Latest Cato Research on Manufacturing and Industrial Policy https://www.cato.org/ en The “China Shock” that Helped U.S. Higher Education https://www.cato.org/blog/china-shock-helped-us-higher-education Scott Lincicome <p>As discussed in my recent <a href="https://www.cato.org/publications/policy-analysis/testing-china-shock-was-normalizing-trade-china-mistake#us-chinese-trade-amplified-costs">Policy Analysis</a> on&nbsp;U.S.-China economic engagement, today’s critics of engagement often overstate the harms caused by Chinese goods imports in the years following China’s accession to the World Trade Organization (a.k.a. the “China Shock”) while ignoring trade liberalization’s many benefits during the same period. A&nbsp;new <a href="https://www.cgdev.org/sites/default/files/trade-liberalization-and-chinese-students-us-higher-education.pdf">Working Paper</a> from the Center for Global Development drills down on one such benefit: increased U.S. higher education exports to China (<em>i.e.</em>, Chinese students attending U.S. colleges and universities). The paper’s abstract summarizes the authors’ findings (emphasis mine):</p> <blockquote><p>We highlight a&nbsp;lesser known consequence of China’s growth and integration into the world economy in relation to the United States: the rise of services trade. <strong>We demonstrate that the US’s trade deficit in goods cycle back as a&nbsp;surplus in exports of education services.</strong> Focusing on China’s accession to the World Trade Organization, we show that Chinese cities more exposed to this trade liberalization episode sent more students to US universities. Results indicate that growth in housing income/​wealth was an important channel that allowed Chinese families in the top of the income distribution to afford US tuition, consistent with large growth in the share of Chinese students who financed their studies using personal funds. Other mechanisms, such as changing returns to education or information flows, appear to play less of a&nbsp;role. We also inform distributional consequences for the US. <strong>Trade liberalization relatively induced increases in the shares of Chinese students studying non‐​STEM fields and attending less‐​selective US universities. Student inflows were similar in destinations with low and high levels of human capital, indicating that educational exports dampened regional inequalities. </strong>Our estimates suggest that recent trade wars could cost US universities around $1.15 bn in tuition revenue.</p> </blockquote> <p>Put simply, many of the dollars that Americans sent to China for low‐​skill manufactures returned to the United States in the form of Chinese students’ “full‐​sticker price tuition payments” at colleges and universities around the country. This, in turn, benefited not only those institutions, but also their American students and surrounding communities. (Chinese students, of course, also <a href="https://www.wsj.com/articles/chinas-national-security-law-reaches-into-harvard-princeton-classrooms-11597829402?redirect=amp#click=https://t.co/t1Ks9szyay">benefited</a>, as did the <a href="https://twitter.com/scottlincicome/status/1301910385025519618">United States more broadly</a>.)</p> <p>Maybe someday the <a href="https://twitter.com/DonaldJTrumpJr/status/1304178198159273984">vocal critics</a> of past U.S. engagement efforts might acknowledge these (and the <a href="https://www.cgdev.org/sites/default/files/trade-liberalization-and-chinese-students-us-higher-education.pdf">many other</a>) past gains, as well as the future harms of potentially “decoupling” the two economies, but I’m not holding my breath.</p> Mon, 14 Sep 2020 15:53:46 -0400 Scott Lincicome https://www.cato.org/blog/china-shock-helped-us-higher-education What if Politicians Are the Biggest Medical Supply Chain Risk? https://www.cato.org/blog/whats-biggest-risk-facing-medical-supply-chains Scott Lincicome <p>The onset of COVID-19 has amplified public concerns about the supposed fragility of global supply chains, and fueled proposals on the left and the right to boost supply chain “resiliency” through government policies (subsidies, tariffs, “Buy American” mandates, etc.) that are intended to encourage the domestic production of essential goods, especially pharmaceuticals and medical devices. Indeed, such “re‐​shoring” plans are one of the few issues on which both <a href="https://www.mhlnews.com/global-supply-chain/article/21123639/coronavirus-shows-us-offshored-too-much-of-its-supply-chain-navarro">President Trump</a> and Democratic challenger <a href="https://joebiden.com/supplychains/">Joe Biden</a> agree. A lengthy new McKinsey <a href="https://www.mckinsey.com/business-functions/operations/our-insights/risk-resilience-and-rebalancing-in-global-value-chains#signin/download/%2F~%2Fmedia%2FMcKinsey%2FBusiness%20Functions%2FOperations%2FOur%20Insights%2FRisk%20resilience%20and%20rebalancing%20in%20global%20value%20chains%2FRisk-resilience-and-rebalancing-in-global-value-chains-full-report-vH.pdf/1">report</a> on global supply chains, however, shows just how daunting (and unrealistic) this re‐​shoring task would be, and that the biggest risk to medical supply chains is not free markets, a global pandemic, or a natural disaster, but <em>politicians themselves</em>.</p> <p>The McKinsey report surveys dozens of supply chain executives and 23 different industries to provide a treasure trove of interesting data and analysis on global supply chain risks. Among the industries examined are both pharmaceuticals and medical devices — two industries that supply chain nationalists in the United States have targeted for particular government attention due to COVID-19 and the alleged risks that these critical industries (and thus the American people) face from the next major shock. McKinsey finds, however, that both industries’ supply chains actually rank among the <em>least</em> exposed to an external shock, with medical devices ranking 23rd (dead last) and pharmaceuticals only a bit higher at 19th:</p> <p> </p><div data-embed-button="image" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="2213f800-51cc-4a1c-9943-5e0572a2ae58" data-langcode="en" class="embedded-entity"> <img srcset="/sites/cato.org/files/styles/pubs/public/2020-09/screencapture-www-mckinsey-com-business-functions-operations-our-insights-risk-resilience-and-rebalancing-in-global-value-chains-1599661133212.png?itok=-avc6sgu 1x, /sites/cato.org/files/styles/pubs_2x/public/2020-09/screencapture-www-mckinsey-com-business-functions-operations-our-insights-risk-resilience-and-rebalancing-in-global-value-chains-1599661133212.png?itok=Boco2J0e 1.5x" width="700" height="765" src="/sites/cato.org/files/styles/pubs/public/2020-09/screencapture-www-mckinsey-com-business-functions-operations-our-insights-risk-resilience-and-rebalancing-in-global-value-chains-1599661133212.png?itok=-avc6sgu" alt="McKinsey - low exposure for medical goods supply chains" typeof="Image" class="component-image" /></div> <p>The risks facing these two supply chains are even lower when looking at just pandemics:</p> <p> </p><div data-embed-button="image" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="c1a3d3f2-05a7-45ed-ae1c-d6ae3a7e5b2e" data-langcode="en" class="embedded-entity"> <img srcset="/sites/cato.org/files/styles/pubs/public/2020-09/screencapture-www-mckinsey-com-business-functions-operations-our-insights-risk-resilience-and-rebalancing-in-global-value-chains-1599661215248.png?itok=ER58xO0v 1x, /sites/cato.org/files/styles/pubs_2x/public/2020-09/screencapture-www-mckinsey-com-business-functions-operations-our-insights-risk-resilience-and-rebalancing-in-global-value-chains-1599661215248.png?itok=ZVpKiLOy 1.5x" width="700" height="700" src="/sites/cato.org/files/styles/pubs/public/2020-09/screencapture-www-mckinsey-com-business-functions-operations-our-insights-risk-resilience-and-rebalancing-in-global-value-chains-1599661215248.png?itok=ER58xO0v" alt="McKinsey - low pandemic exposure for medical goods supply chains" typeof="Image" class="component-image" /></div> <p>The McKinsey report also finds that these two industries also would suffer some of the smallest financial losses in the event of a major supply chain disruption. These data indicate that the current hysteria regarding “essential” medical supply chains is overblown, and that the risks facing these industries are far lower than what many U.S. politicians (and credulous media reports) would have you believe. </p> <p>However, the McKinsey report <em>does</em> show that these industries are vulnerable to two types of man‐​made shock — cyberattacks (due to each industry’s high level of technology) and <em>trade disputes</em>:</p> <p> </p><div data-embed-button="image" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="0f87dce5-c9bb-4467-a9c7-02dfaf0ab511" data-langcode="en" class="embedded-entity"> <img srcset="/sites/cato.org/files/styles/pubs/public/2020-09/screencapture-www-mckinsey-com-business-functions-operations-our-insights-risk-resilience-and-rebalancing-in-global-value-chains-1599661346017.png?itok=vXA8l0hc 1x, /sites/cato.org/files/styles/pubs_2x/public/2020-09/screencapture-www-mckinsey-com-business-functions-operations-our-insights-risk-resilience-and-rebalancing-in-global-value-chains-1599661346017.png?itok=ieqsiHrB 1.5x" width="700" height="709" src="/sites/cato.org/files/styles/pubs/public/2020-09/screencapture-www-mckinsey-com-business-functions-operations-our-insights-risk-resilience-and-rebalancing-in-global-value-chains-1599661346017.png?itok=vXA8l0hc" alt="McKinsey - high trade exposure for medical goods supply chains" typeof="Image" class="component-image" /></div> <p>The report also elaborates on the factors driving these “trade dispute” risks:</p> <blockquote><p>Protectionism has taken root in some of the Western democracies that were once champions of free trade. Borders have gone up again in Europe after decades of integration, and the full implications of that are not yet clear. There is a real chance that tariffs and nontariff barriers will continue to rise, reversing decades of trade liberalization.…</p> <p>In the future, the [pharmaceutical] industry may be subject to greater trade tensions and to regulatory and policy shifts if governments take action to establish domestic production of critical pharmaceutical supplies to safeguard public health.</p> </blockquote> <p>In short, the biggest risk facing these essential medical goods sectors isn’t another pandemic or a natural disaster but <em>political actions</em>, and many U.S. politicians (especially <a href="https://twitter.com/realdonaldtrump/status/1069970500535902208?lang=en">President Tariff Man</a>) are today proposing new subsidies, protectionism or other government policies to “fix” a problem of their own making. Indeed, McKinsey’s analysis shows that there are few actual “economic” factors that would push these industries’ to relocate their supply chains, and that in both cases the stronger forces would be “non‐​economic” (i.e., proposed and enacted government policies that deem these goods “essential” or target them “for national security or economic competitiveness considerations”).</p> <p>The risk, it seems, is us.</p> <p>That said, McKinsey does see discrete challenges facing the pharmaceutical sector due to the potential concentration of a few specific products in certain locations, particularly China or India. Even here, however, there appears to be little need for broad‐​based U.S. government action. First, the risk is extremely narrow due to industry’s overall diversification and currently high levels of U.S. production (even with respect to the “Active Pharmaceutical Ingredients” that have been a recent Trump Administration focus):</p> <p> </p><div data-embed-button="image" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="3ef2ed13-7075-408f-b7da-0a110eaaea46" data-langcode="en" class="embedded-entity"> <img srcset="/sites/cato.org/files/styles/pubs/public/2020-09/McKinsey%203.png?itok=7qJFblQe 1x, /sites/cato.org/files/styles/pubs_2x/public/2020-09/McKinsey%203.png?itok=P1mXT4p4 1.5x" width="536" height="712" src="/sites/cato.org/files/styles/pubs/public/2020-09/McKinsey%203.png?itok=7qJFblQe" alt="McKinsey - high diversification of pharma production" typeof="Image" class="component-image" /></div> <p>Indeed, as I’ll explain in a forthcoming paper, there is substantial economic research showing that this type of interdependence makes conflicts and disruptions <em>less</em> likely, not more.</p> <p>Second, McKinsey notes that surveyed executives are already taking action to fix certain supply chain vulnerabilities that COVID-19 has exposed — particularly “sole sourcing” of certain pharmaceuticals — by diversifying their raw materials sources and suppliers, as well as increasing inventories of critical inputs. (By contrast, fewer were considering re‐​shoring their supply chains.) As such, big new U.S. government efforts to re‐​shore medical supply chains could end up “fixing” a small problem that doesn’t even exist any more.</p> <p>In fact, these policies might even make things <em>worse</em> because mandated U.S. production of certain low‐​margin goods (e.g., “small‐​molecule” generic drugs and their inputs) could be economically infeasible:</p> <blockquote><p>Based on economics alone, there is little reason to believe that pharmaceutical production will shift unless it responds to the rise of new consumers in developing countries or to changes in tax policies or other incentives.… <strong>Production of small‐​molecule drugs would likely need to be digitized and automated to be viable in advanced economies; otherwise, the higher costs of doing business might lead to higher drug prices.</strong> Beyond requiring local production, governments can bolster national resilience through other strategies, such as the regionalization of supply chains, maintaining national stockpiles, or requiring pharmaceutical companies themselves to increase inventory.</p> </blockquote> <p>Without major advances in manufacturing, new U.S government‐​backed initiatives targeting generic drugs might therefore require higher drug prices or permanent government support (in the form of subsidies or tariffs). When combined with the aforementioned trade risks, it seems the best “medical supply chain plan” the U.S. government could implement would be simply to refrain from messy and self‐​defeating economic nationalism and pursue more modest and practical strategies like the stockpiling or inventory requirements that McKinsey mentions above. Such an approach would be preferable from both an economic <em>and</em> political perspective — a lesson you’d <em>hope</em> both Trump and Biden would have learned from the recent <a href="https://www.cato.org/blog/governments-plan-turn-kodak-pharmaceutical-company-sure-seems-underdeveloped">Kodak mess</a> or other recent, COVID‐​related <a href="https://www.ntu.org/foundation/detail/defense-production-act-failures-illustrate-the-folly-of-industrial-policy">industrial policy failures</a>.</p> <p>Alas, it appears that campaign season is no time for such lessons.</p> Wed, 09 Sep 2020 15:10:53 -0400 Scott Lincicome https://www.cato.org/blog/whats-biggest-risk-facing-medical-supply-chains Conservative Industrial Policy and the “China Threat” https://www.cato.org/blog/conservative-industrial-policy-china-threat Scott Lincicome <p><em>The Washington Post</em> <a href="https://www.washingtonpost.com/business/2020/08/26/republicans-favor-industrial-policy/">reports</a> that many conservatives are ditching their “free market orthodoxy” due in large part to Chinese industrial subsidies that allegedly threaten critical parts of the American industrial base:</p> <blockquote><p>Since the Reagan years, Republicans have taken the opposite view — that government should stay small and out of the way and not engage in what has been derisively referred to as picking winners and losers. But China’s rise is forcing them to rethink that.</p> <p>China’s central and regional governments are investing heavily in high‐​tech fields such as aircraft and electric‐​car manufacturing, semiconductors and robotics, by some estimates providing hundreds of billions of dollars to domestic companies through subsidies and other support.</p> </blockquote> <p>As evidence of this shift, the <em>Post</em> cites to recent federal legislation, passed overwhelmingly by both chambers of Congress and praised by Republican industrial policy advocates, that provides billions of dollars in new subsidies to U.S. semiconductor manufacturers. As I&nbsp;noted a&nbsp;few weeks ago in a&nbsp;lengthy and skeptical <a href="https://www.cato.org/blog/does-us-semiconductor-industry-need-urgent-federal-support-stop-china">blog post</a> on the bill, the primary basis for these subsidies — according to its sponsors and other supporters (and confirmed by the <em>Post</em>) — was the aforementioned China threat, in this case the billions of dollars that the Chinese government is spending to develop a&nbsp;globally‐​competitive semiconductor sector. To its credit, the <em>Post</em> briefly notes my skepticism before quoting many others at length who are supportive of the semiconductor plan and broader U.S. industrial policy efforts (one of whom rejects “naive” libertarian views about government involvement in the economy).</p> <p>However, the <em>Post</em> unfortunately omits much of my argument&nbsp;against the new U.S. subsidies, most notably the numerous reports (including a&nbsp;lengthy U.S. International Trade Commission analysis in 2019) that China’s semiconductor sector, despite all of those subsidies, was hardly a&nbsp;threat to the thriving — and in many respects globally dominant — American semiconductor industry. Today from the <em>South China Morning Post </em>comes <a href="https://www.scmp.com/economy/china-economy/article/3099100/chinas-semiconductor-drive-stalls-wuhan-exposing-gap-hi-tech">further evidence</a> of that fact:</p> <blockquote><p>At an idle construction site in western Wuhan, China’s steep climb to semiconductor independence is clear for all to see.</p> <p>The partially‐​built factory, owned by Wuhan Hongxin Semiconductor Manufacturing Company (HSMC), was meant to be a&nbsp;key part of a&nbsp;US$20 billion investment that turned the province into a&nbsp;chip manufacturing hub.</p> <p>But two years after it was started, construction has ground to a&nbsp;halt, with little evidence of progress beyond a&nbsp;few cranes, workers’ dormitories and steel frames jutting into the air.</p> <p>The project, which the local Dongxihu district government said in July had stalled due to underfunding, is the latest example of a&nbsp;Chinese chip factory hitting the rocks because of poor planning or funding shortfalls.</p> <p>Earlier this year, a&nbsp;US$100 million manufacturing plant set up by US chip giant GlobalFoundries and the Chengdu city government ceased operations after remaining idle for almost two years. In the country’s east, a&nbsp;US$3 billion government‐​backed chip plant owned by Tacoma Nanjing Semiconductor Technology went bankrupt in July after failing to attract investors.</p> </blockquote> <p>Be sure to read the whole thing, which details the HSMC project’s many (sometimes humorous) problems and again indicates&nbsp;that China’s grand semiconductor plans and massive subsidies are not nearly as threatening as U.S. politicians and industry lobbyists make them out to be.</p> <p>The semiconductor episode also permits two broader lessons. First, it shows that the mere presence of foreign government subsidies is rarely, if ever, a&nbsp;good reason for American ones — especially when they’re going to a&nbsp;profitable U.S. industry with <a href="https://twitter.com/scottlincicome/status/1286701440371765253">billions in domestic capital expenditures (and billions more cash on hand)</a>. Second, it provides another good example of why <em>some</em> libertarians remain skeptical of U.S. industrial policy plans. <a href="https://www.cato.org/publications/policy-analysis/doomed-repeat-it-long-history-americas-protectionist-failures">All too often</a> — even (or <a href="https://www.cato.org/publications/policy-analysis/jones-act-burden-america-can-no-longer-bear#whither-fleet"><em>especially</em></a>) in the case of “<a href="https://t.co/Vwx5sk0BW9?amp=1">national security</a>” and China (or Japan before it) — ideas that sound good and necessary on paper are revealed upon closer inspection to be corporatist giveaways that counter imaginary threats and end up doing more harm than good. Maybe the U.S. government can overcome these obstacles in the future, but both the semiconductor subsidies and numerous other examples indicate that it’s not the skeptical libertarians who are being naive here.</p> Fri, 28 Aug 2020 17:23:07 -0400 Scott Lincicome https://www.cato.org/blog/conservative-industrial-policy-china-threat With Hurricane Laura Hammering the Gulf, Why Are U.S. Energy Markets So Calm? https://www.cato.org/blog/hurricane-laura-hammering-gulf-why-are-us-energy-markets-so-calm Scott Lincicome <p>An increasingly common refrain in Washington these days is that America's liberalized financial markets and trade policies have made the U.S. economy <a href="https://www.nytimes.com/2020/04/20/opinion/marco-rubio-coronavirus-economy.html">less resilient</a> to pandemics, wars, or other major shocks, and that more regulation is needed to ensure that Americans have access to essential goods at these perilous times. Hurricane Laura's muted impact on U.S. energy markets, however, provides a clear lesson that "openness" and "resiliency" are not mutually exclusive, and in fact that freer markets can actually reduce U.S. vulnerability to economic shocks.</p> <p>As Laura makes landfall, the <em>Wall Street Journal </em><a href="https://www.wsj.com/articles/americas-fuel-making-corridor-prepares-for-hurricane-laura-11598446581?mod=djemMoneyBeat_us">warns</a> that it could endanger a substantial portion of U.S. fuel and petrochemical production capacity:</p> <blockquote><p>Refineries, petrochemical facilities and ports along the Gulf Coast were closing as Hurricane Laura barreled toward the Texas-Louisiana border....</p> <p>Hurricane Laura’s winds and storm surge threatened much of America’s fuel-making and chemicals infrastructure. More than 20% of U.S. refining capacity, capable of processing roughly four million barrels of oil a day, is located within the storm’s potential path, analytics firm IHS<a href="https://www.wsj.com/market-data/quotes/INFO"> </a>Markit said. As of Wednesday afternoon, companies had closed or said they planned to shut nearly three million barrels a day worth of capacity, the firm said....</p> <p>Almost half of the nation’s capacity to produce ethylene, a building block in plastics manufacturing, could shut if the Gulf’s petrochemical hub were hit in the right spot, market intelligence firm S&amp;P Global Platts said. As of Tuesday, chemical makers in southeast Texas and Louisiana—including Motiva, BASF SE, Ineos Ltd. and Total—had already cut 20%, according to IHS Markit.</p> <p>Chemical maker Dow Inc. said Wednesday it was shutting several facilities and reducing staff to essential personnel in Beaumont, Deer Park and other Texas cities.</p> </blockquote> <p>Despite all of these closures and the risk of significant damage to U.S. petroleum products manufacturing capacity and infrastructure, however, domestic prices for various petroleum products have barely budged. According to the aforementioned <em>WSJ </em>story and other recent articles, three factors contribute to this surprising resiliency:</p> <p>First, the United States has <a href="https://www.wsj.com/articles/americas-fuel-making-corridor-prepares-for-hurricane-laura-11598446581?mod=djemMoneyBeat_us">substantial inventories</a> of gasoline and petrochemicals, in part due to decreased demand from COVID-19, that can meet the immediate needs of U.S. manufacturers and consumers in other parts of the country. Second, a separate <em>WSJ </em>article <a href="https://www.wsj.com/articles/oil-markets-wild-swings-subdued-by-options-trading-11598519664?mod=djemMoneyBeat_us">explains</a> how actions by banks, hedge funds, and other investors have kept oil prices (which drive fuel and chemicals prices) stable, despite unknown risks from COVID-19, Hurricane Laura, or other shocks:</p> <blockquote><p>After wild price swings this spring, hedge funds and other investors wagered that volatility would subside by selling options tied to West Texas Intermediate and Brent futures....</p> <p>One way to do this is by selling so-called strangles. The trade involves selling a put option: this gives its owner the right to sell WTI futures at a set price by a certain date. Meanwhile, the investor sells a call option, which gives the owner the right to buy at a different price.</p> <p>Funds that sell strangles are wagering that WTI futures will trade between the strike prices for the put and call options. The funds collect a premium, compensating them for the risk that prices break out of that range and the buyer exercises their right to buy or sell.</p> <p>Strategies such as this are known as selling volatility. They have become commonplace in financial markets during a decade in which ultralow interest rates have prodded investors into creative methods of juicing returns.</p> <p>In recent months, those strategies have helped to squash what is known as implied volatility in oil markets.</p> </blockquote> <p>Finally, industry publication Argus <a href="https://www.argusmedia.com/en/news/2135876-transatlantic-mr-rates-rally-on-us-gasoline-woes?backToResults=true">provides</a> the last piece of the puzzle -- imports:</p> <blockquote><p>The US is structurally short of gasoline and imports a large amount from Europe. The recent upgrading of Laura to a hurricane and its projected path has forced several refiners in Texas and Louisiana to idle capacity or reduce runs, putting pressure on domestic gasoline production....</p> <p>Charterers may have slowed cargo bookings to wait and see the extent of the hurricane's impact. But the disruption to refinery operations so far should still have a substantial impact on US demand for gasoline imports.</p> </blockquote> <p>Argus was speaking only to gasoline, but U.S. Energy Information Administration <a href="https://www.eia.gov/dnav/pet/pet_move_impcus_a2_nus_EPP0_im0_mbbl_a.htm">data</a> show that the United States - despite being a global energy powerhouse (thanks, fracking!) - still imports more than 800 <em>billion</em> barrels of non-crude petroleum products each year, from a wide variety of sources (both friendly and less-so). These alternative supplies should further mute any impact that Laura might have on U.S. energy markets and the economy more broadly.</p> <p> </p><div data-embed-button="image" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="2ad514d6-6997-4dfe-81aa-e01baee41357" data-langcode="en" class="embedded-entity"> <img srcset="/sites/cato.org/files/styles/pubs/public/2020-08/chart.png?itok=GEIAnYm2 1x, /sites/cato.org/files/styles/pubs_2x/public/2020-08/chart.png?itok=ujvwR4tN 1.5x" width="700" height="525" src="/sites/cato.org/files/styles/pubs/public/2020-08/chart.png?itok=GEIAnYm2" alt="The US still imports almost 900 billion barrels of (non-crude) petroleum products each year" typeof="Image" class="component-image" /></div> <p>Immediate benefits aside, this episode also provides important lessons for the ongoing debate in Washington about "essential" goods and U.S. "resilience" to economic shocks. First, it demonstrates that boosting domestic production of essential goods like energy or pharmaceuticals -- through trade restrictions or other types of government regulation -- will alone <em>not</em> guarantee a more "resilient" or "secure" U.S. economy, because, while less openness might make an economy less vulnerable to external supply or demand shocks, it also helps increase a nation’s vulnerability to <em>domestic</em> shocks. As Columbia's Center on Global Energy Policy <a href="https://energypolicy.columbia.edu/sites/default/files/From%20Katrina%20to%20Harvey_Storm%20Resilience%20in%20the%20Age%20of%20Shale.pdf">noted</a> after Hurricane Harvey in 2017, "[t]he flipside of US energy ‘dominance,’ and more specifically of the phenomenal US ramp-up in oil and gas production, refining activity and petrochemical output unleashed by the shale miracle in the last few years, may thus paradoxically be, in some ways, heightened energy vulnerability."</p> <p>Second, we see that free market policies -- including those most commonly targeted for scorn by <em>nouveau</em>-populists -- can actually <em>bolster</em> an economy's ability to withstand or adjust to shocks, regardless of their origin. In this case, having ample (private) storage facilities, diverse sources of supply, and robust, active financial markets (even dastardly hedge funds!) has reduced market risk, calmed prices and thus far prevented Laura's damage to the U.S. energy sector from rippling through the rest of the economy. Such measures could (and often do) apply to other essential goods and, if needed, be bolstered by government stockpiles. Combined, they could alleviate the need for onerous government restrictions on private market activities or generous taxpayer subsidies to favored industries, all in the name of "resiliency."</p> <p>Hopefully, the damage that Hurricane Laura inflicts on the Gulf Coast region will be far less severe than <a href="https://www.eia.gov/todayinenergy/detail.php?id=32852">other recent hurricanes</a>. To the extent that Laura <em>does</em> harm American refineries and pipelines, however, freer markets in the United States, along with substantial stockpiles of essential energy products, should continue to cushion the blow. Let's also hope that American policymakers -- especially those worried about free markets and U.S. "resiliency" -- are paying attention.</p> <p></p> Thu, 27 Aug 2020 13:53:33 -0400 Scott Lincicome https://www.cato.org/blog/hurricane-laura-hammering-gulf-why-are-us-energy-markets-so-calm Trump’s Aluminum Tariffs: Doing What Tariffs Do https://www.cato.org/blog/trumps-aluminum-tariffs-doing-what-tariffs-do Scott Lincicome <p>From the <em>Wall Street Journal</em> comes a&nbsp;<a href="https://www.wsj.com/articles/at-least-one-company-is-cheering-renewed-aluminum-tariff-on-canada-11598270230">distressing&nbsp;tale</a> of U.S. aluminum tariffs’ immense economic costs:</p> <blockquote><p>The <a href="https://www.wsj.com/articles/aluminum-mills-can-makers-at-odds-over-tariff-exemptions-11595509201">tariffs have been unpopular with U.S. manufacturers</a> that consider the duties a&nbsp;windfall for the U.S. aluminum industry. The tariffs drove up costs for beverage cans, car parts, window frames and other products.</p> </blockquote> <p>And failed policy aims:</p> <blockquote><p>Reinstating the tariff on Canada attracted opposition from more than a&nbsp;dozen other aluminum companies including <a href="https://www.wsj.com/market-data/quotes/AA">Alcoa</a> Corp., Novelis Inc. and <a href="https://www.wsj.com/market-data/quotes/ARNC">Arconic</a> Corp. They urged the Trump administration to instead pressure China to stop what they say are unfair government subsidies that encourage <a href="https://www.wsj.com/articles/coronavirus-epidemic-exacerbates-metals-glut-11583409727">excess aluminum production</a> and drag down prices.</p> <p>The tariff on Canada, those companies say, also won’t address higher electricity costs that put the U.S. at a&nbsp;disadvantage against other aluminum‐​producing countries.…</p> <p>The U.S. aluminum industry has been divided over the tariff’s effectiveness at reviving domestic production since the start in 2018. While some idle production capacity at existing smelters reopened in the aftermath as prices rose, the increase in domestic prices was short‐​lived as global aluminum prices fell.</p> <p>No new plants have been constructed in the U.S. in the past two years, and another smelter has closed.…</p> <p>Century has reported losses for nine straight quarters and hasn’t posted an annual profit since 2017, a&nbsp;year before the tariff. The company has been buffeted by a&nbsp;combination of volatile prices for alumina feedstock that squeezed its margins and costs for restarting and expanding lines at its Kentucky smelters.</p> </blockquote> <p>And political dysfunction along the way:</p> <blockquote><p>The Trump administration’s decision to reinstate tariffs on Canadian aluminum is a&nbsp;<a href="https://www.wsj.com/articles/how-century-aluminum-won-a-lonely-fight-for-tariffs-1521720000">victory for one small U.S. company</a> that out‐​lobbied competitors wary of imposing new barriers on a&nbsp;key trading partner.…</p> <p>Chicago‐​based <a href="https://www.wsj.com/market-data/quotes/CENX">Century Aluminum</a> Co., <a href="https://www.wsj.com/market-data/quotes/CENX?mod=chiclets">CENX +0.70% </a>which had pushed hard for the original 10% tariff, lobbied for the restart of duties on Canada as a&nbsp;way to boost slumping U.S. aluminum prices.…</p> <p>Century set up its own trade association in 2015 to push for the 10% tariff enacted in 2018. That group evolved into the American Primary Aluminum Association with startup Magnitude 7&nbsp;Metals as an alternative to the Aluminum Association’s positions on tariffs. [Century CEO] Mr. Bless has become a&nbsp;key ally in the aluminum industry for the administration’s trade policies.</p> </blockquote> <p>Alas, if only someone had <a href="https://www.cato.org/multimedia/cato-daily-podcast/tariffs-not-only-impose-immense-economic-costs-also-fail-achieve-their">warned us this could happen</a>.</p> Tue, 25 Aug 2020 11:59:57 -0400 Scott Lincicome https://www.cato.org/blog/trumps-aluminum-tariffs-doing-what-tariffs-do “Seemingly Out of Nowhere” https://www.cato.org/blog/seemingly-out-nowhere Scott Lincicome <p>A few short&nbsp;<s>interminable</s> months ago, COVID-19 had made it almost impossible to find hand sanitizer, disinfecting wipes, and other cleaning products at the local grocery store or online. The shortages not only sent Americans scrambling for supplies (I actually <a href="https://twitter.com/scottlincicome/status/1238935268020944897">mailed my mom</a> some Clorox Wipes), but also elicited calls from both the right and the left for major changes to U.S. trade and economic policy. Florida Senator Marco Rubio, for example, in April <a href="https://www.nytimes.com/2020/04/20/opinion/marco-rubio-coronavirus-economy.html">wrote</a> in the <em>New York Times</em> that our empty shelves proved that America, suffering a “severely diminished” manufacturing base due to U.S. politicians’ decades‐​long “choice to facilitate offshoring,” needed a “sensible industrial policy” that included “the re‐​shoring of supply chains integral national interest.” Sure, Rubio argued, “some heroic businesses have shifted production to help fill this gap and produce masks, hand sanitizer and other goods,” but “the nation is still behind” because “we by and large lack the ability to make things.” Scott Paul of the union‐​backed Alliance for American Manufacturing <a href="https://www.nytimes.com/2020/04/14/opinion/coronavirus-industry-manufacturing.html">made similar claims</a>&nbsp;on those very same pages a&nbsp;few days earlier. Others <a href="https://www.washingtonpost.com/outlook/2020/04/04/uncle-sam-needs-start-giving-us-all-free-hand-sanitizer/">implored</a> the president to invoke the wartime Defense Production Act to “contract with companies throughout the country to widely produce and distribute free soap and hand sanitizer.” Others still said that the sanitizer shortages of March and April called both global supply chains and&nbsp;<a href="https://messaging-custom-newsletters.nytimes.com/template/oakv2?uri=nyt://newsletter/f7f57bd8-b9ac-4323-acf4-c8cd9c0f1fe6&amp;productCode=INT&amp;te=1&amp;nl=the-interpreter&amp;emc=edit_int_20200314">capitalism itself</a>&nbsp;into question. “Medical masks are already in short supply, and everyday items such as hand sanitizer have become difficult to find,” <a href="https://www.marketwatch.com/story/this-is-how-america-will-beat-covid-19-2020-03-05">said </a>progressive economist James K. Galbraith in March, because “[T]he heavily globalized, consumer‐ and finance‐​driven U.S. economy was not designed for a&nbsp;pandemic.”</p> <p><a href="https://www.cnn.com/2020/08/05/business/hand-sanitizer-purell-clorox/index.html">Fast forward to today</a>: “Walk into any drug store, grocery chain or market today, and you’ll be hit with a&nbsp;wall of <a href="https://www.cnn.com/interactive/2020/07/us/cnn-fda-hand-sanitizer-quiz-july-15-2020-trnd/" target="_blank">hand sanitizers</a> and cleaning products that help fight against the coronavirus.” Wow!</p> <p>So how did this amazing change occur? Did President Trump use the Defense Production Act to force U.S. companies to make these essential goods? Or did Congress, at Senator Rubio’s prodding, enact a “sensible industrial policy” that restored our&nbsp;manufacturing base, re‐​shored our supply chains and thus ended our “dangerous dependency” on foreign countries? Did we finally throw out global capitalism and “design” a&nbsp;better economic system?</p> <p>Actually, it was just the market at work:</p> <blockquote><p>Lesser‐​known brands have popped up seemingly out of nowhere.</p> <p>Although Brands International has always been in the business of making sanitizer, albeit on a&nbsp;smaller scale, the pandemic led it to ramp up production and focus solely on hand sanitizer, according to Mark Rubinoff, the Canadian company’s founder and CEO.</p> <p>Brands International’s 10 production lines were converted to only making Germs Be Gone hand sanitizer. The company sold about 35 million bottles of sanitizer this year, up from 1&nbsp;million in all of 2019.</p> <p>SmartCare, a&nbsp;value‐​products brand of California‐​based Ashtel Studios, has been producing sanitizer since 2014. President Anish Patel said he had planned to build the brand this year and talk to retailers to get it into stores — and then Covid‐​19 came to the US and demand was “explosive.”</p> <p>“What we had planned was going to happen in three‐​to‐​four years happened in a&nbsp;couple months,” he said.</p> <p>The company already sold soaps, bath tissues and kitchen towels at Walgreens, CVS, Menards and Meijer. Patel said those relationships helped SmartCare set up an ever‐​expanding delivery schedule.</p> <p>Israeli company Albaad, which makes wet wipes and feminine hygiene products, was started nearly 35&nbsp;years ago and expanded to the US in 2004 with a&nbsp;production facility in North Carolina. Albaad CEO Dan Mesika said that demand is so high for wipes that the company has been getting requests via its website from individuals desperate to find wipes, asking them to send to their homes.</p> <p>To help meet demand, the company developed Cleanitize disinfecting wipes, which Albaad expects to be released in September or October.</p> <p>Walgreens and CVS started looking in some atypical places for hand sanitizer when demand outstripped supply. They placed orders to M. Skin Care and Miss Spa for hand sanitizer in the late spring. They had made hand sanitizer for the drug store chains off and on over the past decade, but the brands weren’t producing it at all this time last year, according to President Lisa Ashcraft. The company’s sanitizer products hit stores nationwide by June.</p> </blockquote> <p>These are not cherry‐​picked examples, either. While most name brands are still sold out due to persistently high demand, a&nbsp;quick Amazon search shows dozens of other brands of <a href="https://www.amazon.com/s?k=hand+sanitizer&amp;crid=3PVNN334QKBXL&amp;sprefix=hand+sanit%2Caps%2C156&amp;ref=nb_sb_ss_midas-iss_1_10">hand sanitizer</a>, <a href="https://www.amazon.com/s?k=cleaning+wipes&amp;crid=1NK3HIPC407UY&amp;sprefix=cleaning+%2Caps%2C147&amp;ref=nb_sb_ss_i_1_9">cleaning wipes</a>, and other <a href="https://www.amazon.com/s?k=cleaning+supplies+disinfectant&amp;crid=1KWT6H4YVKWKU&amp;sprefix=cleaning+su%2Caps%2C156&amp;ref=nb_sb_ss_i_5_11">cleaning products</a> that were in critical short supply just a&nbsp;couple months ago. You can also get face masks (even <a href="https://mqdirect.com/products/n95-fda-ce-niosh-approved">N95s</a>) or other important COVID-19 consumer goods if you still need them. Certainly, things aren’t perfect out there (the CNN article above notes, for example, that “some companies have resorted to putting sanitizer in unusual bottles” due to materials shortages), but these new producers and their products show how the market — not any government plan or policy — can quickly adjust in response to unexpected situations and thereby meet our essential material needs. It’s also a&nbsp;real testament to the incredible hard work and ingenuity of U.S. retailers and global manufacturers, driven by the aforementioned market signals.</p> <p>“Seemingly out of nowhere,” indeed.</p> <p>Of course, there are things that governments can do to facilitate these necessary market adjustments, but the <em>most important</em> ones mainly involve just getting out of the market’s way. The CNN article notes, for example, that the Food and Drug Administration “temporarily ease[d] restrictions on manufacturers looking to make sanitizer, outlining that ‘the agency does not intend to take action against manufacturing firms that prepare alcohol‐​based hand sanitizers for consumer use.’&nbsp;” In this regard, we seem to be following <a href="https://twitter.com/scottlincicome/status/1247681857812078594" target="_blank">Korea’s lead</a>, which years ago implemented detailed “pandemic preparedness” regulations that allow for the swift approval and production of testing and other essential medical equipment. Other actions, such as refraining from onerous <a href="https://www.cato.org/blog/coronavirus-anti-price-gouging-madness">anti‐​gouging</a> laws that prevent price signals that would encourage new production and discourage hoarding, could also help speed adjustment. In general, however, all those tales of the death of American manufacturing and the failures of free markets and global supply chains thus far seem <a href="https://www.cato.org/blog/governments-plan-turn-kodak-pharmaceutical-company-sure-seems-underdeveloped">greatly</a> <a href="https://www.cato.org/publications/commentary/supply-chain-repatriation-its-buyer-nation-beware">exaggerated</a>.</p> <p>Maybe we don’t need to abandon capitalism after all.</p> Fri, 07 Aug 2020 09:42:29 -0400 Scott Lincicome https://www.cato.org/blog/seemingly-out-nowhere Will President Trump Do to Essential Medicines What He Did to Washing Machines? (Let’s Hope Not.) https://www.cato.org/blog/will-president-trump-do-essential-medicines-what-he-did-washing-machines-lets-hope-not Scott Lincicome <p>Speaking today at a Whirlpool factory in Clyde, Ohio, President Trump will <a href="https://www.thenews-messenger.com/story/news/local/2020/08/03/president-donald-trump-visit-clydes-whirlpool-plant-thursday/5574368002/">credit</a> his January 2018 decision to <a href="https://ustr.gov/about-us/policy-offices/press-office/press-releases/2018/january/president-trump-approves-relief-us">impose 50% “safeguard” tariffs</a> (at Whirlpool’s request) on imported washing machines with creating 200 Ohioan jobs and spurring new domestic investment in appliance manufacturing across the country — a testament to the President’s economic nationalist policy and vision. Continuing that vision, Trump will also <a href="https://www.usatoday.com/story/news/politics/2020/08/06/trump-ohio-president-order-essential-drugs-made-usa/3297875001/">announce</a> he’s signing an Executive Order that “instructs the government to develop a list of ‘essential’ medicines and then buy them and other medical supplies from U.S. manufacturers instead of from companies around the world.”</p> <p>If news reports are correct, however, President Trump will omit several crucial details about Whirlpool and his washing machine tariffs – details that caution against following a similar economic nationalist path for essential drugs and other medical goods.</p> <ul><li>First, those tariffs <a href="https://www.wsj.com/articles/consumers-bore-cost-for-u-s-tariffs-on-washing-machines-paper-finds-11555936276#:~:text=President%20Trump&#039;s%20tariffs%20on%20imported,of%20washing%20machines%20by%2012%25.">dramatically raised prices</a> for both washers <em>and</em> dryers, which economists last year <a href="https://bfi.uchicago.edu/wp-content/uploads/BFI_WP_201961-1.pdf">calculated</a> cost American consumers an additional $1.5 billion per year. Had U.S. retailers been unable spread out the washers’ cost increase to dryers, that already‐​high 12% price increase would have almost <em>doubled</em>. Given these higher costs, and even factoring in the additional tariff revenue collected by the U.S. government, the researchers found that – even under the rosiest job creation scenario — each new American appliance manufacturing job cost U.S. consumers $817,000 <em>per year</em>. Yikes.</li> </ul><p> </p><div data-embed-button="image" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="e9d67e08-e618-44f4-b8ba-547853c571ba" class="align-center embedded-entity" data-langcode="en"> <img srcset="/sites/cato.org/files/styles/pubs/public/2020-08/screencapture-www-wsj-com-articles-consumers-bore-cost-for-u-s-tariffs-on-washing-machines-paper-finds-11555936276-1596719099167.png?itok=vb-vk8F7 1x, /sites/cato.org/files/styles/pubs_2x/public/2020-08/screencapture-www-wsj-com-articles-consumers-bore-cost-for-u-s-tariffs-on-washing-machines-paper-finds-11555936276-1596719099167.png?itok=i5sNC7c4 1.5x" width="337" height="430" src="/sites/cato.org/files/styles/pubs/public/2020-08/screencapture-www-wsj-com-articles-consumers-bore-cost-for-u-s-tariffs-on-washing-machines-paper-finds-11555936276-1596719099167.png?itok=vb-vk8F7" alt="Washer prices increased after tariffs" typeof="Image" class="component-image" /></div> <ul><li>Second, according to an <a href="https://www.usitc.gov/publications/701_731/pub4941.pdf">August 2019 examination</a> of the tariffs’ effects by the United States’ International Trade Commission (ITC), which recommended the tariffs and is required by law to review them periodically, the tariffs have <em>not</em> produced a thriving domestic industry. Although capacity and employment reportedly increased, for example, actual production declined, “resulting in declining capacity utilization, lower productivity levels, and higher unit labor costs.” (The ITC also noted the aforementioned price increases.) Indeed, Whirlpool itself told the Commission that the safeguard “has fallen short of delivering the intended remedial benefits to the continuously operating U.S. producers” due to “unanticipated” responses to the tariffs by foreign exporters (absorbing some of the tariff cost), U.S. importers (stockpiling), and consumers (buying fewer appliances). [Ed. note: all of these actions are common and expected market responses to tariffs.]</li> </ul><ul><li>Finally, it’s doubtful that President Trump will mention Whirlpool’s own <a href="https://www.heritage.org/trade/commentary/whirlpool-advocated-tariffs-washers-now-its-going-through-the-wringers">financial difficulties</a> – caused in large part by <em>other Trump tariffs</em>. In particular, Trump’s “national security” tariffs on steel and aluminum cost the company $300 million per year, collapsing its profits and stock prices (which peaked in January 2018 after the tariffs were announced but <a href="https://www.heritage.org/trade/commentary/whirlpool-advocated-tariffs-washers-now-its-going-through-the-wringers">never recovered</a>). Whirlpool was also affected by Trump’s “Section 301” tariffs on Chinese imports and unsuccessfully sought <a href="https://comments.ustr.gov/s/docket?docketNumber=USTR-2019-0005">exclusions</a> therefrom. (Economic nationalism for thee, but not for me.) The ITC’s 2019 report notes that other U.S. appliance manufacturers faced similar cost pressures due to the steel, aluminum and China tariffs (which raised all prices, not just those for Chinese imports).</li> </ul><p>None of this inspires confidence about the President’s new economic nationalist plans to revive domestic production of pharmaceuticals and other “essential” medical goods. Granted, at this stage President Trump’s new executive order sounds more like a campaign message than a serious policy change, and it involves Buy American rules, not tariffs. However, the administration has already announced subsidies for new domestic production of both pharmaceutical inputs and finished generic drugs – despite <a href="https://www.cato.org/blog/governments-plan-turn-kodak-pharmaceutical-company-sure-seems-underdeveloped">serious questions</a> about the need and implementation of such plans – and economic nationalist policies have a <a href="https://www.cato.org/publications/policy-analysis/doomed-repeat-it-long-history-americas-protectionist-failures">long history of snowballing</a>. (In fact, Trump’s washing machine tariffs were actually the <em>third time</em> that Whirlpool had petitioned and received government protection from imports.) It’s quite logical to assume that subsidized national champions making low‐​margin bulk commodities like generic drugs and their ingredients will seek more government help when faced with intense, lower‐​cost import competition, and that the government will at that point have a strong incentive to provide it.</p> <p>If Trump’s washing machine tariffs are any indication, however, we should all hope that they pass on the chance – especially for something far more essential than a washer‐​dryer.</p> Thu, 06 Aug 2020 13:40:57 -0400 Scott Lincicome https://www.cato.org/blog/will-president-trump-do-essential-medicines-what-he-did-washing-machines-lets-hope-not If Only Senator Hawley Could Legislate Away Unintended Consequences https://www.cato.org/blog/only-senator-hawley-could-legislate-away-unintended-consequences Scott Lincicome <p>Seeking to prove the <a href="https://en.wikipedia.org/wiki/The_road_to_hell_is_paved_with_good_intentions">old adage</a> about roads and good intentions, Missouri Senator Josh Hawley has recently introduced legislation, <a href="https://www.hawley.senate.gov/sen-hawley-introduce-bill-hold-corporate-america-accountable-having-slave-labor-supply-chains">The Slave‐​Free Business Certification Act of 2020</a>, that would impose steep fines and other penalties on large companies doing business in the United States, unless they regularly audited their global supply chains and certified that they <em>and</em> their suppliers did not utilize “forced labor.” The bill’s presumed intent is to discourage slave labor around the world – a&nbsp;goal that’s both laudable and, given troubling reports out of China and elsewhere, still quite important. Unfortunately, good intentions don’t <s>usually</s>necessarily make good policy, and in this case recent history shows how Hawley’s bill would likely make things <em>worse</em>, not better, for the world’s most vulnerable people.</p> <p>The Mercatus Center’s Tyler Cowen helpfully summarized the bill’s theoretical flaws in a&nbsp;recent <em><a href="https://www.bloomberg.com/opinion/articles/2020-07-31/fight-slavery-with-boycotts-not-a-new-law-about-supply-chains">Bloomberg</a></em><a href="https://www.bloomberg.com/opinion/articles/2020-07-31/fight-slavery-with-boycotts-not-a-new-law-about-supply-chains"><span> column</span></a>, noting that the onerous supply chain regulations would most likely cause companies – worried about high compliance costs, bad publicity, and scary penalties – simply to move their supply chains “from the poorest and neediest” countries to wealthier places clearly free of “forced labor” (which, as Cowen helpfully <a href="https://marginalrevolution.com/marginalrevolution/2020/08/how-not-to-fight-modern-day-slavery.html">adds</a>, the Hawley bill defines more broadly than slavery). Sadly, forced labor remains somewhat common around the world, but an exodus of multinational capital and business practices from these places would likely lead to worse, not better, labor conditions. And, like most forms of <a href="https://www.cato.org/publications/policy-analysis/regulatory-protectionism-hidden-threat-free-trade">regulatory protectionism</a>, the law also would likely boost largest corporations (i.e., the ones with the in‐​house lobbying, legal and accounting resources to shoulder new compliance burdens) and increase prices for U.S. consumers. This is <a href="https://www.cato.org/multimedia/cato-daily-podcast/tariffs-not-only-impose-immense-economic-costs-also-fail-achieve-their">Trade Econ 101</a>.</p> <p>We needn’t, however, rely on wonky economic theory to see the likely consequences of Hawley’s legislation. In fact, recent experience with a&nbsp;similar policy – the “conflict minerals” reporting requirements in <a href="https://www.sec.gov/spotlight/dodd-frank-section.shtml#1502">Section 1502</a> of the 2010 Dodd‐​Frank Act – shows that, contrary to some <a href="https://twitter.com/oren_cass/status/1289220424992251905">some claims</a> that onerous supply chain reporting mandates are easy and effective, their end result would most likely be more, not less, of the very thing the mandates are trying to discourage. Section 1502 was similar to Hawley’s proposal in that it required multinational manufacturers like Apple and Intel to audit and disclose whether their supply chains utilized “conflict minerals” (tantalum, tin, gold or tungsten, which are commonly found in smartphones and other consumer electronics) sourced from the Democratic Republic of the Congo (DRC) or an adjoining country. Section 1502 also had similar intentions: the mining of these minerals reportedly funded warlords and fueled violence in the region, so a&nbsp;supply chain disclosure rule would force multinationals to scrutinize their suppliers and weed out the bad actors, and thus cut off the warlords’ funds.</p> <p>Unfortunately, the Section 1502 rules proved to be a&nbsp;<a href="https://www.youtube.com/watch?v=GwQW3KW3DCc">huge mistake</a>. Shortly after the law entered into force, <a href="https://www.nytimes.com/2011/08/08/opinion/how-congress-devastated-congo.html?_r=1">reports</a> emerged that, instead of complying with the new regulations, global corporations simply abandoned the DRC – and its poor miners and small‐​scale purchasers – entirely. This effective embargo on the region not only devastated it further, but it actually benefited “some of the very [DRC warlords] it was meant to single out,” allowed less‐​scrupulous Chinese manufacturers to move in, and undermined civil society groups working to end horrific violence and poverty in the DRC.</p> <p>Things didn’t improve in the following years, either. In fact, Hawley’s fellow Republicans in 2013 held a&nbsp;<a href="https://www.govinfo.gov/content/pkg/CHRG-113hhrg81758/pdf/CHRG-113hhrg81758.pdf">hearing</a> before the House Subcommittee on Monetary Policy and Trade on “The Unintended Consequences of Dodd-Frank’s Conflict Minerals Provision,” at which several participants from across the spectrum advocated for Section 1502’s reform or elimination due to its harmful impact on the DRC. In 2014, dozens of human rights activists and academics <a href="http://www.humanosphere.org/human-rights/2014/09/conflict-mineral-law-dr-congo-harm-good-say-experts/">called</a> for the provision’s repeal because, while a&nbsp;few industry giants had resumed business in the DRC, most mines remained off limits and millions of Congolese miners remained unemployed (or worse). Meanwhile, armed groups and smugglers continued to thrive.</p> <p>Subsequent academic work has confirmed these anecdotes – and the activists’ worst fears. A&nbsp;<a href="https://www.perc.org/2018/09/27/the-unintended-consequences-of-u-s-conflict-mineral-regulation/">2016 study</a> found that Dodd‐​Frank conservatively “increased infant mortality from a&nbsp;baseline average of 60 deaths per 1,000 births to 146 deaths per 1,000 births over this period—a 143 percent increase,” likely by reducing mother’s consumption of infant health care goods and services. A&nbsp;separate <a href="https://www.journals.uchicago.edu/doi/abs/10.1086/689865">study</a> from 2016 found that the “legislation increased looting of civilians and shifted militia battles toward unregulated gold‐​mining territories” in 2011 and 2012. Another <a href="https://journals.plos.org/plosone/article?id=10.1371/journal.pone.0201783">paper</a> from 2018 found that the policy also backfired in the longer run (2013–2015): “the introduction of Dodd‐​Frank increased the incidence of battles with 44%; looting with 51% and violence against civilians with 28%, compared to pre‐​Dodd Frank averages.” Finally, in late 2019 economist Jeffery Bloem <a href="https://blogs.worldbank.org/impactevaluations/unintended-consequences-regulating-conflict-minerals-africas-great-lakes-region">found</a> that “the passage of the Dodd‐​Frank Act <em>roughly doubled</em> the prevalence of conflict in the DRC,” and “[v]iolence against civilians, rebel group battles, riots and protests, and deadly conflict all increase within the DRC due to the passage of the Dodd‐​Frank Act.”</p> <p>In short, a&nbsp;U.S. law seeking to discourage conflict and suffering in the DRC ended up <em>breeding more it</em>.</p> <p>It’s<em>&nbsp;</em>a&nbsp;depressing tale of <a href="https://www.econlib.org/library/Enc/UnintendedConsequences.html">Unintended Consequences</a>&nbsp;that puts a&nbsp;real face on Cowen’s theory and crystallizes the flaws in Hawley’s plan to stop forced labor around the world.&nbsp;It also shows&nbsp;why alternative policies, such as the Xinjiang boycotts and targeted sanctions that Cowen suggests, are a&nbsp;better approach to attacking the serious issues&nbsp;of slavery and&nbsp;human trafficking. Of course, as I&nbsp;<a href="https://www.cato.org/publications/commentary/case-free-trade">noted</a> last year, arguably the <em>best</em> way to improve working conditions for the world’s poorest people is freer trade with least developed countries:</p> <blockquote><p>The lowering of U.S. trade barriers, along with American leadership in creating agreements and institutions such as the WTO, has produced immeasurable benefits for the world’s poorest people. As the World Bank noted in its Report on the Role of Trade in Ending Poverty, since 1990, “a dramatic increase in developing‐​country participation in trade has coincided with an equally sharp decline in extreme poverty worldwide,” and the number of people living in extreme poverty has collapsed. Trade has also “helped increase the number and quality of jobs in developing countries, stimulated economic growth, and driven productivity increases.”</p> <p>A new report from the International Labor Organization provides jaw‐​dropping stats in this regard: Between 1993 and 2018, the share of individuals in low‐ and middle‐​income countries working in extreme poverty fell from almost 42 percent to less than 10 percent — a&nbsp;decline of around 600 million people. Most moved from subsistence farming to formal wage or salary work, providing themselves with first‐​time access to health care and other benefits. And, contrary to popular belief, the job creation in developing countries did not happen primarily in “sweatshop” manufacturing: The share of industrial workers in low‐ and middle‐​income countries almost did not change between 1991 and 2018, with job growth instead coming from sectors such as construction and retail trade; between 1999 and 2017, inflation‐​adjusted real wages in these countries tripled. Child labor is also disappearing: The overall number of child workers (ages five to 17) decreased by approximately 94 million between 2000 and 2016 (from 246 million to 152 million) and is projected to decline by tens of millions more by 2025. These improvements have been especially strong among women and girls, who in many countries faced truly horrible social conditions (hunger, arranged marriages, etc.) before these new jobs existed.</p> </blockquote> <p>I can’t say I’m optimistic that the Senator – who has elsewhere <a href="https://www.cato.org/blog/senator-hawleys-many-misunderstandings-wto">demonstrated</a> a&nbsp;<a href="https://twitter.com/scottlincicome/status/1263210548524695553">questionable understanding</a> of trade <em>and</em> forced labor (which U.S. law <a href="https://www.cbp.gov/trade/programs-administration/forced-labor#:~:text=USMCA-,Forced%20Labor,labor%20%E2%80%93%20including%20forced%20child%20labor.">already restricts</a>) – will learn this economic lesson or the unfortunate history of Dodd‐​Frank and the DRC. Hopefully, his colleagues in Congress will learn about it before millions of the world’s poorest suffer a&nbsp;similar fate.</p> Mon, 03 Aug 2020 16:47:34 -0400 Scott Lincicome https://www.cato.org/blog/only-senator-hawley-could-legislate-away-unintended-consequences The Government’s Plan to Turn Kodak Into a Pharmaceutical Company Sure Seems Underdeveloped https://www.cato.org/blog/governments-plan-turn-kodak-pharmaceutical-company-sure-seems-underdeveloped Scott Lincicome <p>The <em>Wall Street Journal</em> <a href="https://www.wsj.com/articles/kodak-lands-765-million-u-s-loan-in-start-of-medical-supply-chain-fix-11595930400">reports</a> that Eastman Kodak Co. has received initial clearance for a $765 million loan from the U.S. International Development Finance Corporation (DFC), issued under the Defense Production Act with no congressional input or oversight (<a href="https://www.washingtonpost.com/opinions/2020/04/28/we-dont-need-guessing-games-we-need-trump-be-transparent-about-ordering-tests/">or transparency</a>), to produce “starter materials” and “active pharmaceutical ingredients” (APIs) for generic medicines, including the President’s favorite drug hydroxychloroquine. According to the <em>WSJ</em> story, the government financing – if formally committed after due diligence – would allow the (<a href="https://hbr.org/2016/07/kodaks-downfall-wasnt-about-technology?registration=success">famously</a>-<a href="https://petapixel.com/2018/10/19/why-kodak-died-and-fujifilm-thrived-a-tale-of-two-film-companies/">mismanaged</a>) camera‐​turned‐​digital‐​turned‐<a href="https://ftalphaville.ft.com/2020/07/29/1596011042000/Once-again-Kodak-pivots--and-the-share-price-explodes/">cryptocurrency</a> company to “change gears” once again and become a “pharmaceutical company,” with this brand new division eventually (supposedly) making up 30% to 40% of Kodak’s entire business.</p> <p>For the U.S. government, the goal of the loan is to “reduce reliance on other countries for drugs,” especially in case of a pandemic. Although multiple sources identified China as the primary concern (<a href="https://www.cato.org/blog/does-us-semiconductor-industry-need-urgent-federal-support-stop-china">isn’t it always?</a>), White House senior adviser Peter Navarro was more honest about the loan’s actual intent – supply chain “repatriation”:</p> <blockquote><p>This is not about China or India or any one country…. It’s about America losing its pharmaceutical supply chains to the sweat shops, pollution havens, and tax havens around the world that cheat America out of its pharmaceutical independence.</p> </blockquote> <p>President Trump similarly <a href="https://twitter.com/Breaking911/status/1288226416849453058">hailed</a> the deal as a “breakthrough in bringing pharmaceutical manufacturing back to the United States.”</p> <p>Given these statements and the <a href="https://www.whitehouse.gov/presidential-actions/eo-delegating-authority-dpa-ceo-u-s-international-development-finance-corporation-respond-covid-19-outbreak/">emergency</a> action at issue, you’d think that American pharmaceutical manufacturers are in dire straits or that the United States is now suffering major shortages of critical pharmaceuticals. Fortunately, a review of the available data tells a different story.</p> <p>First, although solid public stats on global API production are <a href="https://www.rstreet.org/wp-content/uploads/2020/06/Final-No.-197-Protectionism-in-Pharma-Supply-Chain.pdf">not available</a>, the <a href="https://www.cato.org/publications/commentary/supply-chain-repatriation-its-buyer-nation-beware">data we have</a> do not indicate that government funding is urgently needed:</p> <blockquote><p>[A]ccording to the Food and Drug Administration, of the roughly 2,000 global manufacturing facilities that produce active pharmaceutical ingredients (APIs), 13 percent are in China; 28 percent are in the USA, 26 percent in the EU, and 18 percent in India. For the APIs of World Health Organization “essential medicines” on the U.S. market, 21 percent of manufacturing facilities are located in the United States, 15 percent in China; and the rest in the EU, India, and Canada.</p> </blockquote> <p>The FDA <a href="https://www.fda.gov/news-events/congressional-testimony/safeguarding-pharmaceutical-supply-chains-global-economy-10302019">adds</a> that the United States was home to 510 API facilities in 2019, 221 of which supply the aforementioned “essential medicines.”</p> <p>Second, U.S. government data – on output, R&amp;D and capital expenditures (see tables 1–3 below) – show that American pharmaceutical manufacturers are far from the basket case that Navarro describes:</p> <p> <div data-embed-button="embed" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="bf93cab6-3bca-47a9-9340-af0f3a83b530" data-langcode="en" class="embedded-entity"> <div class="embed embed--infogram js-embed js-embed--infogram"> <div class="infogram-embed" data-id="9f8d0cf7-4112-43dc-a504-a38ee45e5432" data-type="interactive" data-title="Pharmaceutical Manufacturing"></div> </div> </div> </p><p>A recent <a href="https://www.wto.org/english/news_e/news20_e/rese_03apr20_e.pdf">report</a> from the World Trade Organization further notes that, while the United States is indeed a major importer of pharmaceutical products, it’s also one of the world’s largest exporters, having shipped almost $41 billion in medicines (35% of total U.S. medical goods exports) last year. So it’s safe to say that, contra Navarro and Trump, this is hardly an industry in serious distress.</p> <p>Third, the pharmaceutical supply chain has held up pretty well (so far). Imports of pharmaceuticals that the U.S. International Trade Commission recently <a href="https://www.cato.org/blog/new-data-show-americas-limited-dependence-china-essential-medical-goods">deemed critical</a> to fighting COVID-19 have not collapsed in 2020 – in fact, <a href="https://dataweb.usitc.gov/">only 16 of 63</a> products have seen an average monthly decline of more than 20% (by quantity) as compared to the product’s monthly average in 2019. A majority (35) have <em>increased </em>this year – some quite substantially. These are top‐​line estimates in an extremely volatile market so caution is warranted, but they’re still noteworthy, given that the <em>entire world</em> – including major pharmaceutical suppliers in China, Europe, India and elsewhere – was suffering through a generational pandemic for most or all of the months at issue.</p> <p>Imports, of course, are only <a href="https://www.cato.org/blog/new-data-show-americas-limited-dependence-china-essential-medical-goods">one part of the supply chain story</a> (inventories, stockpiles, domestic production and other factors are also relevant). Most importantly, there have been few (if any) signs of major national drug shortages. The last <a href="https://www.fda.gov/emergency-preparedness-and-response/counterterrorism-and-emerging-threats/coronavirus-disease-2019-covid-19#new">FDA notice</a> on a potential shortage was in late March for the trendy (at the time) hydroxychloroquine – a shortage that <a href="https://www.fda.gov/news-events/press-announcements/coronavirus-covid-19-update-fda-revokes-emergency-use-authorization-chloroquine-and">never actually materialized</a>. There’s also been no major spike in drugs that the FDA lists as “currently in shortage”: as I <a href="https://www.cato.org/publications/commentary/supply-chain-repatriation-its-buyer-nation-beware">noted</a> a few months ago, there were 109 drugs on the list in mid‐​December of last year; 103 in late February 2020; and then 108 in mid‐​April. This week, after months of unanticipated chaos, that number <a href="https://www.accessdata.fda.gov/scripts/drugshortages/default.cfm">stood</a> at 117 – a little higher, yes, but not a crisis.</p> <p>All of this raises a host of questions that deserve to be answered before a dollar of taxpayer money is actually sent to Rochester:</p> <ul><li>Even assuming for the sake of argument that sagging domestic API production qualifies as a national emergency, why did Kodak, which has no API or other pharmaceutical experience (though it does make chemicals), receive this government loan, instead of it going to one or more of the <em>hundreds</em> of API facilities already operating in the United States?</li> <li>Which APIs will Kodak’s new venture produce? The DFC <a href="https://www.dfc.gov/media/press-releases/dfc-sign-letter-interest-investment-kodaks-expansion-pharmaceuticals">press release</a> touting the loan notes that “Kodak Pharmaceuticals will produce critical pharmaceutical components that have been identified as essential but have lapsed into chronic national shortage, as defined by the [FDA].” However, a <a href="https://search.usa.gov/search?utf8=%E2%9C%93&amp;affiliate=fda1&amp;sort_by=&amp;query=%22chronic+national+shortage%22">search</a> of the FDA’s website shows no such term, and FDA’s <a href="https://www.fda.gov/news-events/press-announcements/coronavirus-covid-19-supply-chain-update">last “supply chain update”</a> reported no drug, biologic or ingredient shortages at that time. Indeed, the DFC’s statement about Kodak producing an “identified” list of “critical” APIs seemingly contradicts a subsequent one that “[Kodak] plans to coordinate closely with the Administration and pharmaceutical manufacturers <em>to identify</em> and prioritize components that are most critical to the American people and U.S. national security.” So which is it?</li> <li>Why is federal government involvement needed here at all? If a famous, <a href="https://www.businesswire.com/news/home/20200317005784/en/Kodak-Reports-Full-Year-2019-Financial-Results#:~:text=%2D%2D(BUSINESS%20WIRE)%2D%2DEastman,of%20the%20Flexographic%20Packaging%20Division.">billion‐​dollar corporation</a> has a viable business plan, and if these “critical” APIs have indeed been in “chronic short supply” for American pharmaceutical manufacturers (who, as shown above, have plenty of money to spend), it stands to reason that financial assistance would be available from a private source on reasonable terms (DFC’s <a href="https://www.dfc.gov/sites/default/files/media/documents/DFC-DPALoanProgramGuide.pdf">express loan condition</a>), and that neither government coordination nor government capital would therefore be necessary. In other words, where’s the <a href="https://www.cato.org/publications/commentary/beware-dogma">market failure</a>?</li> <li>Finally, what’s the urgency here? Kodak’s API production will probably take years to get off the ground, and the data above raise questions about whether it’s even needed. In fact, the FDA has <a href="https://www.fda.gov/news-events/congressional-testimony/safeguarding-pharmaceutical-supply-chains-global-economy-10302019">stated</a> (<a href="https://www.fda.gov/news-events/press-announcements/coronavirus-covid-19-supply-chain-update">repeatedly</a>) that it needs more information before it could make any definitive conclusions about the global API situation, drug supply chain “resiliency,” and U.S. national security. Private pharmaceutical companies, moreover, are already <a href="https://www.mckinsey.com/industries/pharmaceuticals-and-medical-products/our-insights/pharma-operations-the-path-to-recovery-and-the-next-normal">adapting</a> to a new reality that accounts for lessons learned from COVID-19 (and for worsening U.S.-China trade frictions). Thus, the supply chain issue that Kodak and the Trump administration claim to have identified yesterday might not even exist by the time Kodak Pharmaceutical is operational. The original CARES Act has <a href="https://www.congress.gov/bill/116th-congress/senate-bill/3548/text?q=product+update#toc-idF66D8E36FC5F45A084A3DDC0D7DED21E">commissioned</a> a new study of the pharmaceutical supply chain to identify potential vulnerabilities. Maybe government action might (<em>might</em>) be necessary at that time, but until then, the Trump administration seems to be throwing darts blindfolded. Why?</li> </ul><p>Unfortunately, there’s seemingly no way to know the answers to these questions at this time (though DFC <a href="https://www.dfc.gov/sites/default/files/media/documents/DFC-DPALoanProgramGuide.pdf">says</a> it eventually “will make detailed project‐​level information publicly available, consistent with applicable law”). This didn’t stop Kodak’s stock from exploding upward this week (some of it a <a href="https://www.benzinga.com/news/20/07/16814320/kodak-had-some-very-suspicious-trading-activity-ahead-of-drug-news">little early</a>?), but hopefully someone in Congress is a bit more skeptical.</p> Wed, 29 Jul 2020 18:16:08 -0400 Scott Lincicome https://www.cato.org/blog/governments-plan-turn-kodak-pharmaceutical-company-sure-seems-underdeveloped Does the U.S. Semiconductor Industry Really Need Urgent Taxpayer Support to Stop China? https://www.cato.org/blog/does-us-semiconductor-industry-need-urgent-federal-support-stop-china Scott Lincicome <p>Today, the United States Senate <a href="https://www.wsj.com/articles/senate-passes-defense-policy-bill-with-bipartisan-support-11595530292?mod=djemalertNEWS">approved</a> the FY2021 National Defense Authorization Act (NDAA), which contains an <a href="https://www.congress.gov/amendment/116th-congress/senate-amendment/2244/actions">amendment</a> passed earlier this week, with little floor debate and by a 96-4 margin, that would provide billions of dollars in new federal support for the U.S. semiconductor industry, most notably tax credits and grants for the construction of new domestic manufacturing facilities. The House <a href="https://www.congress.gov/bill/116th-congress/house-bill/6395/amendments?searchResultViewType=expanded">passed</a> a similar bill with a <a href="https://amendments-rules.house.gov/amendments/MATSUI_070_xml71720090438438.pdf">similar amendment</a> earlier this week, so the legislation now goes to conference, where the subsidies are expected to survive.  The two main reasons for the Senate and House amendments (formerly a standalone bill called the “<a href="https://www.warner.senate.gov/public/index.cfm/2020/6/bipartisan-bicameral-bill-will-help-bring-production-of-semiconductors-critical-to-national-security-back-to-u-s">CHIPS Act</a>”), as helpfully summarized by House co-sponsor and Foreign Affairs Committee Ranking Member <a href="https://www.warner.senate.gov/public/index.cfm/2020/6/bipartisan-bicameral-bill-will-help-bring-production-of-semiconductors-critical-to-national-security-back-to-u-s">Michael McCaul</a> (R-TX), are (1) to boost U.S. semiconductor manufacturing and jobs and (2) to prevent China from “dominating” the global semiconductor market:</p> <blockquote><p>Ensuring our leadership in the future design, manufacturing, and assembly of cutting edge semiconductors will be vital to United States national security and economic competitiveness. As the Chinese Communist Party aims to dominate the entire semiconductor supply chain, it is critical that we supercharge our industry here at home. In addition to securing our technological future, the CHIPS Act will create thousands of high-paying U.S. jobs and ensure the next generation of semiconductors are produced in the US, not China.</p> </blockquote> <p>Similarly dire, China-centric statements have been issued by other supporters in Congress (<em>see</em>, <em>e.g.</em>, these from Senators <a href="https://www.alreporter.com/2020/07/22/jones-bill-aimed-at-bringing-jobs-back-from-china-included-in-senate-ndaa/">Doug Jones</a> (D-AL), <a href="https://www.cotton.senate.gov/?p=press_release&amp;id=1391">Tom Cotton</a> (R-AR), or <a href="https://www.schumer.senate.gov/newsroom/press-releases/following-their-push-schumer-gillibrand-announce-massive-federal-investment-in-semiconductor-manufacturing_including-incentives-to-expand-and-build-robust-domestic-microelectronics-industry--secured-in-national-defense-bill">Chuck Schumer</a> (D-NY)), most of whom – unsurprisingly – appear to have <a href="https://www.semiconductors.org/map/">semiconductor manufacturers</a> in their states or districts that stand to profit from the new taxpayer funds. (Schumer’s statement, in classic fashion, actually emphasizes how this cash will help New York companies.)</p> <p>The congressional statements, urgency and near-unanimity would lead a casual observer to believe that the U.S. semiconductor industry is in a truly-desperate position, hobbled by a heavily-subsidized, globally dominant China and in dire need of a massive and immediate injection of government support. That would not, however, be the reality – even <em><strong>assuming</strong></em> (<a href="https://www.pnas.org/content/112/50/15277">erroneously</a>) that “reshoring” global supply chains advances actually national security. Instead, numerous facts and analyses show the U.S. semiconductor industry to be in pretty good shape and the Chinese industry – while certainly subsidized – to <strong><em>not</em></strong> be the dangerous juggernaut that our elected officials claim.</p> <p>Let’s first start with the U.S. industry. Most basically, Bureau of Economic Analysis (BEA) <a href="https://apps.bea.gov/iTable/index_industry_gdpIndy.cfm">data</a> show U.S. “Semiconductor and other electronic component manufacturing” to have increased substantially in recent years, topping $113.4 billion in real gross output and $88 billion in real value-added in 2018 (the last year for which detailed data are available). Real gross output for “Semiconductor and related device manufacturing” alone reached $64.9 billion; more detailed value-added data are not available.</p> <p>The Semiconductor Industry of America (SIA) <a href="https://www.semiconductors.org/wp-content/uploads/2020/04/2020-SIA-Factbook-FINAL_reduced-size.pdf">further</a> <a href="https://www.semiconductors.org/chips-for-america-act-would-strengthen-u-s-semiconductor-manufacturing-innovation/">notes</a> that there are commercial semiconductor manufacturing facilities (called “fabs”) in 18 states, employing more than 240,000 Americans, and that the United States has 12.5 percent of global semiconductor manufacturing capacity. And while the U.S. industry does indeed utilize fabs around the world, the largest share (44.3%) of that work remains in the United States while only small portion (5.6%) is in China:</p> <p> </p><div data-embed-button="image" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="882efa64-04d6-40d9-be6f-aec2f111ec4e" data-langcode="en" class="embedded-entity"> <img srcset="/sites/cato.org/files/styles/pubs/public/2020-07/US%20Wafer%20Capacity%20by%20Location.png?itok=mng1_UBi 1x, /sites/cato.org/files/styles/pubs_2x/public/2020-07/US%20Wafer%20Capacity%20by%20Location.png?itok=H4KBYU8a 1.5x" width="512" height="315" src="/sites/cato.org/files/styles/pubs/public/2020-07/US%20Wafer%20Capacity%20by%20Location.png?itok=mng1_UBi" alt="Percent of U.S.-Headquartered Firm Semiconductor Wafer Capacity by Location" typeof="Image" class="component-image" /></div> <p>The United States is also a <a href="https://comtrade.un.org/data/">top-5 global exporter</a> of semiconductors and related equipment, shipping almost $47 billion in goods falling under Harmonized System subchapters 8542 ($40.0 billion) and 8541 ($6.7 billion) last year. These and other data led the SIA to <a href="https://www.semiconductors.org/2020-state-of-the-u-s-semiconductor-industry/">conclude</a> in its 2020 “State of the U.S. Semiconductor Industry” report that “the semiconductor manufacturing base in the United States remains on solid footing.”</p> <p>In terms of sales (not just manufacturing), moreover, the SIA reports that the U.S. industry is the global leader in market share, with “nearly half” of the entire world semiconductor market – a share that has been remarkably steady (ranging from the mid-40s to low-50s) since the late 1990s – and sales leadership in every major regional market, including China. Sales by U.S semiconductor firms also grew from $76.7 billion in 1999 to $192.8 billion in 2019 - a compound annual growth rate of almost 5%.</p> <p>Beyond output and sales, the U.S. semiconductor industry has been a global leader in capital spending (“capex”) and research and development – a testament to not only their business acumen but also U.S. <a href="https://finance.yahoo.com/chart/SMH#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">capital markets</a>. SIA notes that total R&amp;D and capital expenditures by U.S. semiconductor firms (including "fabless" companies) was $71.7 billion in 2019, growing steadily between 1999 and 2019 at a 6.2% annual rate. R&amp;D expenditures hit $39.8 billion last year, constituting 16.4% of the industry’s total sales last year – a “R&amp;D intensity” second only to pharmaceuticals in the United States and the highest in the world:</p> <p> </p><div data-embed-button="image" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="e9b6e580-ff44-458a-8615-19d02fa317f6" data-langcode="en" class="embedded-entity"> <img srcset="/sites/cato.org/files/styles/pubs/public/2020-07/R%26D%20Intensity.png?itok=9EoJYZWB 1x, /sites/cato.org/files/styles/pubs_2x/public/2020-07/R%26D%20Intensity.png?itok=TTYqo2wo 1.5x" width="700" height="559" src="/sites/cato.org/files/styles/pubs/public/2020-07/R%26D%20Intensity.png?itok=9EoJYZWB" alt="U.S. R&amp;D as a Percentage of Sales, Domestic and Global" typeof="Image" class="component-image" /></div> <p>The U.S. industry’s capex has been similarly world-class: SIA reports that 2018 capital expenditures reached “an all-time high of $32.7 billion” and constituted 12.5% of sales in 2019, with only Korea having a larger global share of semiconductor capex last year:</p> <p> </p><div data-embed-button="image" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="f1f6ad3f-0c0f-4548-9c1d-88e9f9c2af27" data-langcode="en" class="embedded-entity"> <img srcset="/sites/cato.org/files/styles/pubs/public/2020-07/Capital%20Intensity.png?itok=FDzr5rYp 1x, /sites/cato.org/files/styles/pubs_2x/public/2020-07/Capital%20Intensity.png?itok=C1HWiYy_ 1.5x" width="700" height="337" src="/sites/cato.org/files/styles/pubs/public/2020-07/Capital%20Intensity.png?itok=FDzr5rYp" alt="US Semiconductor Firms' Capital Intensity, Global" typeof="Image" class="component-image" /></div> <p>Other data corroborate these findings. According to the U.S. National Science Board’s <a href="https://ncses.nsf.gov/pubs/nsb20203/u-s-business-r-d">2020 report</a> on R&amp;D Trends, U.S. computer and electronic (including semiconductor) companies spent more on R&amp;D in 2016 (the last year available) than any other country surveyed – often many times more – with only South Korea’s sector having greater share of total or manufacturing R&amp;D than the United States:</p> <p> </p><div data-embed-button="embed" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="6e1956b3-298b-4c83-9936-0bda9ebab723" data-langcode="en" class="embedded-entity"> <div class="embed embed--infogram js-embed js-embed--infogram"> <div class="infogram-embed" data-id="1fe78fdc-bc1f-4429-aec2-48053d897bdd" data-type="interactive" data-title="Business R&amp;amp;D (2016)"></div> //--&gt; </div> </div> <p>The BEA <a href="https://apps.bea.gov/iTable/index_MNC.cfm">further calculates</a> that foreign multinational corporations in 2017 spent $7.3 billion and $2.2 billion on R&amp;D and capex, respectively, for their U.S. affiliates in the “semiconductors and other electronic components” sector, up from $4.4 billion and $1.9 billion in 2007. And U.S. semiconductor companies’ stock prices have <a href="https://finance.yahoo.com/chart/SMH#eyJpbnRlcnZhbCI6IndlZWsiLCJwZXJpb2RpY2l0eSI6MSwidGltZVVuaXQiOm51bGwsImNhbmRsZVdpZHRoIjo2LjIwNjg5NjU1MTcyNDEzOCwiZmxpcHBlZCI6ZmFsc2UsInZvbHVtZVVuZGVybGF5Ijp0cnVlLCJhZGoiOnRydWUsImNyb3NzaGFpciI6dHJ1ZSwiY2hhcnRUeXBlIjoibGluZSIsImV4dGVuZGVkIjpmYWxzZSwibWFya2V0U2Vzc2lvbnMiOnt9LCJhZ2dyZWdhdGlvblR5cGUiOiJvaGxjIiwiY2hhcnRTY2FsZSI6ImxpbmVhciIsInN0dWRpZXMiOnsi4oCMdm9sIHVuZHLigIwiOnsidHlwZSI6InZvbCB1bmRyIiwiaW5wdXRzIjp7ImlkIjoi4oCMdm9sIHVuZHLigIwiLCJkaXNwbGF5Ijoi4oCMdm9sIHVuZHLigIwifSwib3V0cHV0cyI6eyJVcCBWb2x1bWUiOiIjMDBiMDYxIiwiRG93biBWb2x1bWUiOiIjZmYzMzNhIn0sInBhbmVsIjoiY2hhcnQiLCJwYXJhbWV0ZXJzIjp7IndpZHRoRmFjdG9yIjowLjQ1LCJjaGFydE5hbWUiOiJjaGFydCJ9fX0sInBhbmVscyI6eyJjaGFydCI6eyJwZXJjZW50IjoxLCJkaXNwbGF5IjoiU01IIiwiY2hhcnROYW1lIjoiY2hhcnQiLCJpbmRleCI6MCwieUF4aXMiOnsibmFtZSI6ImNoYXJ0IiwicG9zaXRpb24iOm51bGx9LCJ5YXhpc0xIUyI6W10sInlheGlzUkhTIjpbImNoYXJ0Iiwi4oCMdm9sIHVuZHLigIwiXX19LCJzZXRTcGFuIjp7Im11bHRpcGxpZXIiOjUsImJhc2UiOiJ5ZWFyIiwicGVyaW9kaWNpdHkiOnsicGVyaW9kIjoxLCJpbnRlcnZhbCI6IndlZWsifX0sImxpbmVXaWR0aCI6Miwic3RyaXBlZEJhY2tncm91bmQiOnRydWUsImV2ZW50cyI6dHJ1ZSwiY29sb3IiOiIjMDA4MWYyIiwic3RyaXBlZEJhY2tncm91ZCI6dHJ1ZSwiZXZlbnRNYXAiOnsiY29ycG9yYXRlIjp7ImRpdnMiOnRydWUsInNwbGl0cyI6dHJ1ZX0sInNpZ0RldiI6e319LCJjdXN0b21SYW5nZSI6bnVsbCwic3ltYm9scyI6W3sic3ltYm9sIjoiU01IIiwic3ltYm9sT2JqZWN0Ijp7InN5bWJvbCI6IlNNSCIsInF1b3RlVHlwZSI6IkVURiIsImV4Y2hhbmdlVGltZVpvbmUiOiJBbWVyaWNhL05ld19Zb3JrIn0sInBlcmlvZGljaXR5IjoxLCJpbnRlcnZhbCI6IndlZWsiLCJ0aW1lVW5pdCI6bnVsbCwic2V0U3BhbiI6eyJtdWx0aXBsaWVyIjo1LCJiYXNlIjoieWVhciIsInBlcmlvZGljaXR5Ijp7InBlcmlvZCI6MSwiaW50ZXJ2YWwiOiJ3ZWVrIn19fV19">steadily climbed</a> over the last decade. Clearly, the sector remains quite attractive.</p> <p>As a result of this investment, the SIA notes that in 2019 the United States remained at or near the “leading edge” of current semiconductor technology (“essentially neck-and-neck [with Korea and Taiwan] in logic process technology as all three nations have raced to bring leading-edge 7/10 nm technology to market”). Taiwan’s TSMC has <a href="https://www.gsmarena.com/production_of_snapdragon_875_chips_has_started_on_tsmcs_5_nm_node-news-43892.php">reportedly</a> begun production of 5 nm chips, but these are just now hitting the market. U.S.-based Intel, meanwhile, is <a href="https://www.extremetech.com/computing/306978-intel-expects-to-reach-process-parity-with-7nm-in-2021-lead-on-5nm">racing</a> to catch up after making what appears to be a bad bet on 10 nm wafers a few years ago.</p> <p>In short, the U.S. semiconductor industry may have temporarily lost its global manufacturing lead, but it’s still quite healthy – in many ways still globally dominant – and is investing billions of its own dollars to stay at or near the top in the future (something the companies’ shareholders seem to think they will accomplish).</p> <p>China, on the other hand, remains <strong><em>years</em> </strong>behind industry leaders in the United States, Korea and Taiwan, and it might never catch up, despite (or perhaps because of) boatloads of subsidies and industrial planning. In fact, a detailed <a href="https://www.usitc.gov/publications/332/journals/chinese_semiconductor_industrial_policy_prospects_for_success_jice_aug_2019.pdf">2019 report</a> on China’s semiconductor industry by the United States International Trade Commission showed that it is precisely this planning and subsidization, along with human capital constraints and international competition, holding back China’s industry:</p> <blockquote><p>China’s semiconductor industrial plans have lacked defined goals and clear implementation strategies, and have been hampered by bureaucratic redundancies. Relying heavily on state-owned enterprises (SOEs), these plans have been hindered by poor management, production inefficiencies, and a level of support from the state that resulted in profligate spending. In particular, the SOEs lack absorptive and innovative capacity, producing chips that fail to gain commercial traction….</p> <p>China’s current plans look more sustainable, but still rely heavily on well-funded but poorly directed SOEs that benefit from a market that lacks true competition. At the same time, some of the larger challenges that hindered previous development, such as a dearth of human capital, remain unaddressed.</p> </blockquote> <p>The report thus concludes that China’s industrial planning efforts – <strong><em>the express basis for new U.S. government subsidies</em></strong> – “will not achieve their desired success,” a conclusion shared by many other <a href="https://www.gizchina.com/2020/06/25/analysts-believe-that-smic-will-not-develop-a-process-below-7-5nm/">industry experts</a>. In fact, analysts recently told the <em><a href="https://www.wsj.com/articles/chinas-semiconductor-contender-isnt-holding-that-many-chips-11594030022">Wall Street Journal</a> </em>that China’s national champion, Semiconductor Manufacturing International Corp. (SMIC), “is still around five years behind TSMC and the gap will likely remain in the foreseeable future.”</p> <p>Some threat.</p> <p>Finally, there is the question of whether these new U.S. subsidies will achieve their “national security” or economic objectives; here too, there’s reason for concern (beyond the aforementioned point about re-shoring and security). Previous U.S. government support for the semiconductor industry has ranged from “<a href="https://www.aei.org/technology-and-innovation/on-semiconductor-industrial-policy-proceed-with-caution/">checkered</a>” to <a href="https://www.cato.org/publications/policy-analysis/doomed-repeat-it-long-history-americas-protectionist-failures">total debacle</a>. In the 1980s, for example, U.S. efforts to support the semiconductor industry through protectionism and industrial policy – then deemed necessary to fend off Japan – cost U.S. computer companies and the economy billions of dollars; encouraged offshoring of high-tech industries and political dysfunction in the United States and Japan; failed to boost U.S. semiconductor production capacity; and actually strengthened Japanese and Korean competitors. Indeed, government policymakers ended up picking the <em><strong>entirely wrong product</strong></em> to subsidize and protect in its attempt to ensure “the future of U.S. global technology leadership.” Yikes.</p> <p>More recent history might not be much better. TSMC, for example, just scored its own U.S. billions to produce semiconductors in Arizona, but the <em>Wall Street Journal</em> <a href="https://www.wsj.com/articles/taiwan-company-to-build-advanced-semiconductor-factory-in-arizona-11589481659">reports</a> that, although construction will begin next year, actual production is targeted for 2024 (at best). Once operational, moreover, the fab will make only 20,000 wafers a month (“making it a relatively small facility for a company that made more than 12 million wafers last year alone”), and it “would likely not be at the leading edge of chip-making technology” because TSMC and other companies plan to move to even smaller, 3 nm chips in the next few years. And, while heralded as a <a href="https://focustaiwan.tw/politics/202005150010">“national security” victory</a> by Secretary of State Pompeo, the aforementioned article notes that “TSMC’s project would also not likely address a desire by the Pentagon to have a U.S. firm make more chips for defense purposes.” (On the other hand, the project, <em>has</em> been deemed a political “<a href="https://www.nytimes.com/2020/05/14/technology/trump-tsmc-us-chip-facility.html">win</a>” for President Trump in a state that he needs in 2020. So it’s got that going for it, <a href="https://www.youtube.com/watch?v=pBWcRqPesws">which is nice</a>.)</p> <p>Lastly, these subsidies could actually hurt U.S. semiconductor exports, which as noted above are significant, and thus end up costing U.S. companies revenue or global market share. As I explained in a <a href="https://www.cato.org/publications/policy-analysis/countervailing-calamity-how-stop-global-subsidies-race">2012 Cato Institute paper</a>, global trade rules and national “countervailing duty” laws allow nations to slap duties on subsidized imports that are found to have “injured” the nation’s own domestic industry. These cases are especially easy where, as here, the subsidies expressly target a specific industry in law, and they ticked up the last time the United States joined the “global subsidies race” in 2009. Another round of “stimulus,” especially for major exporting industry, could do the same today.</p> <p>So, to recap: the House and Senate just fast-tracked billions in direct government subsidies (not just R&amp;D support) to U.S. semiconductor manufacturers that are, by their own account, “on solid footing,” in order to counter a threat that, by the U.S. government’s own account, doesn’t actually exist – billions that, if history is any guide, won’t produce clear benefits and could actually harm the industry.</p> <p>And who says Washington is broken?</p> <p>Ironically, recent U.S. policy – in particular onerous new restrictions on high-skill immigration – <a href="https://www.cato.org/blog/well-do-anything-american-innovation-we-wont-do">could actually help China</a> solve its human capital problem and thus boost its currently-low chances to become an actual player in the global semiconductor game. In a sane world, policymakers eager to help the U.S. semiconductor industry or to counter China’s high-tech ambitions would start there (and then move on to the <a href="https://www.semiconductors.org/growth-based-incentives-not-tariffs-will-strengthen-u-s-chip-manufacturing-and-leadership/">tariffs costing U.S. chipmakers</a> hundreds of millions of dollars) <strong><em>before</em></strong> ramming through billions of “emergency” taxpayer dollars to healthy companies. Even <em><strong>saner</strong></em> would be Congress and Washington policymakers having a serious debate about trade, industrial policy and national security, instead of just diving head-first into economic nationalism every time a <a href="https://twitter.com/Kate_OKeeffe/status/1267086027379834883">lobbyist or industry group</a> says the word “China.”</p> <p>As this week’s votes make clear, unfortunately, such sanity seems to be in very short supply these days.</p> <p></p> Thu, 23 Jul 2020 14:17:20 -0400 Scott Lincicome https://www.cato.org/blog/does-us-semiconductor-industry-need-urgent-federal-support-stop-china We’ll Do Anything for American Innovation, But We Won’t Do That https://www.cato.org/blog/well-do-anything-american-innovation-we-wont-do Scott Lincicome <p>It seems that everywhere you turn these days you’ll find someone in Washington <a href="https://www.nytimes.com/2019/08/20/opinion/america-industrial-policy.html">lamenting</a> the collapse of American innovation and industrial output, and, naturally, proposing his own industrial policy to solve the alleged problems. This includes both <a href="https://www.whitehouse.gov/briefings-statements/america-will-dominate-industries-future/">President Trump</a> and Democratic challenger <a href="https://joebiden.com/madeinamerica/">Joe</a> <a href="https://joebiden.com/supplychains/">Biden</a>, both of whom have promised all sorts of subsidies, protectionism and procurement mandates intended to reinvigorate the American industrial base and restore U.S. innovation supremacy. What these plans have mostly failed to emphasize, however, is how freer markets – especially the liberalization of U.S. trade and immigration restrictions – might help to achieve key industrial innovation objectives (without <a href="https://www.cato.org/blog/ignoring-recent-ignominious-history-buy-american">messy and costly central planning</a>)&nbsp;or how they’ve been harmed by past U.S. government restrictions.</p> <p>A new <a href="http://papers.nber.org/tmp/93044-w27538.pdf">NBER Working Paper</a> from Wharton’s Britta Glennon adds to a&nbsp;growing body of literature showing just how wrong‐​headed the candidates’ omission of these free market policies might very well be. In particular, Glennon shows that past U.S. restrictions on high‐​skilled immigration (implemented through caps on H1-B nonimmigrant visas) resulted not in an increase in hiring American workers but instead in a&nbsp;substantial offshoring of multinational corporation&nbsp;(MNC) jobs <strong>and</strong> R&amp;D activities to these companies’ affiliates in more welcoming countries. Perhaps even more concerning, given recent events at home and abroad, Glennon shows that one of the biggest beneficiaries of these U.S. immigration restrictions was <strong>China</strong>, and that U.S. firms doing the most R&amp;D offshored the most jobs.</p> <p>Glennon’s conclusions are worth quoting at length (emphasis mine and citations omitted):</p> <blockquote><p>[F]oreign affiliate employment increased as a&nbsp;direct response to increasingly stringent restrictions on H-1B visas. This effect is driven on the extensive and intensive margins; firms were more likely to open foreign affiliates in new countries in response, and employment increased at existing foreign affiliates. The effect is strongest among R&amp;D-intensive firms in industries where services could more easily be offshored. The effect was somewhat geographically concentrated: foreign affiliate employment increased both in countries like India and China with large quantities of high‐​skilled human capital and in countries like Canada with more relaxed high‐​skilled immigration policies and closer geographic proximity. These empirical results also are supported by interviews with US multinational firms and an immigration lawyer.</p> <p>Despite the outsized role that multinational firms play in the economy – for example, US multinational firms are responsible for 80% of US R&amp;D and employ about ¼&nbsp;of US private employees – <strong><em>policy debates surrounding immigration have largely overlooked the fact that multinational companies faced with decreased access to visas for skilled workers have an offshoring option, namely, hiring the foreign labor they need at their foreign affiliates</em></strong>. This is the first paper to provide evidence that multinational firms do in fact utilize this option – both at the extensive and the intensive margin – and to examine the relationship between foreign affiliate employees and immigrants, in contrast to the relationship between immigrants and native‐​born workers.</p> <p><strong><em>The results have important implications for understanding how multinational firms respond to artificial constraints on resources and how they globally re‐​distribute those resources. The results also have important policy implications; the offshoring of jobs appears to be an unforeseen consequence of restricting skilled immigration flows</em></strong><em>.</em> Even if H-1B immigrants displace some native workers, any policies that are motivated by concerns about the loss of native jobs should consider that policies aimed at reducing immigration have the unintended consequence of encouraging firms to offshore jobs abroad.</p> <p>The finding that skilled foreign‐​born workers will be hired at foreign affiliates rather than in the US also has important implications for the innovative capacity of the US. Skilled immigrants have been shown to have outsized impacts on innovation in the host country through spillovers. The spatial diffusion of these spillovers disappears with distance since innovative spillovers are geographically localized. <strong><em>From a&nbsp;nationalistic perspective, this is problematic; if skilled foreign‐​born workers are at a&nbsp;US firm’s foreign affiliate instead of in the US, the innovative spillovers that they generate will go to another country instead. Furthermore, the finding that immigrants often are not equally innovative outside the United States has even wider welfare implications. In short, restrictive H-1B policies could not only be exporting more jobs and businesses to countries like Canada [me: and China], but they also could be causing the U.S.’s innovative capacity to fall behind</em></strong><em>….</em></p> </blockquote> <p>Vice President Biden, to his credit, has elsewhere <a href="https://joebiden.com/immigration/">supported</a> “expanding the number of high‐​skilled visas and eliminating the limits on employment‐​based visas by country” in order to boost “American innovation and competitiveness.” Hopefully the Team Biden folks writing the campaign’s immigration plans can talk some sense into their colleagues writing the industrial policy plans, and perhaps even explain how freer access to <em>all</em> global resources – whether high‐​skilled labor or essential <a href="https://voxeu.org/article/costs-cascading-trade-protection">goods</a> like steel and machinery – can boost American companies’ innovation, output and global competitiveness while simultaneously denying potential adversaries those same advantages. As Glennon notes, multinational corporations that drive American R&amp;D have other production options abroad, and they’ll use those options when misguided U.S. policies push them to do so.</p> <p>Unfortunately, President Trump’s longstanding aversion to increased immigration or freer trade – and recent Trump administration efforts to restrict those things even further – provide little opportunity for similar liberalization hopes in the coming weeks or during any second Trump term. To paraphrase a&nbsp;great <a href="https://www.youtube.com/watch?v=9X_ViIPA-Gc">American poet</a>, they’ll do anything to boost American innovation (or to counter China’s rise), but they won’t do <strong><em>that</em></strong>.</p> Mon, 20 Jul 2020 19:10:50 -0400 Scott Lincicome https://www.cato.org/blog/well-do-anything-american-innovation-we-wont-do Determining America’s “Dependence” on China for Essential Medical Goods https://www.cato.org/blog/new-data-show-americas-limited-dependence-china-essential-medical-goods Scott Lincicome <p>The unfortunate onset of COVID-19 has caused many politicians and pundits to proclaim that the United States is distressingly <a href="https://www.theatlantic.com/politics/archive/2020/04/us-britain-dependence-china-trade/610615/" rel="noreferrer noopener" target="_blank">dependent</a> on China for essential medical goods, and to ask whether this “dependence” demands new government programs—in particular, protectionism, subsidies and “Buy American” procurement mandates—to fix the alleged problem.<span> </span>A little‐​noticed <a href="https://usitc.gov/sites/default/files/publications/332/covid-19_related_goods_us_imports_and_tariffs_commission.xlsx">report</a> from United States International Trade Commission (ITC)<span> begins to provide the answer to that question, </span><span>though probably not the answer those same politicians and pundits were expecting.</span></p> <p><span>The June 2020 ITC report on</span> <span>“tariff and trade information for known products related to the response to COVID-19” substantially expands and updates an April report on the same issues. <span> </span>It now covers 203 medical products at the highest level of detail provided in U.S. customs data (the 10‐​digit level of the Harmonized Tariff System of the United States (“HTSUS”)) in six broad categories: (1) COVID-19 test kits/​testing instruments; (2) Disinfectants and sterilization products; (3) Medical imaging, diagnostic, oxygen therapy, pulse oximeters, and other equipment; (4) Medicines (pharmaceuticals); (5) Non‐​PPE medical consumables and hospital supplies; (6) Personal protective equipment (PPE); and (7) Other.<span> </span></span></p> <p><span>The ITC report is useful in several respects.<span> </span>For one thing, it documents the many tariffs that the United States now imposes on these essential imports, thus <a href="https://cei.org/content/repeal-neverneeded-trade-barriers">needlessly</a> reducing supply and increasing prices at the worst possible time.<span> </span></span></p> <p><span>The ITC report also provides the top 5 foreign sources of these “COVID-19” goods in the United States, and in so doing eviscerates the all‐​too‐​common claim that the U.S. market is utterly dependent on China for essential medical goods.<span> </span>In fact, after crunching the numbers for 2019 (full dataset available <a href="https://www.cato.org/sites/cato.org/files/2020-07/USITC%20Medical%20Goods%202.xlsx">here</a>), we see that:</span></p> <ul><li><span>For a majority (103 of 203) of the COVID-19 products in the ITC report, China was an insignificant supplier, representing between 0% and 10% of all imports of such goods in 2019.</span></li> <li><span>For only 32 the 203 items analyzed, did China supply more than half of all imports, and China truly dominates (having, say, more than an 80% import share) only nine import categories – mostly low‐​cost PPE like rubber gloves and hospital gowns.<span> </span>(See Table below.) Moreover, only six (bold italics) of the China‐​majority products are pharmaceuticals or pharmaceutical inputs – what our elected officials seem most worried about:</span></li> </ul><p> <div data-embed-button="embed" data-entity-embed-display="view_mode:media.blog_post" data-entity-embed-display-settings="https://infogram.com/lincicome-table-1-china-imports-1h8n6mxj3kx94xo?live" data-entity-type="media" data-entity-uuid="4ee2491a-92ec-4087-b5a8-171aa092a142" data-langcode="en" class="embedded-entity"><a href="https://infogram.com/lincicome-table-1-china-imports-1h8n6mxj3kx94xo?live="> <div class="embed embed--infogram js-embed js-embed--infogram"> <div class="infogram-embed" data-id="f9da3fb2-ed4b-4cea-854c-cd4bf862236a" data-type="interactive" data-title="Lincicome Table 1: China Imports"></div> </div> </a></div> </p><ul><li><span>Speaking of pharmaceutical goods (found mainly in HTSUS Chapters 29 and 30), the ITC report further shows that China is simply one of many suppliers of these goods, and certainly not a dominant one for almost all of the products at issue.<span> </span>In fact, China was not even a top 5 import source for 34 of 63 pharmaceutical goods on the ITC’s list, and it was only the top foreign supplier for nine of those products (only a few of which could, as noted above, be considered to have a dominant China import share in 2019).<span> </span>At the same time, India</span>—<span>another frequent target of D.C. supply chain anxiety</span>—<span>was a majority foreign supplier of only <strong>one</strong> of these pharmaceutical products (with 72.7% of all imported “Anticonvulsants” under HTSUS 3004.49.0020 in 2019), and had greater than 25% import share for only five others.<span> </span></span></li> <li><span>Overall, the ITC data for imports of pharmaceuticals and all other COVID-19 goods show a wide variety of foreign sources, mostly from allies like Canada, Mexico, Japan, Brazil and the EU — with relatively few items truly dominated by a single country. <span> </span>(Only 21 of 203 products overall had a supplier country with over 80% import share in 2019; only 91 of the products even had a supplier country with a bare majority.)</span></li> </ul><p><span>The ITC report thus reveals that, far from suffering some sort of major “dependence” crisis that demands an immediate, wide‐​ranging overhaul of the U.S. manufacturing sector and U.S. trade and procurement policies, the United States generally imports essential medical goods from a diverse (and ever‐​changing) group of foreign suppliers, and that</span>—<span>at most</span>—<span>there are only a handful of these products (from China or elsewhere) which are so dominated by a single country that they might require the federal government’s attention.</span></p> <p><span>The key word here, of course, is “might” because even products with highly concentrated import shares don’t necessarily demand new government action. As I explained recently in </span><a href="https://www.cato.org/publications/commentary/supply-chain-repatriation-its-buyer-nation-beware"><em><span>National Review</span></em></a><span>, import shares alone (which is all the ITC examined) can’t tell us how “dependent” the United States actually is on the foreign source country at issue:</span></p> <blockquote><p><span>[I]solated import‐​share figures tell us very little about actual “vulnerabilities,” because they omit domestic production and local inventories. According to a new study from the </span><a href="https://www.stlouisfed.org/on-the-economy/2020/april/us-rely-other-countries-essential-medical-equipment"><span>St. Louis Federal Reserve</span></a><span>, China supplied almost 30 percent of all imported “essential medical equipment” (hand sanitizer, masks, personal protective equipment, ventilators, etc.) in 2018 but accounted for only 9 percent of total domestic consumption because <em>American</em> producers supplied the vast majority (more than 70 percent) of these products….</span></p> <p><span>At the same time, we have massive stockpiles of other critical drugs to prepare for crisis‐​related spikes in demand.</span></p> </blockquote> <p><span>Import share figures might also hide other global producers that have substantial capacity but simply didn’t sell to the United States during the period at issue (<em>e.g.</em>, due to long‐​term contracts or geographic considerations), and they don’t tell us about the availability of similar or alternative products (e.g., a different type of antibiotic) in the marketplace or about key inputs or intermediaries in the manufacturing process.<span> </span>Furthermore, all of these figures will need to be updated to account for massive recent changes in the U.S. and global markets for these goods, as manufacturers around the world expanded capacity or adapted their operations to meet the COVID-19 challenge.<span> </span></span></p> <p><span>Finally, even a complete dataset of U.S. and global medical goods production and trade won’t answer more fundamental questions about trade, manufacturing, supply chain “resiliency,” national security, and the proper role of the federal government in addressing these issues – the topic of a new Cato Institute paper on which I’m now working.</span></p> <p><span>Nevertheless, the ITC report is a good starting point for these discussions, as it shows the relatively few COVID-19 products for which more detailed information</span>—<span>on domestic and global production, supply chains, U.S. inventories and stockpiles, etc.</span>—<span>may be needed to advise on optimal U.S. “supply chain” policies going forward.<span> </span>Right now, those additional data are limited to non‐​existent, but they should be improved by a forthcoming report from the National Academies of Sciences, Engineering and Medicine that was commissioned by the </span><a href="https://www.congress.gov/bill/116th-congress/senate-bill/3548/text?q=product+update#toc-idFB06C2870EAA4D09A985E99C0424B70A"><span>CARES Act</span></a><span>.<span> </span></span></p> <p><span>In the meantime, the ITC’s new report should quell policymakers’ immediate concerns that urgent and major government action is needed to fix America’s medical goods “dependency” problem. Judging from recent Trump administration </span><a href="https://www.washingtonpost.com/business/2020/05/19/trump-takes-first-step-toward-returning-medical-supply-chains-us/"><span>actions</span></a><span> and </span>proposals <span>from the </span><a href="https://joebiden.com/supplychains/"><span>Biden campaign</span></a><span> and </span><a href="https://thehill.com/policy/healthcare/495192-senate-dems-unveil-bill-to-federalize-medical-supply-chain-boost-production"><span>Congress</span></a><span>, however, nobody seems to have read it.</span></p> Mon, 13 Jul 2020 16:32:46 -0400 Scott Lincicome https://www.cato.org/blog/new-data-show-americas-limited-dependence-china-essential-medical-goods Ignoring the Recent (and Ignominious) History of “Buy American” https://www.cato.org/blog/ignoring-recent-ignominious-history-buy-american Scott Lincicome <p>Democratic Presidential nominee — and current 2020 front‐​runner — Joe Biden yesterday released a “<a href="https://joebiden.com/madeinamerica/">Made In All of America</a>” plan heavy on “Buy American” mandates, pursuant to which&nbsp;$400 billion in new federal energy and infrastructure projects must use only “American products, materials, and services.” Biden’s plan, it should be noted, is hardly novel:&nbsp;Buy American laws have been around for almost a&nbsp;century, and similar types of procurement restrictions are now quite&nbsp;<em>en vogue</em>&nbsp;among politicians and wonks on both the left and the right.&nbsp;As Cato scholars have argued for <a href="https://www.cato.org/publications/policy-analysis/foreign-manufacturers-united-states-should-they-be-told-buy-american">decades</a>, however, Buy American requirements are bad <a href="https://www.cato.org/blog/false-promise-buy-american">law</a>, bad <a href="https://www.cato.org/blog/buy-american-hurts-most-americans">economics</a>, bad <a href="https://www.cato.org/publications/cato-online-forum/what-can-ttip-accomplish-liberalize-government-procurement">trade policy</a>, and bad <a href="https://www.cato.org/blog/buy-american-politics-usual">politics</a> (well, for <a href="https://www.nwitimes.com/business/local/steel-industry-hails-buy-american-executive-order/article_77608930-7822-589c-99ec-444d9d414386.html">most Americans</a> at least).</p> <p>Yet one needn’t pore over reams of wonkery to understand the problems that Buy American restrictions cause for U.S. companies, workers, taxpayers, and public works projects.&nbsp;Instead, a&nbsp;quick review of what happened the last time these rules were injected into a&nbsp;massive U.S. infrastructure law — way back in 2009 when <em>Biden himself</em> was in the White House <em>and</em> <a href="https://www.npr.org/2020/04/06/828303824/a-look-back-at-how-joe-biden-managed-the-2009-stimulus-package">managing</a> the law’s implementation — may suffice.</p> <p>From the <a href="https://www.wsj.com/articles/SB125306012124114135"><em>Wall Street Journal</em></a> in September 2009:</p> <blockquote><p>On paper, Tom Pokorsky would seem to be a&nbsp;clear beneficiary of the government’s $787 billion economic‐​stimulus package.</p> <p>Mr. Pokorsky runs Aquarius Technologies Inc., a&nbsp;company in Port Washington, Wis., that makes equipment to treat sewage. The stimulus plan earmarks some $6 billion for municipal wastewater projects that are right in his company’s sweet spot.</p> <p>But the bill’s Buy American provisions — meant to give U.S. companies a&nbsp;leg up on foreign competition — are causing Aquarius and other U.S. companies a&nbsp;lot of grief with both suppliers and clients in Canada.</p> <p>Now that grief has boiled over into a&nbsp;major diplomatic row with the largest U.S. trading partner. Canadian communities angered by perceived American chauvinism have started a&nbsp;Buy Canadian campaign to exclude U.S. bidders from municipal contracts.</p> <p>“If that sticks, well, there goes 25% of my business,” said Mr. Pokorsky. “To me, Ontario may as well be Indiana.”</p> <p>Halton Hills, a&nbsp;town of 50,000 people about 25&nbsp;miles west of Toronto, is one of about a&nbsp;dozen Canadian communities forging ahead with plans to amend their procurement policies to freeze out American companies. “We won’t be taking any products from any country that is discriminating against us,” said Mayor Rick Bonnette.</p> <p>Officials in Washington and Ottawa are scrambling to avoid an all‐​out trade war. Even so, Buy American guidelines are complicating life for American companies, muddling municipal bidding procedures and blunting the overall effect of the stimulus.</p> <p>To date, the Environmental Protection Agency has disbursed just $77 million of the $5.9 billion it has for municipal wastewater projects, in part because of Buy American provisions. Overall, the government has either spent or committed about $210 billion in stimulus finds, leaving $370 billion still to be doled out. (The rest of the stimulus is made up of tax cuts.)</p> </blockquote> <p>The <em>WSJ</em> story also shows that the Buy American rules’ problems weren’t just limited to bureaucratic delays or foreign retaliation — they <em>also</em> raised costs for U.S. companies and&nbsp;consumers (in this case, U.S. taxpayers) and were often just plain incompatible with the realities of multinational investment and 21st century&nbsp;global supply chains:</p> <blockquote><p>Aquarius gets a&nbsp;lot of its parts from abroad, particularly from Canada. Such integration became even tighter after the North American Free Trade Agreement in 1994 joined the U.S., Canada and Mexico in a&nbsp;free flow of goods and services.</p> <p>Trojan Technologies Inc. of Ontario, North America’s dominant maker of ultraviolet disinfection equipment for treating sewage, is a&nbsp;key supplier to Aquarius and other companies.</p> <p>Because of the Buy American provisions, Trojan has had to shift production to a&nbsp;plant in Valencia, Calif., a&nbsp;move that has resulted in delays and additional costs being passed on to customers, said Trojan executive Christian Williamson.</p> <p>Trojan is a&nbsp;subsidiary of Danaher Corp., a&nbsp;U.S. conglomerate based in Washington.</p> <p>While some companies have the flexibility to shift production to the U.S., others don’t. General Electric Co. assembles complex wastewater‐​treatment systems in Canada with parts from Europe.…</p> <p>Bob Weese, a&nbsp;spokesman for GE Canada, said the group’s wastewater‐​treatment business was having a&nbsp;tough time bidding for contracts with U.S. municipal governments because of the procurement rules.</p> <p>“The supply chains are so integrated, it is crazy to try to impose a&nbsp;Buy American provision,” he said. “Some components cross the border four or five times” before they are completed.</p> <p>Buy American rules are gumming up the plans of Frederick County, Md., to get $6 million of stimulus money for a $100 million wastewater‐​treatment plant. Long after the project bids and contracts had been signed, the county found itself on the wrong side of the Buy American provisions because their system uses certain membranes made by a&nbsp;GE subsidiary in Canada.</p> </blockquote> <blockquote><p>Kevin Demosky, a&nbsp;county utility official, is applying to the EPA for a&nbsp;waiver to use the GE parts. “<strong>The [Buy American] rules affect a&nbsp;small part of the project but are like a&nbsp;virus infecting the whole thing,” he said. “It’s like they want us to go back in time</strong>.”</p> </blockquote> <p>The Biden plan, it should be noted, actually wants to “<a href="https://joebiden.com/madeinamerica/">crack down</a>” on Buy American waivers, ensuring even <em>less</em> flexibility for American companies, even <em>higher</em>&nbsp;costs for American taxpayers,&nbsp;and even <em>more </em>problems for American infrastructure projects — projects that, let’s face it, aren’t exactly <a href="https://www.politico.com/magazine/story/2018/07/06/gateway-tunnel-new-york-city-infrastructure-218839">models</a>&nbsp;of <a href="https://sanfrancisco.cbslocal.com/2020/02/12/california-high-speed-rail-cost-rises-80-billion/">efficiency</a> already.</p> <p>At least, as the <em>Financial Times</em> <a href="https://www.cato.org/blog/buy-american-destroy-american-jobs">noted</a>&nbsp;in June 2009,&nbsp;<em>one group</em> of Americans clearly benefited from the Stimulus Bill’s&nbsp;Buy American rules:</p> <blockquote><p>Confusion reins. For fear of missing out on contracts, many companies are demanding that all their suppliers are Buy American‐​compliant regardless of any exemptions.<br><br> “Those companies that can comply are of course thrilled and are trumpeting that in their marketing. Those that cannot are in agony and are losing business and cutting workers,” says David Ralston, a&nbsp;government procurement lawyer at Foley &amp;&nbsp;Lardner. “<strong>The many companies that find themselves in the gray areas are calling their lawyers.</strong>”</p> </blockquote> <p>Stimulus, indeed!</p> <p>Libertarians and other free marketers are frequently accused of impractical “fundamentalism” when we express opposition to things like Buy American rules and other types of protectionism and industrial policy.&nbsp;The short history lesson above&nbsp;(which you’d <em>think</em> the Biden Team knows, given the Vice President’s&nbsp;involvement) hopefully shows that, while&nbsp;Biden’s Buy American plan might be good politics, it’s not the <em>free marketers</em> untethered from reality.</p> Fri, 10 Jul 2020 12:11:30 -0400 Scott Lincicome https://www.cato.org/blog/ignoring-recent-ignominious-history-buy-american U.S. Leaders (Still) Learning the Wrong Lessons from China’s Rise https://www.cato.org/blog/us-leaders-still-learning-wrong-lessons-chinas-rise Daniel J. Ikenson <p>While collecting materials to offer a retort to arguments favoring robust U.S. industrial policy, I came across an <a href="https://www.cato.org/publications/commentary/us-leaders-learning-wrong-lessons-chinas-rise">article</a> I wrote on the subject published in <em>China-U.S. Focus</em> on March 15, 2011. I am struck by how much of that piece is still relevant to today’s debate. The article also notes that perceptions developed during the Great Recession (particularly among U.S. policymakers) were the catalyst for the steady decline in the U.S.-China relationship during the Obama administration, which accelerated with rise of Xi Jinping and the election of Donald Trump (a chronology covered in more detail in <a href="https://www.cato.org/publications/free-trade-bulletin/abyss-us-china-trade-war-inevitable">this analysis</a>).</p> <p>While I still plan to write a fresh rebuttal to the more recent arguments for industrial policy, for the time being, the original is republished in full below.</p> <p><strong>U.S. Leaders Learning the Wrong Lessons from China’s Rise</strong></p> <p><strong>by Daniel Ikenson</strong></p> <p>If imitation is the sincerest form of flattery, then the U.S.-China relationship should be brimming with good will. By that standard, 2010 was a celebration of mutual admiration and respect. As Chinese leaders were trying to cultivate an American mainstay — home‐​grown innovation, U.S. policymakers were singing the praises of industrial policy. In this case, only one country can benefit from emulating the other’s policies — and it’s not the United States.</p> <p>The Chinese are right to turn their attention to innovation. It is essential to their next stage of development. But innovation cannot be mandated from the top down. Innovation requires — among other important conditions — a culture that values dissent. Thus far, dissent has not featured prominently in China’s economic model. Unless and until that changes, China will struggle to ascend the global value chain.</p> <p>But at least China’s leaders know what their economy needs, which is more than can be said of ascendant U.S. opinion leaders and policymakers. They seem determined to march the U.S. economy into the suffocating embrace of industrial policy. If it works for the Chinese, then it can work for us, seems to be the mantra of New York Times columnist Thomas Friedman, who wrote:</p> <p>One party autocracy certainly has its drawbacks. But when it is led by a reasonably enlightened group of people, as China is today, it can also have great advantages. That one party can just impose the politically difficult but critically important policies needed to move a society forward in the 21st century.</p> <p>This is a poor analogy. Just because industrial policy may have facilitated catch‐​up growth in an impoverished country committed to reversing the damage of a two‐​century slumber does not mean it is the right course for a country in the technological vanguard that owes its success to ingenuity, innovation, and entrepreneurship. Chinese leaders can learn from America’s successes and failures, but the only proven model for an economy at the technological fore is one steeped in innovation and entrepreneurship.</p> <p>However, with over $100 billion in direct subsidies and tax credits already devoted to green technology, President Obama disagrees. He is convinced that America’s economic future depends on the ability of U.S. firms to compete and succeed in the solar panel, wind harnessing, and lithium ion battery markets. Concerning those industries, the president said: “Countries like China are moving even faster… I’m not going to settle for a situation where the United States comes in second place or third place or fourth place in what will be the most important economic engine of the future.”</p> <p>With all due respect, how does the president know that those will be the most important economic engines of the future? By placing bets on particular industries, the administration is overriding a selective, evolutionary process that has undergirded the world’s most successful innovation machine, while reducing the chances of worthy ideas, firms, and industries leading the next commercial wave. Did President Obama’s predecessors anticipate the arrival of Steve Jobs, Bill Gates, or Mark Zuckerberg and the revolutionary products and services they delivered? Did Washington bureaucrats foresee the advent of specific life‐​extending medicines and devices, like digestible, pill‐​sized cameras? Had those proposing industrial policy in response to a rising Japan in the 1980s and early 1990s prevailed, much of the technology and medical advances taken for granted today would have never come to fruition.</p> <p>Why the sudden turn to industrial policy last year?</p> <p>That China emerged from the Great Recession virtually unscathed and on the same 30‐​year‐​long, high‐​growth trajectory, while the United States continues to confront slow growth, high unemployment, and a large public debt (much of it owned by the Chinese), has fueled fear, self‐​loathing and self‐​doubt among U.S. opinion leaders, which has altered their perceptions of the bilateral relationship. Media opinions about how China has thrived at U.S. expense for too long have proliferated. And woven into stories about China’s rise have been unmistakable appeals to U.S. nationalism.</p> <p>In Chinese reluctance to oblige U.S. policy wishes, readers have been told that China selfishly follows a “China‐​First” policy. In the increasing willingness of Chinese officials to criticize U.S. policies, readers have learned of a new “triumphalism” in China. As a result, once‐​respected demarcations between geopolitical and economic aspects of the bilateral relationship have been blurred, with economic frictions now more likely to be cast in the context of our geopolitical differences. Columnist Robert Samuelson — a one‐​time proponent of the view that globalization means interdependence — now believes that “China’s worldview threatens America’s geopolitical and economic interests.”</p> <p>Simultaneously, the U.S. business community in China — long‐​time advocates of bilateral engagement and an important counter‐​balance to U.S. import‐​competing industries that constantly clamor for protectionism and other actions against China — began to sound the alarm about increasingly discriminatory and protectionist policies in China. They were right to complain and to enlist the support of U.S. officials to compel the Chinese government to reverse those policies.</p> <p>But the firestorm over China’s technology transfer and indigenous innovation policies, in conjunction with the infamous Google hacking incident, painted a picture of an increasingly adversarial China, which opinion leaders and the president were quick to embrace. After all, if the United States is going to “win the future,” as the president exhorts, then somebody has to lose. When the imperative of winning the future is cast as “our generation’s Sputnik moment,” the president encourages the view that China is an adversary. And if we are to draw parallels between the U.S.-China economic relationship and the U.S.-Soviet Cold War rivalry, then industrial policy is to be considered a matter of national security.</p> <p>This adversarial, zero‐​sum characterization of the bilateral relationship is wrong. Regrettably, it may feed increasing acrimony in the relationship, which in turn could fortify the political case for more industrial policy. The United States is on a slippery slope. Hopefully a new batch of policymakers can reverse course before the U.S. economy and the bilateral relationship suffer further damage.</p> <p></p> Tue, 07 Jul 2020 14:13:32 -0400 Daniel J. Ikenson https://www.cato.org/blog/us-leaders-still-learning-wrong-lessons-chinas-rise Johan Norberg discusses the “de‐​industrialization of the world” on the ChannelFMF’s Free Marketeers podcast https://www.cato.org/multimedia/media-highlights-tv/johan-norberg-discusses-de-industrialization-world-channelfmfs-free Mon, 01 Jun 2020 11:04:59 -0400 Johan Norberg https://www.cato.org/multimedia/media-highlights-tv/johan-norberg-discusses-de-industrialization-world-channelfmfs-free The Coronavirus Is Not a Good Argument for Protectionism https://www.cato.org/blog/coronavirus-not-good-argument-protectionism Simon Lester <p>Protectionists have been emboldened by the Trump administration’s approach to trade policy, and some are now using COVID-19 as an argument to support their cause. In most cases, it’s not worth responding, but I don’t think of economics columnist Noah Smith as an economic nationalist, so if he is saying things along these lines, I feel like it merits a response. Here’s what he said <a href="https://www.bloomberg.com/opinion/articles/2020-03-24/offshoring-left-the-u-s-unprepared-for-coronavirus">in his column</a> yesterday:</p> <blockquote><p><strong>Offshoring Left the U.S. Unprepared for Coronavirus</strong></p> <p>…</p> <p>But a new problem threatens to reverse even this tepid progress: a shortage of personal protection equipment. Medical workers who do coronavirus testing need to wear masks, gowns and other items to prevent them from being infected after dealing with large numbers of infected patients. Another problem is a shortage of the cotton swabs used to carry out the tests.</p> <p>It seems almost unthinkable that shortages of these simple materials could hamstring the medical system of the country with the biggest economy on the planet. Economist and long‐​time policy adviser Larry Summers wondered how this could happen:</p> <p> <div data-embed-button="embed" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="7e2b31c4-e64e-41cb-addb-895c991f73e7" data-langcode="en" class="embedded-entity"> <div class="embed embed--twitter js-embed js-embed--twitter"> <blockquote class="twitter-tweet"><p lang="en" dir="ltr" lang="en" lang="en">Thoughts at the end of a long week:<br /><br />Why can’t the greatest economy in the history of the world produce swabs, face masks and ventilators in adequate supply?</p>— Lawrence H. Summers (@LHSummers) <a href="https://twitter.com/LHSummers/status/1241329121768230912?ref_src=twsrc%5Etfw">March 21, 2020</a></blockquote> </div> </div> </p><p>The reason is offshoring. Over the years, the U.S. has outsourced the production of items such as masks, mostly to China — which is now reluctant to allocate any of its production capacity to the U.S., given its own needs and the deteriorating relations between the two countries. Making these objects is technologically somewhat challenging, but it’s also a low‐​margin, commoditized business — there’s little in the way of network effects or brand value or patents to yield big profits. So it made sense for the U.S. to focus on higher‐​value things at the beginning and end of the supply chain — medical services that make use of masks, marketing and distribution, and innovation of technologies used to create better masks.</p> <p>This was an example of thinking on the margin. Economics predicts that businesses decide what to produce based on what makes a little bit more profit. The siren song of marginal profit drew the U.S. relentlessly away from mask production.</p> <p>The problem is that when the economy suffers a huge shock such as a war or a pandemic, the margin vanishes. The U.S. economy is projected to shrink by 30% or more in the second quarter as a result of the coronavirus, and the necessity of doing mass testing has created an abrupt shift in the demand for protective equipment and swabs. What made economic sense yesterday doesn’t make sense today.</p> <p>Eventually the U.S. will reconfigure its economy in response to these shocks. Domestic mask and swab factories will open, or existing facilities will be repurposed to make them. But that will take time, and the U.S. needs more testing now. Lockdowns can suppress the virus, but only at great economic cost; as soon as restrictions end and people go back to their jobs, coronavirus will come roaring back unless the country has a strict regime of widespread testing and contact tracing in place. Thus, every day that the economy fails to provide enough masks and swabs is another day that it has to remain in shutdown.</p> <p>If businesses will always make decisions on the margin, then it’s government’s job to insure the country against big shocks such as pandemics and wars. The U.S. could have used trade barriers and government support to make sure that the entire supply chain for medical equipment stayed in the country. But government action against offshoring has long been stigmatized, including by Summers himself, who in 2012 lambasted offshoring skeptics as “Luddites.”</p> <p>The coronavirus crisis should cause advocates of unrestricted free trade to rethink their blanket opposition to protectionism. An economy based entirely on far‐​flung supply chains is more profitable in normal times, but when a crisis hits, it can quickly become a liability. Items such as masks and swabs are too crucial to be left to the whims of international markets.</p> </blockquote> <p>There is a valid but narrow point buried in his argument, but it requires a lot more nuance than what he is offering. It’s true that if you are in the midst of a geopolitical conflict with a particular country, you wouldn’t want to be dependent on them for certain essential products. For example, during World War II, we wouldn’t have wanted to be dependent on Germany for rifles or for penicillin.</p> <p>So yes, you want to make sure that you are not getting <em>all </em>products that are, in some sense of the term, essential from a single country, which could be the subject of a geopolitical conflict, or could be susceptible to a natural disaster. (You also may want to consider whether it really makes sense to have that geopolitical conflict. There are concerns with China, but they could certainly be handled better than we are currently handling them.)</p> <p>But that’s a very narrow proposition, and it doesn’t translate into “offshoring left the U.S. unprepared for coronavirus.” It also doesn’t necessitate a rethinking of support for free trade. Rather, it requires a country to take a look at what products are essential for security or public health or some other policy, and to make sure it has a diverse and reliable supply of those products. To be clear, that does not mean “reshoring” all production of those products to the United States. Offshoring has many benefits, and in fact helps ensure a supply of these essential products, because there are risks to having your own country as the sole supplier. We want to have good trading relationships with the rest of the world, because when (inevitably) something goes wrong with our own production, we want to be able to quickly get help from others. We are better off if this manufacturing knowledge is distributed around the world. We just want to make sure that we have sources of supply in countries that we can count on.</p> <p>So is Noah right that offshoring is to blame here? No. Every country needs to have a plan for ensuring that it can get medical equipment when it needs it. But it’s costly and risky to seek self‐​sufficiency in this production, and it’s better for everyone to maintain a cooperative international approach to making these products.</p> Wed, 25 Mar 2020 10:47:02 -0400 Simon Lester https://www.cato.org/blog/coronavirus-not-good-argument-protectionism Gains From Deregulation Undone by Tariffs https://www.cato.org/blog/gains-deregulation-undone-tariffs Jeffrey Miron, Erin Partin <p>Optimism among U.S. manufacturers was near an all‐​time high in early 2017. Just eleven days into his presidency Trump signed <a href="https://www.cato.org/blank">an executive order</a> specifically targeting overregulation. According to <a href="https://www.cato.org/blank">a survey</a> by the National Association of Manufacturers, an advocacy group representing 14,000 U.S. companies, 93.3 percent of respondents felt optimistic about their company’s outlook. This optimism was driven by an expectation that the new administration would focus on deregulation, which would benefit the domestic manufacturing industry. The administration’s commitment to deregulation <a href="https://www.cato.org/blank">kept industry confidence high</a> through much of 2017 and 2018 as <a href="https://www.cato.org/blank">regulations</a> <a href="https://www.cato.org/blank">continued to be repealed</a>.</p> <p> </p><div data-embed-button="image" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="c5a478b6-9e83-4cb4-820d-6ddbce586eda" data-langcode="en" class="embedded-entity"> <img srcset="/sites/cato.org/files/styles/pubs/public/2020-01/NAM.png?itok=jZaWKS0q 1x, /sites/cato.org/files/styles/pubs_2x/public/2020-01/NAM.png?itok=HTzjo3sF 1.5x" width="700" height="406" src="/sites/cato.org/files/styles/pubs/public/2020-01/NAM.png?itok=jZaWKS0q" alt="This figure shows the results of a NAM survey with the percent of respondents expressing a positive outlook each quarter from 2016-2019" typeof="Image" class="component-image" /></div> <p>However, the escalating trade war with China is erasing many of the gains from deregulation. Small and medium sized firms are being <a href="https://www.cato.org/blank">hit hard</a> by high tariffs on steel and other imported components. The only hope for many companies is to apply for <a href="https://www.cato.org/blank">tariff exemptions</a>, but the process is often opaque, arbitrary, and tilted heavily in favor of larger firms with strong lobbying power.</p> <p><a href="https://www.cato.org/blank">Pro Publica reports</a>:</p> <blockquote><p>“Companies with enough resources and savvy can not only push their own cases, they can work to undermine those of competitors.”</p> <p>“With new tariffs being announced and lifted on a few days’ notice and trade agreements constantly being renegotiated, companies have scrambled to protect themselves. Tariff exclusions are highly sought after because they offer a huge competitive advantage — especially if a rival still has to pay. The review of exclusions is happening on a compressed time schedule, with little warning before tariffs and a complex set of rules that few people understand go into effect. And there are no second chances.”</p> <p>“The Commerce Department at first had projected that it would see only about 4,500 applications — a threshold that was passed almost instantly. According to a regulatory filing, USTR estimated that each exclusion request would take applicants two hours to prepare, at a cost of $200 each, and two and a half hours for USTR to process. For the China tariffs, adjudicating cases is expected to take 175,000 staff hours over the course of a year, at a cost of $9.7 million.”</p> </blockquote> <p>Trump’s trade war is harming U.S. manufacturers, their employees, and their customers. While it may be too soon to determine the damage to the economy, the thirty percent drop in manufacturer confidence over the past year does not bode well.</p> Thu, 09 Jan 2020 15:29:11 -0500 Jeffrey Miron, Erin Partin https://www.cato.org/blog/gains-deregulation-undone-tariffs Do Oren Cass’s Justifications for Industrial Policy Stack Up? https://www.cato.org/publications/commentary/do-oren-cass-justifications-industrial-policy-stack-up Ryan Bourne <div class="lead mb-3 spacer--nomargin--last-child text-default"> <p>Oren Cass wants the U.S. government to adopt <a href="https://www.lawliberty.org/2019/07/23/resolved-that-america-should-adopt-an-industrial-policy/" target="_blank">a&nbsp;manufacturing‐​focused “industrial policy.”</a></p> </div> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>In a&nbsp;speech at the National Conservatism conference last month, the Manhattan Institute scholar explicitly repudiated the view that resources are usually best allocated by voluntary market trades between consumers and producers.</p> <p>No, said Cass, “market economies do not automatically allocate resources well across sectors.” Some “vital sectors…suffer from underinvestment” as a&nbsp;result and, though naturally imperfect, a “sensible industrial policy” could improve on the outcomes we currently experience.</p> <p>A belief that there is such widespread “market failure” to be corrected through the government thumbing the scale might sound familiar to those with knowledge of the socialist economic planning debates. Cass <a href="https://twitter.com/oren_cass/status/1160244259544588293?s=20" target="_blank">baulks at the idea</a> the socialist label can be thrown at him. But he has not yet answered the central questions this analogy poses: Why is the government better placed to decide the industrial composition of the economy than the interaction of consumers and producers? And would the political system deliver an economically‐​reasoned industrial policy in practice?</p> <p>Some <a href="https://twitter.com/hamandcheese/status/1154392633516724224?s=20" target="_blank">industrial policy advocates</a> rightly state that current policy is more interventionist than we would like, and replete with incentives, subsidies, and tax breaks that could be considered a&nbsp;de facto industrial policy for the economy already.</p> <p>But Cass’s case is not merely a&nbsp;criticism of how current policy operates, or seeking to level the playing field. He explicitly says that <em>markets</em> do not allocate funds effectively, thus implying an explicit manufacturing‐​focused industrial strategy <em>from government</em> would be desirable even if today’s current distortions were eliminated.</p> <p>Yet his speech gives no indication of how we might judge how well or badly resources are currently allocated across sectors, nor a&nbsp;measure of how we could judge whether there is indeed currently “underinvestment” within them.</p> <p></p> </div> , <aside class="aside--right aside pb-lg-0 pt-lg-2"> <div class="pullquote pullquote--default"> <div class="pullquote__content h2"> <p>Oren Cass asserts that markets cannot generally allocate resources efficiently by industry. Yet he provides no meaningful metrics to show this is the case, nor shows why his policies would deliver better outcomes.</p> </div> </div> </aside> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>The closest he gets is a throwaway line about the size of manufacturing in U.S. output (12 percent) being smaller than in Germany (23 percent) and Japan (19 percent). No evidence is presented for why these levels are optimal or even better.</p> <p>Without this kind of information, how are we to judge Cass’s industrial policy prescriptions and whether they achieve his goals? Is economic efficiency his aim? Employment? Or something else?</p> <p>In the absence of meaningful metrics for success, we must instead assess the likelihood of what he foresees as the social and economic benefits from a manufacturing‐​focused policy shift.</p> <h3>The Supposed Benefits of Manufacturing</h3> <p>Manufacturing, which he defines as making “physical things” (traditional manufacturing, resource extraction, energy production, agriculture, some construction), is said by Cass to have three major upsides compared to employment in other sectors:</p> <p> </p><ol><li>It “provides particularly well‐​paying, stable employment — especially for men with less formal education.”</li> <li>It “tends to deliver faster productivity growth because its processes are susceptible to technological advances that complement labor and increase output.”</li> <li>It (manufacturing production) is inextricably linked with innovation, and thus a more dynamic economy.</li> </ol><p>These are aggregated as justification for policy to incentivize or support manufacturing sectors through nine specific policy proposals, including everything from demands for government investment in basic science research right through to intrusive local content requirements, restrictions on foreign ownership and biasing the tax code towards this “productive” use of labor.</p> <h3>Stable Employment?</h3> <p>The claim that manufacturing “provides particularly well‐​paying, stable employment — especially for men with less formal education” is an eye‐​opening one, given that this debate arises in part due to a precipitous decline of manufacturing employment in the United States over recent decades.</p> <p>Since 1987, employment in manufacturing has <a href="https://fred.stlouisfed.org/series/MANEMP" target="_blank">fallen by 33 percent</a>, equivalent to around 5 million fewer jobs. As economists Kerwin Kofi Charles, Erik Hurst and Mariel Schwartz <a href="https://www.nber.org/papers/w24468" target="_blank">have outlined</a>, “the declines [in employment] have been most pronounced among those with lower levels of accumulated schooling.” If “stable employment” that was good for those with “less formal education” was guaranteed by manufacturing, it’s unlikely that policy would be needed to revive it.</p> <p>What Cass means then is that manufacturing *used to* provide stable employment for low‐​skilled workers in the post‐​war period. Industrial policy advocates imply either that policy somehow took a wrong turn from the 1980s and 1990s onwards, with “globalization” or liberalized trade, which destroyed this stability, or that with a few policy tweaks we could return to those good old days when low‐​skilled men had jobs for life.</p> <p>There’s of course some truth in the memory of “jobs for life.” In the immediate post‐​war period, many people did work for one firm for their whole career. But this belief in widespread post‐​war manufacturing job stability is somewhat overplayed and infused with romanticism. Even to the extent it did exist, of course, that doesn’t mean an industrial policy will bring it back.</p> <p>In 1963, for example, the median economy‐​wide measure of continuous <a href="https://www.jstor.org/stable/41835113?seq=1#page_scan_tab_contents" target="_blank">years of association with an employer was 4.6 years</a>; in 2018 it <a href="https://www.bls.gov/news.release/tenure.nr0.htm" target="_blank">was 4.2 years</a>. A fall, sure, but not dramatic.</p> <p>Though absolute employment levels in manufacturing peaked in June 1979, in relative terms manufacturing has been in near continuous decline since WW2 too (see Figure 1). In 1947, 33 percent of the workforce were employed in manufacturing, but that had already fallen to 21.2 percent by the turn of 1980, and further to 8.5 percent today.</p> <div class="responsive-embed"></div> <p>This is instructive of a trend which suggests “policy” — and hence globalization and trade — is only part of the equation. Across almost all high‐​income countries, as economies become richer the balance of activity taking place in “industry” falls. Figure 2 shows that in every G7 country, for example, the proportion of total employment in “industry” — mining and quarrying, manufacturing, construction, and public utilities — has fallen since 1991, albeit to different levels. “Manufacturing employment,” as Cass defines it, could only have been more “stable” on aggregate over long periods if you presume that this universally experienced structural trend could have been bucked.</p> <div class="responsive-embed"></div> <p>It’s true that, at the level of the individual worker, manufacturing jobs tend to be more “secure” in any given year than a job in the rest of the economy. Since 1990, the rate of “job destruction” in manufacturing has averaged 4.5 percent of jobs per year, far below the 6.9 percent for the economy as whole.</p> <p>But that ignores important historical context. The rate of annual job creation in manufacturing since the 1960s has been low too, and there was net job destruction in each decade from the 1960s through 2010. In fact, even in the supposed golden era of “stable employment” from the end of the second world war to 1980, the rate of job destruction in manufacturing was 6 percent per year, not massively dissimilar to the overall rate of job destruction today, and certainly higher than the current manufacturing employment destruction rate (see Figure 3).</p> <div class="responsive-embed"></div> <p>Manufacturing also seems to fare worse than the broader economy during economic downturns, in both output terms and its net effect on jobs. Real GDP for the whole economy fell between 2007 Q4 and 2009 Q4 by 4.0 percent, for example, yet real value‐​added in manufacturing fell by a massive 14.9 percent. In that same period, manufacturing employment levels fell by 16.3 percent, compared with a much smaller overall decline in total nonfarm payrolls of 5.9 percent. Some security!</p> <p>In short, manufacturing provides more stable employment in the sense that the likelihood of your job being lost in any given year is lower than for the rest of the economy. But the sector as a whole has been in long‐​term employment decline, even prior to contemporary globalization, with net job losses over long periods and a huge fall in the manufacturing share of total employment. Job creation and destruction likewise tend to be much more volatile in manufacturing and so disproportionately drive fluctuations in the broader economy. Perhaps the policy tools Cass favors could raise the output and employment share of manufacturing. Whether that would generate more secure employment sustainably seems unlikely.</p> <h3>Higher Labor Productivity?</h3> <p>The second reason Cass gives for favoring a manufacturing‐​biased industrial strategy is that manufacturing tends to experience higher rates of productivity growth.</p> <p>The idea is simple enough: Cass rightly highlights that manufacturing activities tend to be more prone to automation or, as he puts it, “technological advances that complement labor and increase output.” Productivity growth is ultimately what drives improvements in living standards. Surely, then, if policy had ensured more resources towards the manufacturing sector then economic growth and the gains to ordinary workers would have been much stronger over the past 30 years?</p> <p>Sadly, this view gets things completely backwards and shows a glaring contradiction with his first claim about employment. As my trade colleagues never tire of outlining, manufacturing output has continued rising and the real GDP share of manufacturing has remained steady despite a long‐​term decline in manufacturing employment. That’s precisely because historic productivity growth in manufacturing overall has been strong, causing (at least a large part of) the employment decline of the sector. Cass’s desire for “stable employment” and “high productivity growth” in manufacturing is thus a direct contradiction.</p> <p>Productivity is about producing more output with less input (including labor). Automation and technological improvements reduce the number of workers needed to produce a given quantity of goods. Unless there is very responsive consumption demand, then, productivity improvements (fostered by both innovation and indeed trade competition) will tend to reduce the number of required workers. Workers that remain will also tend to be higher skilled and hence higher paid.</p> <p>The economist Robert Lawrence <a href="https://www.nber.org/papers/w24151" target="_blank">outlines the story best</a>. Suppose an innovation trickles through the manufacturing sector, raising the productivity of workers. This increases the supply of the good. The extent to which this feeds through to higher output or lower prices depends on the elasticity of demand — that is, the slope of the demand curve for the product.</p> <p>For manufactured goods in general, demand is relatively unresponsive to price. As prices fall due to increased supply, the quantity demanded does not greatly change. Consumers instead pocket the savings and tend to spend more on services. The workers that remain in the sector, on higher wages, likewise spend relatively more on services with their higher incomes. That’s why, between 1947 and 2017, the share of consumer spending on goods fell from 62 percent to 33 percent, despite manufacturing output continuing to rise.</p> <p>The broad statistics show this this trade‐​off between productivity and employment. Between 1980 and 2010, when manufacturing productivity growth was rapid, employment levels in manufacturing fell dramatically. Since 2010, when the manufacturing productivity performance has been near stagnant, <a href="https://fred.stlouisfed.org/series/MANEMP" target="_blank">employment in manufacturing has crept up</a>.</p> <p>You can see this at the sub‐​sector level too. Take the manufacturing industry for computers and electronic products. Over the past 30 years, the sector has seen a 1000 percent increase in productivity. That has meant employment even in that sector, where demand has grown massively, has fallen by a huge 47 percent since 1987.</p> <p>This trade‐​off can be seen by looking at the manufacturing industries with the strongest employment performance too. Manufacturing industries that have bucked the trend with employment growth, rather than contraction, include “support activities for mining,” “beverages and tobacco,” and “food manufacturing.” Yet these are three of the six worst performing manufacturing in terms of labor productivity performance. “Beverages and tobacco” has actually seen a labor productivity decline since 1987.</p> <p>In contrast, the top 5 manufacturing industries by productivity performance since 1987 — computer and electronic products, but also oil and gas, textile mills, primary metals and transportation — each saw reductions in employment between 21 percent and 78 percent of their 1987 workforces.</p> <p>That’s not to say that there is a definitive pattern between employment and productivity at the level of individual industry. American apparel production for, example, has seen a dramatic employment collapse while labor productivity has stagnated over the last 30 years. This is presumably because demand for clothes has simply shifted to cheaper imports from less developed countries. Plastics employment has been fairly stable too, despite impressive productivity growth. This is presumably because plastics consumption has been rising.</p> <p>This all highlights an obvious truth though. The only ways to get “stable employment” through a manufacturing industrial policy would be a) to avoid disruptive productivity improvements in sectors where demand is largely fixed, b) to ensure workers are always able to move into new manufacturing industries as labor‐​saving technologies proliferate, or c) to focus attention solely on sectors where demand is likely to continue growing.</p> <p>Strategy a) would clearly worsen economic efficiency — it would be actively making the economy poorer. Both b) and c) depend on second‐​guessing future demand patterns and the likelihood of individual sectors enjoying productivity growth. Even if the economy could be engineered in this direction, rapid productivity growth industries would unlikely lead to a return of tons of stable blue‐​collar jobs for low education workers either.</p> <p>Would it not be better to just follow a consumer‐​led policy where the US traded according to its comparative advantages, and the industrial structure of the economy adapted to changing domestic and global demands? One cannot help but feel lots of industrial policy advocates simply <a href="https://twitter.com/hamandcheese/status/1161411417095987200?s=20" target="_blank">do not like the sorts of service sector jobs</a> that have proliferated as consumer demands have shifted. They get <a href="https://twitter.com/oren_cass/status/1161790225691140096?s=20" target="_blank">incredibly defensive</a> about accusations they desire the reshoring of monotonous low‐​skilled manufacturing activities. But these are exactly the sorts of jobs that would provide the relatively “stable employment” they desire.</p> <p>In a world where a massive growth of the middle‐​class in China and beyond is expected to lead to a surge in demand for services and high value‐​added manufacturing, which the US specializes in, it would especially seem short‐​sighted to actively try to rebalance the economy to much wider manufacturing employment.</p> <p>Even aside from the growth‐​destroying effects of the cronyism and rent‐​seeking Cass’s programs would facilitate, it seems weird to assume too that manufacturing productivity will necessarily be more robust than services sectors in future. Many believe we could be on the cusp of AI, driverless cars and robotics enabling rapid productivity growth even within the service sector.</p> <h3>Innovation?</h3> <p>Cass’s final claim is that manufacturing is inherently tied up with innovation. He does not explain what he means by this, other than saying a productive capacity is needed to “scale” ideas. Nor does he provide metrics of innovation he believes would improve under his policies.</p> <p>That’s probably unsurprising — innovation is itself difficult to define and measure. Given that Cass cites Germany and Japan as “successful” examples of the sorts of economic structure he desires though, perhaps comparisons between the United States and these countries might be instructive?</p> <p><a href="https://en.wikipedia.org/wiki/International_Innovation_Index#Large_country_ranking" target="_blank">Various</a> global <a href="https://www.globalinnovationindex.org/Home" target="_blank">innovation indices</a> produce very different results on which of these countries are more innovative, though the US does not perform consistently “worse” across them than either Germany or Japan. In the face of such subjectivity, we might judge overall economy‐​wide productivity as an appropriate proxy of past innovativeness.</p> <p><a href="https://www.forbes.com/sites/niallmccarthy/2019/02/05/where-labor-productivity-is-highest-infographic/#1202dd87ea44" target="_blank">OECD data suggests</a> GDP per hour worked is around the same in Germany and the United States, and much higher in both than Japan. Average annual productivity growth across all three countries has been almost exactly the same since 1990 too, though over the past 10 years it has been significantly faster here in America (even as manufacturing productivity growth has slowed).</p> <p>In fact, between 1980 and 2010 manufacturing productivity growth overall was stronger in the United States than Germany or Japan. It’s only since the financial crisis that U.S. productivity has completely stagnated (see Figure 4).</p> <div class="responsive-embed"></div> <p>Cass cites China as another tentative success story too. But China’s growth is largely “catch‐​up,” and the country is still much, much poorer than the United States. <a href="https://www.nber.org/papers/w26075#fromrss" target="_blank">Studies of specific components</a> of China’s industrial strategy have found that while interventions did alter the country’s industrial composition, they led to “sizable distortions” and “increased industry fragmentation and idleness.”</p> <p>But maybe Cass believes America has big successes to build on. Maybe if we just used his tools to eke out a slightly larger manufacturing sector, then the economy could be even more dynamic and innovative.</p> <p>The belief that “industrial policy” could improve the dynamism of the economy also finds little support in the UK’s experience. A comprehensive evaluation by economists <a href="https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/277158/ep2-government-policy-since-1945.pdf" target="_blank">Tim Leunig and Stephen Broadberry</a> of post‐​war policy found the creation of “national champions” had very poor results, while industrial subsidies were “an almost unmitigated failure” and “not successful in either supporting output or employment.” In particular, the government could not “successfully distinguish between sectors that were in inevitable decline and sectors with real prospects for the future.” The knowledge problem strikes again.</p> <p>None of this is to say everything is perfect here in the United States, nor that policy currently isn’t interventionist in ways that currently harm manufacturing, innovation, and the broader economy. Too often, in making some of the arguments outlined above, libertarians are misinterpreted as being inherently hostile to manufacturing industries, rather than simply being neutral and not seeking to prefer them to service sectors. Reviewing regulatory and environmental rules, the poor application of property taxes that can bias against industrial activity at the local level, and trade protectionism that raises costs for importers of intermediate goods, could all make manufacturing more productive, while reversing policy biases against it.</p> <p>But it’s worth noting that Leunig and Broadberry’s conclusions about what improves manufacturing performance are the precise opposite from the policies Cass wants to adopt. They say the things that helped make British manufacturing stronger and more productive were foreign direct investment, greater trade liberalisation and a market‐​based competition framework. Cass instead wants to “Tax foreign acquisition of U.S. assets, making U.S. goods relatively more attractive,” “Retaliate aggressively against mercantilist countries that undermine market competition,” and “Impose local content requirements in key supply chains like communications.”</p> <h3>Conclusion</h3> <p>Oren Cass asserts that markets cannot generally allocate resources efficiently by industry. Yet he provides no meaningful metrics to show this is the case, nor shows why his policies would deliver better outcomes. His two main claims about the benefits of a manufacturing sector — “stable employment” and “strong productivity growth” — are directly contradictory. A plethora of evidence suggests as countries’ get richer due to automation and technological improvements, they demand relatively more services, and so the industrial sector declines in employment terms.</p> <p>It would hurt, not improve, general economic performance to try to create stable employment in manufacturing industries given these trends, and would be particularly foolish given the likely rising demand for high‐​end manufacturing and services (healthcare, education, insurance, finance, etc.) as the global middle‐​class develops.</p> </div> Thu, 15 Aug 2019 15:05:00 -0400 Ryan Bourne https://www.cato.org/publications/commentary/do-oren-cass-justifications-industrial-policy-stack-up Daniel J. Ikenson discusses Trump’s threat to raise tariffs on Mexican auto exports on Sinclair Broadcast Group https://www.cato.org/multimedia/media-highlights-tv/daniel-j-ikenson-discusses-trumps-threat-raise-tariffs-mexican-auto Fri, 05 Apr 2019 10:49:00 -0400 Daniel J. Ikenson https://www.cato.org/multimedia/media-highlights-tv/daniel-j-ikenson-discusses-trumps-threat-raise-tariffs-mexican-auto Daniel J. Ikenson discusses whether Trump saved the steel industry on NPR’s All Things Considered https://www.cato.org/multimedia/media-highlights-radio/daniel-j-ikenson-discusses-whether-trump-saved-steel-industry-nprs Mon, 07 Jan 2019 10:14:00 -0500 Daniel J. Ikenson https://www.cato.org/multimedia/media-highlights-radio/daniel-j-ikenson-discusses-whether-trump-saved-steel-industry-nprs Patrick J. Michaels’ research on the Chevy Volt subsidies is cited on The Lars Larson Show https://www.cato.org/multimedia/media-highlights-radio/patrick-j-michaels-research-chevy-volt-subsidies-cited-lars-larson Thu, 06 Dec 2018 11:51:00 -0500 Patrick J. Michaels https://www.cato.org/multimedia/media-highlights-radio/patrick-j-michaels-research-chevy-volt-subsidies-cited-lars-larson Daniel J. Ikenson discusses foreign automakers and tariffs on NPR’s Marketplace https://www.cato.org/multimedia/media-highlights-radio/daniel-j-ikenson-discusses-foreign-automakers-tariffs-nprs Wed, 05 Dec 2018 11:48:00 -0500 Daniel J. Ikenson https://www.cato.org/multimedia/media-highlights-radio/daniel-j-ikenson-discusses-foreign-automakers-tariffs-nprs Metal Tariffs: A Nonsensical Solution in Search of a Problem https://www.cato.org/publications/commentary/metal-tariffs-nonsensical-solution-search-problem Colin Grabow <div class="lead mb-3 spacer--nomargin--last-child text-default"> <p>President Trump’s tariffs on imports of steel and aluminum are so ill‐​conceived that even those meant to benefit from them are crying out for relief. Citing a&nbsp;lack of domestic supply, Alcoa this week requested that the Trump administration&nbsp;<a href="https://www.nytimes.com/2018/08/06/business/dealbook/alcoa-requests-reprieve-from-trumps-aluminum-tariffs.html" target="_blank" rel="noopener noreferrer" data-saferedirecturl="https://www.google.com/url?hl=en&amp;q=https://www.nytimes.com/2018/08/06/business/dealbook/alcoa-requests-reprieve-from-trumps-aluminum-tariffs.html&amp;source=gmail&amp;ust=1533918921560000&amp;usg=AFQjCNFR3yvx33hucbaYjZ2wL5Bynqz9Hg">grant the company an exemption</a>&nbsp;from tariffs on aluminum imports from Canada.</p> </div> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>They’re going to have to get in line. The Commerce Department says that it has already received&nbsp;<a href="https://www.wsj.com/articles/wilbur-ross-announces-first-results-from-20-000-tariff-exclusion-requests-1529502874" target="_blank" rel="noopener noreferrer" data-saferedirecturl="https://www.google.com/url?hl=en&amp;q=https://www.wsj.com/articles/wilbur-ross-announces-first-results-from-20-000-tariff-exclusion-requests-1529502874&amp;source=gmail&amp;ust=1533918921560000&amp;usg=AFQjCNGvnTapn-epRz4U0c9UgTcCvca2qA">over 20,000 such requests</a>&nbsp;to be excluded from steel and aluminum tariffs.</p> <p>Alcoa relies on specialization and international supply chains to operate in a&nbsp;cost‐​effective manner. Aluminum sheet for cans made by a&nbsp;plant in Indiana uses alloys cut into thick slabs in Quebec.</p> <p></p> </div> , <aside class="aside--right aside pb-lg-0 pt-lg-2"> <div class="pullquote pullquote--default"> <div class="pullquote__content h2"> <p>President Trump’s tariffs on imports of steel and aluminum are so ill‐​conceived that even those meant to benefit from them are crying out for relief.</p> </div> </div> </aside> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>While Alcoa says that it has gone so far as to attempt purchasing such slabs from its competitor, Century Aluminum, the company is not capable of production that meets Alcoa’s specifications.</p> <p>So, instead, it must continue to import from Canada and pay the Trump administration’s 10‐​percent tariff to obtain needed supplies. Costs go up and competitiveness is reduced. And for what?</p> <p>Despite the increased price of aluminum, prices have not yet risen a&nbsp;sufficient amount for the company to justify restarting some of its idled smelters. The tariffs, therefore, appear to have created the opposite of a&nbsp;happy medium — enough to harm the company’s bottom line but apparently insufficient to provide a&nbsp;dramatic kickstart to domestic production.</p> <p>Furthermore, to the extent U.S. tariffs provide aluminum makers with a&nbsp;competitive edge, it only endures so long as the import tax is left in place.</p> <p>That a&nbsp;renaissance in U.S. aluminum‐​making has failed to take hold isn’t much of a&nbsp;surprise when one considers some of the industry’s fundamental drivers.</p> <p>The decline in domestic production in large part reflects the simple fact that the metal’s creation consumes enormous amounts of electricity —&nbsp;<a href="https://www.eia.gov/todayinenergy/detail.php?id=32872" target="_blank" rel="noopener noreferrer" data-saferedirecturl="https://www.google.com/url?hl=en&amp;q=https://www.eia.gov/todayinenergy/detail.php?id%3D32872&amp;source=gmail&amp;ust=1533918921560000&amp;usg=AFQjCNFMVtVNvF3xG87usdGzXACgNss2gA">three times more</a>&nbsp;electricity per pound of production than paper and paperboard products, which is the second‐​most energy‐​intensive industry.</p> <p>This hands a&nbsp;large advantage to countries with bountiful supplies of cheap hydroelectric power, such as Canada. It’s no coincidence that companies such as Alcoa have chosen to locate several of their smelters there or that Canada is by far the&nbsp;<a href="https://www.commerce.gov/sites/commerce.gov/files/the_effect_of_imports_of_aluminum_on_the_national_security_-_with_redactions_-_20180117.pdf" target="_blank" rel="noopener noreferrer" data-saferedirecturl="https://www.google.com/url?hl=en&amp;q=https://www.commerce.gov/sites/commerce.gov/files/the_effect_of_imports_of_aluminum_on_the_national_security_-_with_redactions_-_20180117.pdf&amp;source=gmail&amp;ust=1533918921560000&amp;usg=AFQjCNGNiQOX0vtV7O2-J2nKRVHBZkoowA">largest U.S. source</a>&nbsp;of imported primary aluminum.</p> <p>This arrangement has served both countries well. Canada uses its comparative advantage to produce aluminum more cheaply than in the United States, while American firms get access to a&nbsp;key input needed to make products ranging from cars to beer cans.</p> <p>Everyone wins, or at least they did until President Trump decided to proceed with his misguided tax on foreign metals.</p> <p>Adding insult to injury is Trump’s justification of the tariffs on national security grounds. Canada is arguably the staunchest ally of the United States. Beyond their shared membership in NATO, Canada is considered such a&nbsp;key part of U.S. national security thinking that the country has been designated a&nbsp;part of the&nbsp;<a href="https://fas.org/sgp/crs/natsec/IF10548.pdf" target="_blank" rel="noopener noreferrer" data-saferedirecturl="https://www.google.com/url?hl=en&amp;q=https://fas.org/sgp/crs/natsec/IF10548.pdf&amp;source=gmail&amp;ust=1533918921560000&amp;usg=AFQjCNGe0Zax7zykNKyIlBHhy0Oy6lw_rA">U.S. Defense Industrial Base</a>.</p> <p>In exchange for an exemption to “Buy American” requirements, their companies are&nbsp;<a href="http://www.atlanticcouncil.org/blogs/defense-industrialist/is-imported-aluminum-a-threat-to-american-national-security" target="_blank" rel="noopener noreferrer" data-saferedirecturl="https://www.google.com/url?hl=en&amp;q=http://www.atlanticcouncil.org/blogs/defense-industrialist/is-imported-aluminum-a-threat-to-american-national-security&amp;source=gmail&amp;ust=1533918921560000&amp;usg=AFQjCNEl2Rr0I99Q8MfO-xAQEJdlnDM3LA">legally obligated</a>&nbsp;to supply American military contractors.</p> <p>Perhaps more importantly, it is far from obvious that the United States is in danger of being dependent on imported aluminum to satisfy its defense needs. As shown by the&nbsp;<a href="https://www.commerce.gov/sites/commerce.gov/files/the_effect_of_imports_of_aluminum_on_the_national_security_-_with_redactions_-_20180117.pdf" target="_blank" rel="noopener noreferrer" data-saferedirecturl="https://www.google.com/url?hl=en&amp;q=https://www.commerce.gov/sites/commerce.gov/files/the_effect_of_imports_of_aluminum_on_the_national_security_-_with_redactions_-_20180117.pdf&amp;source=gmail&amp;ust=1533918921560000&amp;usg=AFQjCNGNiQOX0vtV7O2-J2nKRVHBZkoowA">Trump administration’s own report</a>&nbsp;into the impact of aluminum imports&nbsp;the Department of Defense and its contractors use only a “small percentage” of U.S. aluminum production.</p> <p>While it’s true that a&nbsp;number of smelters currently stand idle and that a&nbsp;Kentucky production facility that produces military‐​grade aluminum is operating well under its peak capability, such spare capacity can serve as a&nbsp;wartime asset by enabling a&nbsp;quick ramp‐​up in production.</p> <p>The tariffs on aluminum, like those on steel, are a&nbsp;nonsensical solution in search of a&nbsp;problem. Americans firms that use aluminum to provide needed goods and services are seeing their competitiveness undermined.</p> <p>Other businesses must contend with lost sales due to foreign retaliation. Workers face reduced compensation or even layoffs while consumer wallets are being hit with increased costs.</p> <p>Now, even those supposed to be on the winning side of the ledger, such as Alcoa, are finding themselves in the loser column. All in the name of a&nbsp;national security threat that is entirely fictitious.</p> <p>This is needless self‐​impoverishment. It’s time for the tariffs to go.</p> </div> Thu, 09 Aug 2018 10:00:00 -0400 Colin Grabow https://www.cato.org/publications/commentary/metal-tariffs-nonsensical-solution-search-problem Duncan Hunter Should Stop Supporting the Jones Act and Sink This Rusted‐​Out Hulk of a Law https://www.cato.org/publications/commentary/duncan-hunter-should-stop-supporting-jones-act-sink-rusted-out-hulk-law Colin Grabow <div class="lead mb-3 spacer--nomargin--last-child text-default"> <p>Americans who wonder how bad laws and boondoggle government programs manage to persist year after year need look no further than Rep. Duncan Hunter’s example. Hunter is one of Congress’s leading advocates for special interests in the country’s maritime industry. And few issues are dearer to this industry’s heart than a&nbsp;nearly 100‐​year‐​old law called the Jones Act.</p> </div> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>Formally known as the Merchant Marine Act of 1920, the Jones Act mandates that the domestic transportation of waterborne cargo be performed by vessels that are U.S.-flagged, U.S.-crewed, U.S.-owned, and U.S.-built. Vessels produced in U.S. shipyards, however, cost as much as eight times more than equivalent ships constructed overseas. Paired with reduced competition from these restrictions, the Jones Act results in artificially‐​inflated transportation costs for the goods American consumers purchase.</p> <p>Americans would rebel if domestic airlines were forced to purchase U.S.-built planes or trucking firms were denied access to imported vehicles, knowing full well the result would be higher prices. Yet the Jones Act persists, decade after decade, in large part because of the unflinching support offered by legislators such as Rep. Hunter to the special interests that benefit from reduced competition and increased costs to consumers.</p> <p></p> </div> , <aside class="aside--right aside pb-lg-0 pt-lg-2"> <div class="pullquote pullquote--default"> <div class="pullquote__content h2"> <p>The Jones Act results in artificially‐​inflated transportation costs for the goods American consumers purchase.</p> </div> </div> </aside> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>Although he has long been a&nbsp;reliable acolyte for rent‐​seeking beneficiaries of the Jones Act, Congressman Hunter recently went beyond the call of duty.</p> <p>In mid‐​July a&nbsp;pro‐​Jones Act special interest group released a&nbsp;report which made the unbelievable claim that the law has no adverse impact on consumers in Puerto Rico, despite the fact that much of what the island consumes is transported aboard expensive Jones Act vessels. This conclusion was in large part based on a&nbsp;price comparison between a&nbsp;handful of items sold at Walmart locations in Jacksonville, Florida and Puerto Rico.</p> <p>No explanation of the report’s methodology or product selection criteria were furnished, and a&nbsp;quick perusal of Walmart’s website shows numerous items to be significantly more expensive in Puerto Rico than Jacksonville. Ice cream that retails for $2.98&nbsp;in Florida, for example, costs over $8&nbsp;in San Juan.</p> <p>Yet in response to the study, Hunter quickly arranged a&nbsp;gathering of the House Subcommittee on Coast Guard and Maritime Transportation, of which he is the chairman. What transpired was a&nbsp;veritable lovefest. The congressmen in attendance, including Hunter, lobbed a&nbsp;series of softball questions to a&nbsp;panel carefully assembled to ensure only sentiment in favor of the law was voiced.</p> <p>Instead of holding the established interests to account or questioning the status quo, Hunter and other members of Congress dutifully carried their water.</p> <p>Furthermore, when Puerto Rico’s Central Recovery and Reconstruction Office recently released a&nbsp;draft report highlighting the law’s negative impact on the territory’s economy, Hunter quickly took issue with the claim. Citing the findings of the maritime industry’s own report on Puerto Rico, Hunter dashed off a&nbsp;letter to the CRRO the same day the industry‐​backed report was released.</p> <p>This is why unjust laws such as the Jones Act persist. This is how the legislative sausage gets made.</p> <p>To be clear, the nexus between Jones Act supporters and politicians goes beyond Hunter and his lone House subcommittee. Perhaps surprisingly, some of the law’s biggest champions are found among communities that are most dependent on sea transport and thus most subjected to its burdens. In Hawaii, each member of the congressional delegation favors the Jones Act, as does Puerto Rico’s lone federal representative.</p> <p>Among the Alaskan congressional delegation, Sen. Lisa Murkowski and Rep. Don Young are firmly in the pro‐​Jones Act camp while Sen. Dan Sullivan has been quiet. Alaska presents a&nbsp;particularly galling example, as in 1984 the state’s voters overwhelmingly passed a&nbsp;ballot initiative demanding that the state’s governor use his best efforts to persuade Congress to repeal the Jones Act — a&nbsp;requirement currently written into state law.</p> <p>All is surely explained when one realizes that the areas of the United States most burdened by the Jones Act are also disproportionately home to maritime special interests who profit from the law and the protection from competition it affords.</p> <p>The insidious relationship that the Jones Act promotes between special interests and legislators must be counted as another of its many negative effects. The time has come to sink this rusted‐​out hulk of a&nbsp;law.</p> </div> Sun, 05 Aug 2018 09:19:00 -0400 Colin Grabow https://www.cato.org/publications/commentary/duncan-hunter-should-stop-supporting-jones-act-sink-rusted-out-hulk-law No Truckers? Let’s Try Ships https://www.cato.org/publications/commentary/no-truckers-lets-try-ships Colin Grabow <div class="lead mb-3 spacer--nomargin--last-child text-default"> <p>Although the economy continues to ride high, there is&nbsp;growing concern&nbsp;that a&nbsp;dearth of truckers could soon drive it into a&nbsp;ditch.&nbsp;<a href="https://www.foxbusiness.com/economy/truck-driver-shortage-throwing-wrench-into-business-activity-fed" target="_blank">Anecdotes suggest</a>&nbsp;an increasingly frantic scramble for drivers, with&nbsp;$70,000 salaries&nbsp;said to be insufficient to lure new drivers to the field. The trucking industry faces a&nbsp;shortage of 63,000 open positions this year — a&nbsp;number that is only expected to increase — and companies are already said to be&nbsp;turning down loads&nbsp;due to a&nbsp;lack of available trucks.</p> </div> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>Some members of Congress have responded by&nbsp;<a href="https://www.washingtonpost.com/news/wonk/wp/2018/03/27/lawmakers-let-teens-drive-18-wheelers-across-the-country" target="_blank">introducing a&nbsp;bill</a>&nbsp;that would allow drivers as young as 18 to transport goods outside the state they’re licensed in, down from the current age of 21. While a&nbsp;welcome step, more‐​expansive thinking is needed. Additional drivers are one solution, but there is another that should be considered: more ships. Rather than tinkering at the policy margins, Congress should pursue measures that would transfer freight from the nation’s roads onto its waterways.</p> <p>Repealing the Jones Act would be a&nbsp;good start.</p> <p></p> </div> , <aside class="aside--right aside pb-lg-0 pt-lg-2"> <div class="pullquote pullquote--default"> <div class="pullquote__content h2"> <p>Repeal the Jones Act. It escalates the cost of shipping goods on America’s waterways.</p> </div> </div> </aside> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>Passed in 1920, this law mandates that ships transporting cargo between two points in the United States be domestically flagged, owned, crewed, and built. Intended to bolster the U.S. maritime sector, the Jones Act has instead been a&nbsp;case study in the failures of protectionism. Absent foreign competition, U.S. shipbuilders produce vessels whose price is as much as eight times higher than those built abroad. This disincentive to the purchase of new vessels means we have fewer ships and a&nbsp;fleet that is old and inefficient.</p> <p>High costs have inevitably followed and, along with them, increased demand for transportation alternatives such as trucking and rail.</p> <p>The proof is in the numbers. From 1960 to 2014, the amount of freight placed on railroads&nbsp;increased by 48 percent&nbsp;while intercity trucks saw their loads grow by an impressive 217 percent. In sharp contrast, the amount of cargo carried by ships sailing around the coasts during this period decreased by 44 percent. And Great Lakes shipping declined by 43 percent.</p> <p>Even as Americans have shunned ships for domestic use, however, they appear perfectly willing to employ them to conduct trade with Canada and Mexico. Freed from the Jones Act’s restrictions, coastal ships linking the United States with Canada and Mexico have seen their freight tonnage more than double during the same time period.</p> <p>Given the decline of domestic shipping, Americans are now left with a&nbsp;transportation system that is hugely dependent on trucks — and on the drivers who operate them. According to the Bureau of Transportation, in 2015, trucks in the United States were responsible for transporting&nbsp;63.8 percent&nbsp;of total freight shipments. For 2016, the American Trucking Associations places the total even higher, at 71 percent.</p> <p>In a&nbsp;more rational system, much of the goods carried by truck would travel aboard ships plying the country’s coastal waters. In Europe, for example,&nbsp;40 percent&nbsp;of domestic freight goes by sea. In the United States the figure is a&nbsp;mere 13 percent. While some of this can perhaps be explained by geographic and other factors, the enormous gulf between the two figures suggests that the Jones Act is a&nbsp;likely culprit.</p> <p>Beyond helping to solve the country’s driver shortage, the removal of trucks from the highways would have numerous other benefits. Although a&nbsp;mere 4&nbsp;percent of highway vehicles, trucks are thought to cause&nbsp;20 percent of traffic, which in turn costs Americans many billions of dollars in lost productivity, wasted gas, and increased pollution. Trucks are also responsible for a&nbsp;disproportionate amount of highway maintenance, with a&nbsp;single&nbsp;80,000-pound tractor‐​trailer said to cause as much damage to pavement as&nbsp;<a href="https://www.transportation.gov/content/developmenrt-short-sea-shipping" target="_blank">9,600 cars</a>. Representing 10 percent of vehicle miles traveled, trucks cause&nbsp;over 75 percent of the Federal Highway Administration’s pavement‐​maintenance costs.</p> <p>Crumbling roads, meanwhile, are not only costly to repair — they are estimated to produce, annually,&nbsp;<a href="https://www.cnbc.com/2015/07/23/bad-roads-cost-car-owners-billions-report.html" target="_blank">$109 billion in vehicle damage</a>&nbsp;borne by the nation’s drivers. We need a&nbsp;more efficient and less costly transportation system. To help alleviate the shortage of truckers, let’s start by freeing ourselves of the Jones Act and taking advantage of our country’s underutilized coastal waterways.</p> </div> Thu, 26 Jul 2018 09:55:00 -0400 Colin Grabow https://www.cato.org/publications/commentary/no-truckers-lets-try-ships