $140 per day ($100 of venison and $40 of clothing). Had they chosen to live in solitude and not exchange, they could still produce $140 per day, but Aaron would have only venison and Paul would have only clothing. Any attempt by either man to produce a&nbsp;combination of these products would yield less total output. If each devoted four hours each to venison and clothing production, for example, their combined daily output would be $110. Aaron would produce $50 of venison and $25 of clothing; Paul would produce $15 of venison and $20 of clothing.</p> <p>Moving from a&nbsp;two‐​person economy illustration, in the modern economy, we specialize in an occupation and exchange the monetized form of the output we produce most efficiently [our wages and salaries] for the goods and services we produce less efficiently. It’s the same concept on a&nbsp;grand scale. Enlarging markets entails the reduction or elimination of barriers that inhibit the free flow of goods, services, capital, and labor. The larger the market, the greater is the scope for specialization, exchange, and economic growth. Just as consumers have a&nbsp;greater variety and a&nbsp;better quality of items to purchase with their monetized output, producers have access to a&nbsp;greater variety and a&nbsp;better quality of inputs for producing most efficiently.</p> </blockquote> <p>We trade so that we can move from subsistence toward&nbsp;abundance. When we restrict trade, we limit the scope for specialization. When we limit the scope for specialization, we produce and consume (and save) less than we could. When we restrict trade, we move in the wrong direction–from abundance toward subsistence. This is true regardless of the products or services being restricted and regardless of the&nbsp;reasons offered by policymakers for those restrictions.</p> <p>Americans are much less free to trade today than we were before the Trump presidency.&nbsp;Since his inauguration, President Trump has imposed new tariffs&nbsp;on nearly half a&nbsp;trillion dollars of imports (that’s roughly one‐​fifth of all imports and two‐​thirds of imports from China). In 2017 (before the steel and&nbsp;aluminum, and China tariffs went into effect), U.S. imports from the world amounted to $2.3 trillion, with Customs and Border Protection taking $33 billion in duties. That amounted to an effective tariff rate of 1.42 percent.</p> <p>In 2019 (the first full year that Trump’s tariffs were in effect), U.S. imports amounted to $2.5 trillion, with Customs taking over $71 billion. That&nbsp;$38 billion in additional taxes doubled the effective tariff rate to 2.85 percent, and came out of the pockets of<a href="https://www.cato.org/blog/whos-bearing-burden-tariff-boom"> these U.S. businesses</a> and consumers. Among those businesses are producers of medical equipment and supplies, and parts thereof. But regardless of whether they produce medical products, all of those businesses reflect the benefits of trade. They channel the benefits of specialization to the whole economy, which take the form of more value added, which means more consumption and savings, which means more progress toward abundance. The tariffs they have been incurring impede that process and reverse our&nbsp;progress toward abundance.</p> <p>So what should a&nbsp;president concerned about limiting the pandemic’s economic and human costs do about these trade restrictions? Obviously, he should lift them. Despite ongoing <a href="https://twitter.com/dikenson/status/1245074626738298885?s=20">rumors</a> that Trump would suspend duty collection for a&nbsp;period of three months to free up cash flow for businesses to enable them to keep more people on their payrolls, no such actions have been taken. Instead, rumors persist that Trump will sign an executive order mandating that federal agency procurement of medical supplies and pharmaceuticals be governed by <a href="https://www.cato.org/blog/lets-distance-buy-american-protectionism">“Buy American” provisions</a>. Yes, the administration’s answer to medical supply shortages is not to lift the tariffs&nbsp;contributing to the shortage, but to compound the problem by limiting domestic access to foreign supply.</p> <p>The Trump administration is not taking the pandemic seriously enough. Its protectionism contributes to the rising COVID-19 contraction and fatality rates.</p> </p> Wed, 01 Apr 2020 16:07:25 -0400 Daniel J. Ikenson https://www.cato.org/blog/protectionism-kills Let’s Distance from “Buy American” Protectionism https://www.cato.org/blog/lets-distance-buy-american-protectionism Daniel J. Ikenson, Logan Kolas <p>The Trump Administration <a href="https://www.nytimes.com/2020/03/11/business/economy/coronavirus-china-trump-drugs.html">is</a> <a href="https://www.thedailybeast.com/peter-navarro-trumps-china-hawk-is-trying-to-commandeer-the-coronavirus-stimulus?ref=scroll">reportedly</a> <a href="https://www.politico.com/newsletters/morning-trade/2020/03/18/travel-industry-expects-the-worst-786181">considering</a> an executive order to&nbsp;restrict federal agencies from purchasing foreign medical supplies and equipment. That would be a&nbsp;mistake. As a&nbsp;general matter—and, especially during a&nbsp;pandemic—the White House should avoid measures that impede Americans’ access to affordable, quality medical supplies.</p> <p>Discriminatory government procurement laws are part of the disastrous trade policy legacy of President Herbert Hoover, who signed into law, on his last full day in office, the Buy American Act in 1933. This law was intended to compel the U.S. government to procure American‐​made goods, in an era when federal government expenditures were expanding dramatically. Of course, restricting the supply of goods and services available for government acquisition only ensured (<a href="https://www.cato.org/blog/false-promise-buy-american">and still does ensure</a>) that taxpayers got the smallest bang for their buck. It also made it harder (<a href="https://www.cato.org/blog/deciphering-buy-american-dispute">and still does</a>) for U.S. suppliers to compete abroad, as foreign governments adopted similar measures.&nbsp;</p> <p>Although tariffs and other trade barriers were reduced considerably over the decades from their Hoover‐​era peaks, discrimination against foreign goods through “Buy America” and other protectionist procurement rules continued. Some international trade rules restraining these kinds of practices emerged over the years, but they were riddled with exceptions. Today, these rules are the shiny object catching the attention of an administration that considers imports a&nbsp;cost, trade a&nbsp;zero‐​sum game, and walls preferable to bridges.</p> <p>These discriminatory procurement provisions are always a&nbsp;problem, but today the stakes are even higher. The public health crisis is bringing the economy to its knees. Supply shortages abound. And demand for goods and services has plummeted amid widespread social distancing.</p> <p>Advocates of “Buy American” provisions and American “self‐​sufficiency,” more broadly, invoke a&nbsp;noble purpose: To decouple America from its reliance on China, which presents some vaguely defined national security threat. <a href="https://www.thedailybeast.com/peter-navarro-trumps-china-hawk-is-trying-to-commandeer-the-coronavirus-stimulus?ref=scroll">Reports</a> suggest that the prospective executive order picks up on this theme, noting that the president would designate active pharmaceutical ingredients as “critical technology,” necessary for national security.</p> <p>But if diversifying away from China (which, for some products, may be prudent from a&nbsp;national security perspective) is the objective, it is hard to justify the collateral damage that Buy American provisions would cause. Buy American means forgoing purchases from <em>all</em> other countries, not just China.</p> <p>In a&nbsp;<a href="https://www.fda.gov/drugs/drug-shortages/report-drug-shortages-root-causes-and-potential-solutions">report</a> detailing pharmaceutical drug shortages even before the pandemic, the FDA noted that only 8&nbsp;percent of FDA‐​approved finished dosage form (FDF) manufacturing sites and 14 percent of active pharmaceutical ingredients (API) sites were located in China in 2018. Comparatively, the United States was home to 37 percent and 12 percent of the world’s FDF and API facilities, respectively. In other words, restricting U.S. government acquisitions to U.S.-manufactured pharmaceuticals would put&nbsp;55 percent of the world’s FDA‐​approved FDF sites and 74 percent of its API facilities off limits. That outcome risks severe supply shortages and very high prices for finished pharmaceutical medications—two scourges the administration should be trying to subdue.</p> <p>Meanwhile, a&nbsp;review of the Census Bureau’s <a href="https://dataweb.usitc.gov/">import statistics</a> suggests that the argument that Americans are too reliant on China for pharmaceuticals and their ingredients is greatly exaggerated. In 2019, the United States imported $132 billion of products classified in the <a href="https://www.usitc.gov/harmonized_tariff_information">Harmonized Tariff Schedule of the United States</a> (HTS) as “Pharmaceuticals” (<a href="https://hts.usitc.gov/current">Chapter 30</a>). Of that $132 billion, only $1.6 billion (or 1.2%) came from China. As for the chemical ingredients in pharmaceutical products—most of which are classified in <a href="https://hts.usitc.gov/current">Chapter 29</a> of the HTS under “Organic Chemicals”—U.S. imports amounted to $49.2 billion in 2019, of which China accounted for $7.7 billion, or 15.6 percent. Granted, there may be some specific products or ingredients where China accounts for a&nbsp;more significant share of U.S.&nbsp;imports, but broad Buy American restrictions would be akin to using a&nbsp;sledgehammer to do a&nbsp;scalpel’s job.</p> <p>“Buy American” provisions also generate other costs. On top of the economic disruptions, protectionist procurement rules would risk further damage to already frayed U.S. relationships with other countries at a&nbsp;time when we should be working together to contain the pandemic and its economic costs. This could further erode&nbsp;America’s sullied reputation and further impede the next president’s efforts to reestablish trust and reassert U.S. global leadership.</p> <p>There is still time to avoid this outcome. President Trump should note that trade is doing <a href="https://marginalrevolution.com/marginalrevolution/2020/03/let-the-markets-work.html">some great things</a> to help fight the pandemic, that it would be wise to forego a&nbsp;Buy American executive order, and that he should heed the advice of other <a href="https://www.thedailybeast.com/peter-navarro-trumps-china-hawk-is-trying-to-commandeer-the-coronavirus-stimulus?ref=scroll">advisers</a> and <a href="https://www.finance.senate.gov/imo/media/doc/2020-03-25 CEG, SFC Republicans to Donald J. Trump (Trade Measures during COVID-19).pdf">Senate Finance Committee Republicans</a>. Too much is at stake.</p> Thu, 26 Mar 2020 13:36:43 -0400 Daniel J. Ikenson, Logan Kolas https://www.cato.org/blog/lets-distance-buy-american-protectionism With the Economy in an Induced Coma, No Time to Waste in Bridging the Medical Supply Gap https://www.cato.org/blog/economy-induced-coma-no-time-waste-bridging-medical-supply-gap Daniel J. Ikenson <p>At the behest of public health officials and politicians, many Americans have submitted —to varying degrees—to the practice of social distancing. The logic behind the push for social distancing is that it will help “flatten the curve.” Flattening the curve is shorthand for slowing the contagion to limit the surge in demand for health care services (hospitals, doctors, nurses, beds, respirators, testing kits, gloves, sanitizers, and other protective gear), which we have learned in recent weeks are in woefully short supply. By distancing ourselves from each other, the rate of contagion is forecast to be more manageable and less likely to strain the health care system to the point of collapse. Fair enough.</p> <p>Through laws, advisements, and social pressure, the economy has been put into an induced coma to relieve pressure on our medical infrastructure. But, of course, that preemptive behavior carries huge financial and human costs. Government is notorious for touting the benefits and ignoring the costs of the regulations it imposes or the actions it recommends. The concept of maximizing the net benefits is utterly foreign to most policymakers.</p> <p>As Chris Edwards <a href="https://www.cato.org/blog/coronavirus-politicians-vs-economy">describes,</a> the economy cannot withstand a&nbsp;prolonged shutdown, and with economic contraction comes worsening despair, destitution, and increased morbidity and mortality rates. The benefits of extreme social distancing may save lives over the next few months, but the costs—in addition to what may become the worst economic contraction the world has ever witnessed—include lost lives, too. Accordingly, it makes no sense to put all the onus on reducing demand for health services—especially when doing so requires our taking actions that will kill people anyway.</p> <p>It’s only a&nbsp;matter of time before people—especially younger people with less savings to fall back on—start to reckon that social distancing is an inferior choice.&nbsp;If we are to prevent or mitigate this eventuality, we must aim to shorten the period where social distancing is necessary. That can only happen if we ramp up efforts on the medical infrastructure supply side.</p> <p>Over the past 48&nbsp;hours, we have seen stories about certain U.S. manufacturers working to convert their factories into facilities to produce badly needed medical supplies, and equipment or shipping companies rerouting and reconfiguring what they deliver and when. But is this really happening on a&nbsp;meaningful scale? Has there been an impact on the supply of masks, gloves, and respirators? Has there been follow through on these stated initiatives?</p> <p>I haven’t been able to get answers. I’ve inquired with officials who work for major business trade associations in Washington, but have received no responses. Two days ago, Ford Motor Company made noises about reopening shuttered facilities to produce respirators, but the last substantive news story on this matter that I’ve seen was <a href="https://www.politico.com/news/2020/03/20/detroit-wont-save-us-from-a-ventilator-shortage-anytime-soon-139272">published yesterday</a>&nbsp;in Politico. The story notes:</p> <blockquote><p>“[M]anufacturing facilities in the United States are already at 100 percent production capacity and are looking to ramp up by another 15 or 20 percent,” said Jim Jeffries, the senior vice president for public affairs for AdvaMed, which represents medical technology companies. He said in the medical industry, companies are adding third shifts and repurposing production lines, while also looking to other sectors — autos among them — to see if protective equipment can be “retrofitted” to help combat the crisis.</p> <p>“You’re seeing a&nbsp;really strong industry‐​wide mobilization to the fight,” Jeffries said. “They’re looking at literally every possibility to make sure that we can meet the demand.”</p> <p>But a&nbsp;spokesperson for General Motors underscored Thursday that there is no concrete plan yet to do anything.</p> <p>“This is very early,” said GM spokesperson Jeannine Ginivan. “Right now it’s just an internal feasibility study on whether it‘s possible for us to help out in the production of medical equipment.”</p> </blockquote> <p>This doesn’t sound promising. Of course, for many existing businesses, converting operations to produce these needed commodities doesn’t portend profitability. And without a&nbsp;degree of certainty as to how much will be demanded and for how long, it’s a&nbsp;crapshoot to know how much to invest in production capacity and distribution.</p> <p>For those and other reasons, business appears slow, even unwilling, to meet the challenge. <a href="https://twitter.com/BizRoundtable/status/1241348239950938112">This statement</a> from the Business Round Table praising the administration’s decision to open a&nbsp;THREE MONTH comment period on the question of whether and which tariffs should or should not be lifted on imports from China speaks to a&nbsp;complete absence of urgency.</p> <p>While I&nbsp;am not recommending&nbsp;the government (especially THIS government) commandeer factories and other private assets to redirect manufacturing output to bridging the medical supply gap (less drastic inducements, such as tax forgiveness and future tax credit allowances, are available), that redirection has to happen so that everyone can be tested, the sick quarantined, and the healthy set free to begin the long process of resuscitating the economy. The alternative is unimaginable.</p> Sat, 21 Mar 2020 13:29:21 -0400 Daniel J. Ikenson https://www.cato.org/blog/economy-induced-coma-no-time-waste-bridging-medical-supply-gap Protectionist Shipping Restrictions Are Choking the U.S. Economy https://www.cato.org/publications/commentary/protectionist-shipping-restrictions-are-choking-us-economy Daniel J. Ikenson <div class="lead mb-3 spacer--nomargin--last-child text-default"> <p>Economists rightly criticize President Trump’s tariffs for their pernicious effects on U.S. producers and consumers. Import taxes on intermediate goods—inputs like steel, aluminum, and electronic components—drive up production costs and operating expenses for businesses along supply chains on down to the end users. But we must broaden the inquiry to include trade restrictions on the most common intermediate input: freight transportation.</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 accumulated economic cost of the Jones Act after 100&nbsp;years amounts to squandered resources in the trillions of dollars.</p> </div> </div> </aside> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>In the United States, businesses and governments spend north of $600 billion per year on transportation (and warehousing). That spending is much higher on account of a&nbsp;100‐​year old law called the&nbsp;<a href="https://www.cato.org/research/jones-act">Jones Act</a>. Formally known as Section 27 of the Merchant Marine Act of 1920, the Jones Act restricts waterborne transport of cargo between any two points in the United States to vessels that are U.S.-built, -owned, -crewed, and -flagged. That restriction triggers a&nbsp;cascade of costs that rains down on the U.S. economy, amounting to tens of billions of wasted dollars per year.</p> </div> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>In a&nbsp;<a href="https://www.cato.org/publications/policy-analysis/environmental-costs-jones-act">new study</a>&nbsp;published today by the Cato Institute, former chief international economist at the Council of Economic Advisers and current Texas Tech professor Timothy Fitzgerald estimates the environmental costs of the Jones Act, alone, to be as high as $8.2 billion per year. Fitzgerald notes:</p> </div> , <blockquote class="blockquote"> <div> <p>The century since the Jones Act’s passage has witnessed a&nbsp;dramatic decline in maritime transport. In an apparent effort to promote U.S. shipbuilding and U.S. shipping, the law has unwittingly incentivized alternative modes of transport, which generate environmental externalities that could be reduced under a&nbsp;different policy environment. — Timothy Fitzgerald</p> </div> </blockquote> <cite> </cite> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>Think about it like this. Protecting domestic shipbuilders from foreign competition raises the cost of producing ships, as well as the prices that shipbuilders can charge their captive customers. Those customers—the domestic shipping companies or “carriers,” who are themselves excused under the law from having to compete with foreign carriers—cover their costs by charging higher shipping rates to their customers, who are mainly U.S. producers, wholesalers, and retailers. And those higher transportation costs are reflected in higher prices across the economy.</p> <p>As a&nbsp;result of the Jones Act, cargo that is now too costly to move on water is instead diverted, primarily, to roads and rails. This is where Fitzgerald sharpens his pencil.&nbsp;He notes that greenhouse gas emissions are far greater for trucks and trains than they are for ships and that 40 percent of Americans live along the nation’s coastlines, which suggests there could be much greater supply and demand for water transportation.</p> <p>Whereas trucks account for 66.1 percent of the transportation sector’s domestic freight miles and 80.5 percent of its greenhouse gas (GHG) emissions, water transport accounts for only 3.4 percent of the freight miles and 0.9 percent of GHG emissions. Accordingly, trucks are five times more costly than ships by this metric. Fitzgerald notes: “The good news is that relative to the overall transportation sector, maritime transport is relatively clean. Reallocating freight across modes has the potential to reduce GHG emissions.”</p> <p>Fitzgerald’s estimates are predicated on the benefits that would accrue if 10 percent of freight moved by surface transportation were to move to waterborne shipping (a conservative assumption) and that the current fleet of Jones Act eligible ships was upgraded to include modern, more environmentally friendly ships—both reasonably conservative assumptions. After all, more than half of the Jones Act fleet, according to Fitzgerald’s analysis, is more than 25&nbsp;years old, which means the average fuel efficiency and the type of fuel burned are both inferior, environmentally, to modern alternatives.</p> <p>Under that set of assumptions, Fitzgerald concludes that the “Environmental costs from freight transport are substantial. Plausible changes to the current set of rules governing freight transport could reduce costs from emission in excess of $8 billion per year.” That’s compelling. But there’s more.</p> <p>Beyond the immediate transportation costs and environmental costs of the Jones Act, there is also the matter of the disproportionate wear and tear on U.S. transportation infrastructure caused by trucks and trains. Federal, state, and local governments spent more than $400 billion on transportation infrastructure in 2017, a&nbsp;significant share of which covered the cost of maintenance and repairs. There is also the deepening problem of traffic congestion caused by the growing volume of trucks on our highways. Some portion of the approximately $100 billion in annual lost wages and output due to traffic congestion is a&nbsp;cost rightly attributable to the Jones Act.</p> <p>The Cato Institute is working on estimates for these other costs, but it is safe to say that the accumulated economic cost of the Jones Act after 100&nbsp;years amounts to squandered resources in the trillions of dollars. Despite presiding over the decimation of U.S. shipbuilding, the precipitous decline in the number of ships in the fleet, and a&nbsp;dramatic atrophying in the number of merchant marines, the Jones Act is still rationalized by its proponents as a&nbsp;national security imperative.&nbsp;But it is a&nbsp;costly failure that continues to burden the U.S. economy and weaken national security.</p> </div> Mon, 02 Mar 2020 08:53:31 -0500 Daniel J. Ikenson https://www.cato.org/publications/commentary/protectionist-shipping-restrictions-are-choking-us-economy Who Is Paying for Trump’s Tariffs? https://www.cato.org/blog/whos-bearing-burden-tariff-boom Daniel J. Ikenson <p>Imagine a president boasting about how he raised your cost of living. Or how he made it more expensive to produce goods at your factory. Imagine that president standing at a lectern under the stars and stripes, smiling and beaming pride, as he announces he’s reduced your real income and impeded your company’s ability to compete at home and abroad. Of course, that is exactly what tariffs do.</p> <p>But the pols never put it that way. Instead, they tell you that tariffs are needed to protect upstanding American producers from predatory foreign enterprises intent on cornering the market and stealing U.S. jobs. Or that tariffs are imperative to protecting an industry that is vital to national security. Or, as President Trump sees it, that tariffs generate revenue for the Treasury—a pay‐​to‐​play cash cow financed by foreign producers that previous presidents weren’t tremendous enough to figure out how to exploit.</p> <p>Trump’s announcement last week that he’d tap into that bounty of “massive tariff money coming into the USA!” to provide more subsidies to American farmers—who’ve lost billions of dollars in export sales as a result of the trade war—got me wondering exactly who’s footing the bill for those subsidies. On Sunday, I provided a brief <a href="https://www.forbes.com/sites/danikenson/2020/02/23/trump-is-robbing-the-rust-belt-to-buy-farm-state-votes/#175e133337d4">summary</a> at Forbes, which I expand upon below.</p> <p>Trump is right that tariff revenues are flooding the coffers of the U.S. Treasury. Duties collected reached a record high of $71 billion in 2019, well more than double the $33 billion collected in 2017 (the last year before Trump’s tariffs took effect) and—at 2.85 percent of total import value—more than double the weighted‐​average tariff rate of 1.41 percent that prevailed from 2001–2017.</p> <p> <div data-embed-button="embed" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="16d48f23-ae07-46fe-8338-6386a15fd9d0" data-langcode="en" class="embedded-entity"> <div class="embed embed--infogram js-embed js-embed--infogram"> <div class="infogram-embed" data-id="_/1cWVYzFkhBrP0v00FwuN" data-type="interactive" data-title="U.S. Duties Collected and Weigted-Average"></div> </div> </div> </p> <p>In 2017, the last year unaffected by Trump’s tariffs, U.S. import value totaled $2.33 trillion and the $33 billion of duties collected on those imports amounted to a trade‐​weighted average tariff of 1.4 percent—precisely, the average over the previous 16 years.</p> <p>In 2018, Trump’s tariffs began to take effect at different points in the year. The duties collected for the year surged to $48 billion, or 1.9 percent of the $2.55 trillion value of imports.</p> <p>Then, in 2019, tariffs on steel and aluminum from most countries, and tariffs on most imports from China were in effect for the whole year. Those tariffs reduced import value slightly, to $2.50 trillion, but the duties collected surged to a record $71 billion—a 123 percent increase over 2017 for an annual rate of 2.8 percent. In other words, tariffs paid by U.S. importers to the U.S. Treasury increased from $33 billion in 2017 (last year before the tariffs) to $71 billion (first full year of tariffs). Where did that extra $38 billion come from?</p> <p>Contrary to Trump’s claims, that money didn’t “[come] into the USA.” The products came in, but the money was already here. It was transferred as a tax from importers—U.S. producers, U.S. wholesalers, and U.S. retailers—to the U.S. government. By raising the costs of manufacturing inputs or final goods purchased by U.S. importers, the tariffs—in every case—amount to an increase in U.S. producers’ costs of production and/​or an increase in Americans’ cost of living. Businesses were made less profitable (which means less investment and less hiring) and individuals and families experienced lower real income, on account of higher prices (which means less consumption and less savings).</p> <p>So, who paid that $38 billion tax bill?</p> <p>The table below reveals the imported products accounting for the largest shares of the $38.3 billion tariff “windfall.” The products are identified by the 6‐​digit subheading of the U.S. <a href="https://hts.usitc.gov/current">Harmonized Tariff Schedule</a>. In 2019, the total U.S. import value of $2.5 trillion was entered under 5,285 different 6‐​digit subheadings or product groups. Close to 60 percent of that value consisted of products classified as raw materials, intermediate goods, and capital equipment—the purchases of U.S. producers.</p> <p> <div data-embed-button="embed" data-entity-embed-display="view_mode:media.blog_post" data-entity-embed-display-settings="https://infogram.com/1p30jgz7pkkwq5u0l9vxvwnlvmidwww5v5x" data-entity-type="media" data-entity-uuid="97a6ccac-207d-4d51-8249-840c5a0285af" data-langcode="en" class="embedded-entity"><a href="https://infogram.com/1p30jgz7pkkwq5u0l9vxvwnlvmidwww5v5x"> <div class="embed embed--infogram js-embed js-embed--infogram"> <div class="infogram-embed" data-id="a5c786af-ed09-4707-babb-af86f126590e" data-type="interactive" data-title="Ikenson Share Table NEW"></div> </div> </a></div> </p> <p>The table shows the 100 products most burdened by Trump’s tariffs (I have the full table of 5,285 products offline, if anyone’s interested). The product accounting for the largest share of the $38.3 billion tariff increase was HTS-6 code 8517.62 or “MACHINES FOR THE RECEPTION, CONVERSION AND TRANSMISSION OR REGENERATION OF VOICE, IMAGES OR OTHER DATA, INCLUDING SWITCHING AND ROUTING APPARATUS.” This subheading likely consists of products that are both intermediate and final goods. The subheading accounted for $1.2 billion of the $38.3 billion tariff increase, or 3.23 percent of the total increase. In 2017, the $47.3 billion of imports of this subheading were subject to no tariffs. The tariffs in 2019 amounted to 3.1 percent of the import value, which had declined considerably—and presumably on account of the tariffs—from $47.3 billion to $39.8 billion. (Note the other fields in the table.)</p> <p>Going through the table (which is sortable by any of the field headings), it should become apparent that these products bearing the brunt of Trump’s tariffs are mostly inputs used to produce manufactured goods in the United States. The cost of production in the United States for things such as solar panels, which use HTS 8541.40 (“PHOTOSENSITIVE SEMICONDUCTOR DEVICES, INCLUDING PHOTOVOLTAIC CELLS; LIGHT-EMITTING DIODES); computing devices, which use HTS 8473.30 (“PARTS AND ACCESSORIES FOR AUTOMATIC DATA PROCESSING MACHINES AND UNITS THEREOF, MAGNETIC OR OPTICAL READERS, TRANSCRIBING MACHINES, ETC., NESOI”); and machinery, which uses HTS 8537.10 (“BOARDS, PANELS, CONSOLES, ETC. WITH ELECTRICAL APPARATUS, FOR ELECTRIC CONTROL OR DISTRIBUTION OF ELECTRICITY, FOR A VOLTAGE NOT EXCEEDING 1,000 V”) are all higher on account of these tariffs. Higher costs mean lower profits, which means businesses have fewer resources to investment and create jobs. Or higher costs mean higher prices, which mean consumers have less to spend and save. Indeed, the tariffs on the dozens of items on this list that are consumer products directly reduce real income, unless retailers absorb the costs, which then translate into lower profits, less investment, and less hiring.</p> <p>The bottom line is that the costs of Trump’s tariff are being shouldered by U.S. businesses and consumers. Producers and consumers of exactly what can be discerned from the table above.</p> Thu, 27 Feb 2020 16:17:04 -0500 Daniel J. Ikenson https://www.cato.org/blog/whos-bearing-burden-tariff-boom Trump Is Robbing the Rust Belt to Buy Farm State Votes https://www.cato.org/publications/commentary/trump-robbing-rust-belt-buy-farm-state-votes Daniel J. Ikenson <div class="lead mb-3 spacer--nomargin--last-child text-default"> <p>In an ALL CAPS tweet last week, President Trump reassured America’s farmers that their service in the trade war continues to entitle them to federal subsidies “UNTIL SUCH TIME AS THE TRADE DEALS WITH CHINA, MEXICO, CANADA AND OTHERS FULLY KICK IN…” According to Trump, that assistance—provided to help farmers cope with tanking export revenues thanks to foreign retaliation for Trump’s tariffs—will be “PAID FOR OUT OF THE MASSIVE TARIFF MONEY COMING INTO THE USA!”</p> </div> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>Well, in one sense, Trump is right. U.S. tariff coffers&nbsp;<em>are</em>&nbsp;overflowing with record amounts of duties collected on imports. However, the money isn’t “coming into” the country. It’s already here. It’s just being transferred from U.S. businesses—mostly manufacturers—to the U.S. government. The implication that the “money coming into the USA” is some windfall courtesy of foreign producers and governments is utterly false. Trump is playing a&nbsp;shell game here, hoping the public will lose sight of the ball. He’s eager to conceal that he is stealing from the manufacturing sector to buy farm state votes.</p> <p>For many decades, annual U.S. tariff “revenues” (to be clear, they’re revenues to the government, but costs to the private sector) as a&nbsp;percentage of annual U.S. import value was remarkably consistent. Between 2001 and 2016, for example, annual tariff collections amounted to between 1.2 percent and 1.7 percent of the value of total imports. In 2017, the last year unaffected by Trump’s trade policies (tariffs didn’t start until 2018), U.S. import value totaled $2.33 trillion and the $33 billion of duties collected on those imports amounted to a&nbsp;trade‐​weighted average tariff of 1.4 percent—precisely, the average over the previous 16&nbsp;years.</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>Trump is playing a&nbsp;shell game here, hoping the public will lose sight of the ball.</p> </div> </div> </aside> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>In 2018, Trump’s tariffs began to take effect at different points in the year. The duties collected for the year surged from $33 billion to $48 billion, or to 1.9 percent of a&nbsp;still‐​growing pool of imports. Then, in 2019, it all hit the fan. Tariffs on steel and aluminum from nearly everywhere, and large swaths of products from China were in effect for the whole year. Year‐​end data show that total import value declined, but duties collected skyrocketed to a&nbsp;whopping $71 billion—a 123 percent increase over 2017.</p> <p>The trade‐​weighted average tariff of 1.4 percent that had prevailed from 2001 to 2017 doubled to 2.8 percent in 2019. If the historical rate of 1.4 percent had applied to 2018 and 2019 imports, U.S. Customs would have collected duties of $71 billion&nbsp;<em>over two years</em>. Instead, over those two years, Customs collected $129 billion in tariffs for a “windfall” of $58 billion.&nbsp;Except it’s not a&nbsp;windfall. Those tariffs were paid to U.S. Customs by U.S. importers and those importers aren’t volunteering to dive on grenades to save the rest of us from this massive tax burden. The $58 billion is a&nbsp;tax that has been imposed on U.S. producers, logistics providers, wholesalers, retailers, and consumers.</p> <p>A closer look at the import statistics provides a&nbsp;better picture of exactly whom is bearing the burden of Trump’s tariffs or—to be honest—who is financing Trump’s effort to placate farmers with lump sums that are nothing more than efforts to buy their votes.</p> <p>Between 2017 (pre‐​tariff base year) and 2019 (tariffs fully implemented), duty collections increased from $33 billion to $71 billion. That $38 billion increase was generated from new taxes imposed on U.S. importers of a&nbsp;broad array of goods. Most (almost three‐​quarters) of that $38 billion increase was generated from taxes imposed on the material inputs and finished goods of eight manufacturing industries listed in the table below.&nbsp;(These “industries” correspond to what is known as the “Chapter” level or the “2‐​digit” level of the Harmonized Tariff Schedule, which really captures multiple industries within the broad category descriptions in the table below.)</p> </div> , <figure class="figure overflow-hidden figure--default figure--no-caption responsive-embed-no-margin-wrapper"> <div class="figure__media"> <img width="700" height="378" alt="dcusi-1.jpg" class="lozad component-image" loading="lazy" data-srcset="/sites/cato.org/files/styles/pubs/public/2020-02/dcusi-1.jpg?itok=W1bT4-MB 1x, /sites/cato.org/files/styles/pubs_2x/public/2020-02/dcusi-1.jpg?itok=NQ57W6cE 1.5x" data-src="/sites/cato.org/files/styles/pubs/public/2020-02/dcusi-1.jpg?itok=W1bT4-MB" typeof="Image" /> </div> </figure> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>So, among the facts and trends the table reveals is that duties collected on imports of electrical machinery and equipment, etc. (HTS Chapter 85) exceeded $10.2 billion in 2019, which was an $8.3 billion increase over the duties collected on them in 2017. That increase accounts for 21.7 percent of the increase in all duties collected between 2017 and 2019, which renders producers of “electrical machinery and equipment parts thereof” the U.S. industry most burdened by the tariff increases. More than one in every five dollars of that $38 billion “windfall,” which Trump plans to wire to the bank accounts of farmers in Iowa, Illinois, and Nebraska, will come from the wallets of producers and consumers (and retailers, distributors, etc.) of electrical machinery, equipment, and their parts.</p> <p>The following table provides a&nbsp;clearer idea of exactly which kinds of firms in the electrical machinery industries are flipping the bill for farmers. Importers of this list of 6‐​digit HTS products, which include manufacturers who rely on these inputs to produce their machinery, are paying a&nbsp;sizable chunk of Trump’s tariffs (almost 22% of the increase in all tariffs, as noted in the table above). They include firms that use electrical plugs, sockets, processors, printed circuits, motors, semiconductors, and other parts. They paid $8.3 billion more tariffs in 2019 than they did in 2017.</p> </div> , <figure class="figure overflow-hidden figure--default figure--no-caption responsive-embed-no-margin-wrapper"> <div class="figure__media"> <img width="700" height="378" alt="dcusi-2" class="lozad component-image" loading="lazy" data-srcset="/sites/cato.org/files/styles/pubs/public/2020-02/dcusi-2.jpg?itok=fejDQoqp 1x, /sites/cato.org/files/styles/pubs_2x/public/2020-02/dcusi-2.jpg?itok=SxA-f9Wo 1.5x" data-src="/sites/cato.org/files/styles/pubs/public/2020-02/dcusi-2.jpg?itok=fejDQoqp" typeof="Image" /> </div> </figure> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>The second most burdened set of industries import components and final goods that fall under Chapter 84. As noted in the first table, importers of these products paid $6.6 billion more in tariffs in 2019 than they did in 2017. The most tariffed products in Chapter 84 are listed in the table below.</p> </div> , <figure class="figure overflow-hidden figure--default figure--no-caption responsive-embed-no-margin-wrapper"> <div class="figure__media"> <img width="700" height="378" alt="dcusi-3" class="lozad component-image" loading="lazy" data-srcset="/sites/cato.org/files/styles/pubs/public/2020-02/dcusi-3.jpg?itok=-zWosK3K 1x, /sites/cato.org/files/styles/pubs_2x/public/2020-02/dcusi-3.jpg?itok=mE38lA8_ 1.5x" data-src="/sites/cato.org/files/styles/pubs/public/2020-02/dcusi-3.jpg?itok=-zWosK3K" typeof="Image" /> </div> </figure> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>The bottom line is that Trump’s tariffs have raised the costs of production for goods throughout the manufacturing sector. That has had adverse effects across the manufacturing spectrum with particularly acute problems in industries that have also seen their revenues squeezed by foreign competitors who now have access to cheaper inputs and can offer their products at lower prices than can U.S. firms. Meanwhile, U.S. farmers have been the primary targets of retaliatory tariffs because agriculture is presumed to carry disproportionate political weight in Washington, which might be leveraged to end the madness of the trade war. Instead, Trump is doubling down on his plan to buy their quiescence. But the tab is falling on manufacturing. And their disquiet could spell big trouble for Trump’s reelection bid.</p> <p>The answer is to rescind all the tariffs imposed since 2018 and begin the process of digging industry and agriculture out of holes that never should have been dug.</p> </div> Sun, 23 Feb 2020 14:56:22 -0500 Daniel J. Ikenson https://www.cato.org/publications/commentary/trump-robbing-rust-belt-buy-farm-state-votes Daniel J. Ikenson discusses China reducing tariffs on U.S. goods on KURV’s The Drive Home https://www.cato.org/multimedia/media-highlights-radio/daniel-j-ikenson-discusses-china-reducing-tariffs-us-goods-kurvs Thu, 06 Feb 2020 11:13:21 -0500 Daniel J. Ikenson https://www.cato.org/multimedia/media-highlights-radio/daniel-j-ikenson-discusses-china-reducing-tariffs-us-goods-kurvs Commerce Claims Powers to Countervail Undervalued Currencies https://www.cato.org/blog/commerce-claims-powers-countervail-undervalued-currencies Daniel J. Ikenson <p>In the days of old, before Donald Trump came to Washington and laid waste to what was once trade policy orthodoxy, a&nbsp;Commerce Department <a href="https://www.federalregister.gov/documents/2020/02/04/2020-02097/modification-of-regulations-regarding-benefit-and-specificity-in-countervailing-duty-proceedings">rule change</a> set to take effect on April 6, which will treat undervalued foreign currencies as subsidies subject to duties under the U.S. countervailing duty law, would have been among the year’s most important trade policy developments.</p> <p>But given the Commerce Department’s enthusiastic partnership in the administration’s project to expand the universe of import transactions subject to tariffs; Trump’s deleterious trade war on fellow Americans trying to transact with people in China; the renegotiation of NAFTA for the purposes of repatriating supply chains and eliminating trade deficits according to the tenets of Gunboat Diplomacy; and the president’s unabashed subversion of the World Trade Organization and the global trade rules, generally, these new regulations seem little more than business as usual.</p> <p>But they’re not. They will grant the Commerce Department’s Office of Enforcement and Compliance—an agency that can’t utter the word “imports” without the modifier, “unfair”—another weapon to carry out the wishes of U.S. import‐​competing industries (regardless of the cost to others), including their wish to be import‐​competing in name only.</p> <p>The modifications to the CVD regulations, according to the <a href="https://www.federalregister.gov/documents/2020/02/04/2020-02097/modification-of-regulations-regarding-benefit-and-specificity-in-countervailing-duty-proceedings">notice</a> in the Federal Register, will “[C]larify how Commerce will determine the existence of a&nbsp;benefit when examining a&nbsp;subsidy resulting from currency undervaluation and clarify that companies in the traded goods sector of the economy can constitute a&nbsp;group of enterprises for purposes of determining whether a&nbsp;subsidy is specific.” (More on these points shortly.)</p> <p>These new rules are poorly considered and, especially, do not belong in the hands of a&nbsp;Commerce Department that has overseen an unsavory steel and aluminum tariff exemption process that could inspire the next Martin Scorsese film. According to the Commerce Department’s own <a href="https://www.oig.doc.gov/OIGPublications/OIG-20-003-M.pdf">Inspector General</a>, the process “is neither transparent nor objective” and has the “appearance of improper influence in decision‐​making for tariff exclusion requests.”</p> <p>The question of whether and how to respond to foreign currency manipulation (more recently expanded to currency “undervaluation”) has been vexing policymakers for many years. Currency manipulation is said to occur when governments take actions to suppress the values of their currencies in order to advantage their own producers. An undervalued currency, it is argued, essentially serves as a&nbsp;tax on imports and a&nbsp;subsidy for exports.</p> <p>In 2003, Sen. Chuck Schumer (D‑NY) first introduced his bill calling for a&nbsp;27.5 percent tariff on all imports from China to compel the Chinese government to permit the yuan to appreciate. Schumer’s idea was roundly rejected in the Senate as a&nbsp;massive consumption tax on the American people—and WTO‐​illegal to boot (remember, this was back when the welfare of consumers and the rule of law were things.) But that setback didn’t stop Schumer from reintroducing the same bill in subsequent Congresses with Sen. Lindsey Graham (R‑SC)—also, to no avail. The measure, which was welcomed by domestic auto and steel producers would have been a&nbsp;disaster for U.S. consumers, who would have had less real income, and for export‐​oriented U.S. producers and their workers, who would have suffered the wrath of foreign retaliation.</p> <p>Since then, other proposals for dealing with currency manipulation have come and gone—each with its own set of economic, methodological, or political problems. The idea of treating currency manipulation as a&nbsp;countervailable subsidy gained some traction during the legislative push for Trade Promotion Authority in 2015. At that time, Senator Schumer and others tried to attach an amendment to a&nbsp;companion bill to the 2015 Trade Promotion Authority legislation, which would have changed the statute to authorize the use of the countervailing duty law to offset the benefits conferred through an undervalued currency on a&nbsp;country’s exporters. That amendment didn’t survive the reconciliation process.</p> <p>The idea that currency manipulation should be treated as a&nbsp;subsidy and remedied under the CVD law was embraced early on by the Trump administration. One of the problems confronting those charged with making this happen is that the law (and the WTO’s rules on these matters, which largely mirror U.S. law) requires the “benefit” from the alleged subsidy to be “specific.” This means, for example, that a&nbsp;subsidy must be provided to a&nbsp;specific industry or for a&nbsp;specific purpose in order to be countervailable under the law. Since the value of a&nbsp;country’s currency affects its economy broadly—including its exporters, importers, and import‐​consuming producers—it is hard to imagine that the “benefits” from currency manipulation could be considered specific enough to any particular group.</p> <p>Commerce aims to remedy that by modifying 19 CFR 351.502 to explain that:</p> <blockquote><p>[E]nterprises that buy or sell goods internationally (i.e., enterprises in the traded goods sector of an economy) can comprise a “group” of enterprises for specificity purposes. The modification fills a&nbsp;gap in section 771(5A)(D) of the Act, which states that a&nbsp;subsidy can be specific if provided to “a group” of enterprises or industries, but does not define the word “group.” Existing 19 CFR 351.502 makes clear that in determining whether there is a “group,” Commerce is not required to determine whether there are shared characteristics among the enterprises or industries that are eligible for, or actually receive, the subsidy.</p> </blockquote> <p>Commerce goes on to explain that this revision provides further clarification that the “traded goods sector” can be treated as a “group” for purposes of meeting the specificity requirement. Essentially, “specificity” loses its common meaning by being permitted a&nbsp;very broad application.</p> <p>The other major modification is the addition of 19 CFR 351.528, which “provides guidance for Commerce’s determinations of undervaluation and benefit when examining a&nbsp;potential subsidy resulting from the exchange of an undervalued currency.” This regulation spells out Commerce’s normal practice in determining whether there is a&nbsp;subsidy and how it will calculate the value of the benefit it confers.</p> <p>But a&nbsp;review of how Schumer came to choose 27.5 percent as his magic number back in 2003 illustrates why Commerce’s new regulation is a&nbsp;big problem. When Schumer introduced his bill, economists were generally in consensus that the Chinese currency was undervalued. But they disagreed widely about the magnitude. Economists from the IMF, the OECD, the Federal Reserve, the U.S Treasury, think tanks, and academia were all producing different estimates of undervaluation. Schumer chose 27.5 percent because it was the midpoint in a&nbsp;range of dozens of these estimates spanning from 10 percent to 45 percent.</p> <p>More important than the imprecision in Schumer’s approach is the fact that reputable economists from esteemed institutions disagreed widely in their estimates of undervaluation. This meant that they took different approaches to estimating the difference between the yuan’s actual value and its true market value, which reveals that there is no consensus among economists about how to estimate currency undervaluation because there is disagreement about how to ascertain the true market value of a&nbsp;currency unless it is free‐​floating and determined by its supply and demand. This conclusion yields some important implications.</p> <p>First, without knowing the true market value of a&nbsp;currency, it is impossible to calculate accurate countervailing duties to offset the effects of currency manipulation. Roughly speaking, a&nbsp;10 percent countervailing duty implies that the currency is priced below its actual market value by 10 percent or that the manipulation amounts to a&nbsp;10 percent subsidy for exports. But at best, a&nbsp;countervailing duty could only be an estimate of the value of a&nbsp;subsidy conferred through manipulation of the currency.</p> <p>Considering that economists’ estimates of Chinese currency undervaluation varied by as much as 35 percentage points, and that any methodology employed by the U.S. Department of Commerce—in its zeal to protect domestic producers above all else—would certainly differ from one employed by an economist at the OECD or the IMF or MIT, countervailing duties would likely worsen any distortions caused by currency manipulation and inflict collateral damage on consumers and import‐​using producers.</p> <p>As the Peterson Institute’s Fred Bergsten lamented after years of trying to make it work:</p> <blockquote><p>Determining the existence and extent of currency misalignment, especially as a&nbsp;possible trigger for remedial action [i.e., specifically, the application of countervailing duties under the Countervailing Duty law], has proven enormously difficult, however, both intellectually and politically. Numerous conceptual approaches to defining and measuring currency “misalignment” have been attempted. The IMF uses three different measures that often produce very different results. Most official discussions, and even many academic efforts, have foundered at this initial level.</p> </blockquote> <p>Second, this doesn’t account for the costs incurred by exporters on their imported intermediate goods. Any benefits that may accrue to exporters from an undervalued currency must be offset by the higher costs of imported raw materials and intermediate goods consumed in production of the exported product. One person raised this issue with the Commerce Department after it published the proposed regulations, but Commerce was dismissive of it:</p> <blockquote><p>[A] commenter has argued that an undervalued currency may increase certain costs to a&nbsp;firm, which supposedly would negate or offset any benefits received by that firm due to an undervalued exchange rate. The commenter argued that an undervalued exchange rate will increase the firm’s costs for imported raw materials and equipment, which should be considered in determining whether the firm received a&nbsp;benefit from exchanges of the undervalued currency.</p> <p>We disagree with this commenter that these modifications to our regulations should include this concept. We note that section 771(6) of the Act provides for only a&nbsp;limited number of adjustments to the gross countervailable subsidy in order to calculate the net countervailable subsidy. These are: (a) Any application fee, deposit, or similar payment paid in order to qualify for, or to receive, the benefit of the countervailable subsidy; (b) any loss in value of the countervailable subsidy resulting from its deferred receipt, if the deferral is mandated by government order; and (c) export taxes, duties, or other charges levied on the export of merchandise to the United States specifically intended to offset the countervailable subsidy received. The adjustment proposed by this commenter is not included within the list in section 771(6) of the Act, and therefore we are not including it in this final rule.</p> </blockquote> <p>It’s fitting that Commerce modified its regulation to account for a&nbsp;possible new form of benefit‐​conferring subsidization but then refused to even consider that its new approach warrants a&nbsp;whole new set of potential offsets. To be fair, Commerce doesn’t have the authority to change the law. But it should at least be honest about the concerns.</p> <p>Moreover, countervailing duties would address only the export subsidy portion of the distortion, leaving in place the import tax effect of the currency manipulation, even magnifying its adverse impact on U.S. exporters by keeping foreign products that would have been bound for the United States, if not for the countervailing duty, in the foreign market, increasing the supply and suppressing prices. There might also be overt retaliation. U.S. exporters, in other words, would get no relief and, in fact, would be punished by CVD measures.</p> <p>Finally, if a&nbsp;currency’s true market value is determined by the intersection of its supply and demand curves, it is important to recognize that those curves (their shapes and positions) are affected by underlying economic activity, as well as public policy—monetary, fiscal, and regulatory. In other words, currency values reflect all sorts of policy decisions that it would be improper to indict direct manipulation occurring through currency market interventions, but not indirect manipulation delivered through other policy channels. After all, it is the effect of policy and not its intent that matters to the real economy.</p> <p>Allowing the Commerce Department—especially THIS Commerce Department—these new authorities is something we will soon regret.</p> Tue, 04 Feb 2020 17:32:54 -0500 Daniel J. Ikenson https://www.cato.org/blog/commerce-claims-powers-countervail-undervalued-currencies Core Principles for a U.S.-UK Free Trade Agreement https://www.cato.org/blog/core-principles-us-uk-free-trade-agreement Simon Lester, Daniel J. Ikenson <p>With Brexit Day upon us&nbsp;and the United Kingdom poised to reclaim control of its trade policy for the first time in 47&nbsp;years, it’s worth sharing some preliminary thoughts about an eventual free trade agreement between the United States and the United Kingdom.</p> <p>The first thing to keep in mind is that this process could take a&nbsp;while. The United Kingdom and the European Union are entering a&nbsp;transition period during which the terms of their existing relationship will continue, while they seek agreement on the terms of a&nbsp;new one. Understanding the rules and contours of that new relationship will be crucial to other governments interested in negotiating with the United Kingdom. In other words, it will be difficult to conclude a&nbsp;comprehensive U.S.-UK trade agreement until the terms of the new UK-EU relationship are settled.</p> <p>Meanwhile,&nbsp;some less comprehensive deals between the two countries that build toward a&nbsp;full‐​fledged agreement are possible. But, eventually, there is likely to be a&nbsp;U.S.-UK free trade agreement, which we hope will move both countries closer to a&nbsp;state of free trade. Such a&nbsp;deal would reflect certain principles and include broadly liberalizing terms, as we described in a&nbsp;<a href="https://www.cato.org/publications/white-paper/ideal-us-uk-free-trade-agreement-free-traders-perspective">collaborative paper</a> last year.</p> <p>The core provisions of trade agreements concern market access for goods, services, and investment. The U.S.-UK deal should provide for the elimination of tariffs as quickly as possible, on as many goods as possible, and to the lowest levels possible. It should limit the use of so‐​called trade remedy or trade defense measures, as well as measures rationalized as national security imperatives. It should open all government procurement markets to each other’s goods and services providers. It should open all sectors of the economy to investment from businesses and individuals in both countries. It should open all services markets without exception to competition from providers of the other country. It should ensure that the rules that determine whether products and services are originating (meaning that they come from one or both of the agreement’s parties) are not so restrictive that they limit the scope for supply chain innovations. Those rules should reflect the fact that globalization has made it difficult—and sometimes arbitrary—to define a&nbsp;product’s origin. Because of cross‐​border investment and global supply chains, the DNA of products and services is very difficult to trace nowadays, and that is good. Finally, the agreement should simplify, streamline, and make transparent all administrative procedures governing customs clearance for goods and the admission of all qualifying persons for the purpose of conducting business services.</p> <p>In addition to those free‐​market requirements, the U.S.-UK agreement must also include rules governing e‐​commerce. Digital trade—data flows that are essential components in the provision of goods and services in the 21st century—must remain untaxed and protected from misuse and abuse. Rules that prohibit governments from imposing localization requirements or any particular data architecture that reduce the efficacy of digital services should be included, and obligations should be imposed on entities to ensure data privacy, consistent with the requirement that data flow as smoothly as possible.</p> <p>When border barriers come down, the potentially protectionist aspects of regulation and regulatory regimes become more evident. If those regulations are comparable when it comes to achieving the same social outcomes—consumer safety, product reliability, worker safety, environmental friendliness—there may be scope to allow businesses to comply with only one set of rules. A&nbsp;regulatory cooperation mechanism to promote mutual recognition would be a&nbsp;useful innovation, as a&nbsp;means to reducing business costs (provided no deep cultural aversion or science‐​based reason exists for considering one regulation better than the other and worth the greater cost).</p> <p>Finally, the rules must be enforceable. What’s the point of a&nbsp;trade agreement if its terms are just suggestions? To make sure governments keep their promises, the agreement should include a&nbsp;binding and enforceable dispute settlement mechanism. That mechanism would not be a&nbsp;true court, with the power to order governments to comply. Rather, the standard mechanism used in most trade agreements—with recourse to a&nbsp;third‐​party adjudicator for a&nbsp;ruling and then self‐​enforcement through authorized suspension of the trade agreement obligations—is sufficient.</p> <p>On the other hand, some common free trade agreement provisions simply don’t belong in free trade agreements. Among the more prominent examples is overly protective intellectual property rules. It is important that intellectual property rules protect what is actually intellectual property and do not go beyond that or create rights where none actually exist.</p> <p>Other examples include provisions on labor rights and environmental protections. These rules have expanded the scope of trade agreements far beyond traditional trade and commercial issues. The scope and reach of labor laws and environmental protections are a&nbsp;controversial domestic policy issue, and the use of international agreements to create a&nbsp;one‐​size‐​fits‐​all solution in these areas is problematic.</p> <p>Furthermore, the United States and the United Kingdom are open, transparent, and free market‐​oriented economies. But if a&nbsp;U.S.-UK FTA is to be a&nbsp;model that applies to others, it is useful to set it up in a&nbsp;way that deals with issues that may arise down the road. Other countries’ economies are less open and have more state intervention; therefore, it is worth having the United States and the United Kingdom work out rules in this FTA that could apply to others who might want to join later. Examples include rules promoting transparency and disciplining the behavior of state‐​owned enterprises. The United States and United Kingdom should be able to agree to very high standards in these areas, standards that other parties might not reach. And then through the open accession clause, parties that wanted to reap the benefits of this agreement would have to accept these disciplines.</p> <p>Summing up, an eventual U.S.-UK FTA should remove barriers to trade in goods and services, open up all sectors of the both economies to investment, and, ultimately, go as far as possible to remove all administrative impediments to economic integration without encroaching on the sovereignty of governments to pass laws and regulate in the public interest in ways that do not discriminate against foreign goods, services, and companies.</p> <p>In practical terms, that means (subject to good faith, non‐​discriminatory public policy exceptions):</p> <ul> <li>Zero tariffs on all goods (agricultural commodities, primary industry resources, and manufacturing industry goods);</li> <li>Zero discriminatory non‐​tariff barriers, which means no discrimination by either party in the content or exercise of the laws, regulations, or practices affecting the provision of services of either party, including no restrictions on the entry of business people in the conduct of the provision of business services;</li> <li>Zero restrictions on competition for government procurement;</li> <li>Zero restrictions on foreign direct investment in the economy;</li> <li>Zero restrictions on cross‐​border data flow;</li> <li>Elimination to the fullest extent possible of impediments to expeditious customs clearance procedures for both imports and exports;</li> <li>Preclusion of antidumping or safeguard measures between the parties and special consideration for waivers when either party imposes trade restrictions for national security reasons.</li> </ul> Thu, 30 Jan 2020 14:37:58 -0500 Simon Lester, Daniel J. Ikenson https://www.cato.org/blog/core-principles-us-uk-free-trade-agreement Daniel J. Ikenson discusses the signing of a U.S.-China trade deal on WWL’s The Newell Normand Show https://www.cato.org/multimedia/media-highlights-radio/daniel-j-ikenson-discusses-signing-us-china-trade-deal-wwls Thu, 16 Jan 2020 13:09:45 -0500 Daniel J. Ikenson https://www.cato.org/multimedia/media-highlights-radio/daniel-j-ikenson-discusses-signing-us-china-trade-deal-wwls Daniel J. Ikenson discusses the signing of a U.S.-China trade deal on Sirius XM’s The Press Pool with Julie Mason https://www.cato.org/multimedia/media-highlights-radio/daniel-j-ikenson-discusses-signing-us-china-trade-deal-sirius-xms Wed, 15 Jan 2020 13:05:35 -0500 Daniel J. Ikenson https://www.cato.org/multimedia/media-highlights-radio/daniel-j-ikenson-discusses-signing-us-china-trade-deal-sirius-xms Daniel J. Ikenson discusses the signing of a U.S.-E.U. trade deal on NPR’s Marketplace https://www.cato.org/multimedia/media-highlights-radio/daniel-j-ikenson-discusses-signing-us-eu-trade-deal-nprs Wed, 15 Jan 2020 13:04:20 -0500 Daniel J. Ikenson https://www.cato.org/multimedia/media-highlights-radio/daniel-j-ikenson-discusses-signing-us-eu-trade-deal-nprs Daniel J. Ikenson discusses the signing of a U.S.-China trade deal on WJR’s The Guy Gordon Show https://www.cato.org/multimedia/media-highlights-radio/daniel-j-ikenson-discusses-signing-us-china-trade-deal-wjrs-guy Wed, 15 Jan 2020 13:02:38 -0500 Daniel J. Ikenson https://www.cato.org/multimedia/media-highlights-radio/daniel-j-ikenson-discusses-signing-us-china-trade-deal-wjrs-guy