Latest Cato Research on Trade Policy https://www.cato.org/ en Beware the Costs of a Technology Trade War https://www.cato.org/blog/beware-costs-technology-trade-war-attrition Daniel J. Ikenson, Huan Zhu <p>In a&nbsp;<a href="https://www.cato.org/blog/us-china-tech-battle-threatens-pandemic-containment-more">post</a> last month, we raised concerns about the unforeseen and underappreciated costs of expanding export controls on U.S. technology. Either those concerns fell on deaf ears or the administration did its due diligence and determined that the expected benefits outweigh the expected costs because—earlier this week—the Commerce Department published <a href="https://www.federalregister.gov/documents/2020/05/19/2020-10856/export-administration-regulations-amendments-to-general-prohibition-three-foreign-produced-direct">new rules</a> further restricting Huawei’s access to U.S. technology.</p> <p>U.S. exports to Huawei have been tightly controlled since Huawei and its affiliates were placed on the <a href="https://www.bis.doc.gov/index.php/policy-guidance/lists-of-parties-of-concern/entity-list">Entity List</a> in 2019 for national security reasons. However, because of the design of U.S. export regulations and the nature of technology supply chains, Huawei and its affiliates were still able to import semiconductors from foreign producers that use U.S. chipmaking equipment and software. The new rules are intended to close this loophole and completely cut off Huawei from U.S. technology.</p> <p>Explaining the purpose of those new rules, Commerce Secretary Wilbur Ross—betraying naïve expectations that Huawei would have just thrown in the towel and shut down its operations after last year’s U.S. sanctions—<a href="https://www.commerce.gov/news/press-releases/2020/05/commerce-addresses-huaweis-efforts-undermine-entity-list-restricts">offered</a>:</p> <blockquote><p>Despite the Entity List actions the Department took last year, Huawei and its foreign affiliates have stepped‐​up efforts to undermine these national security‐​based restrictions through an indigenization effort. However, that effort is still dependent on U.S. technologies. This is not how a&nbsp;responsible global corporate citizen behaves. We must amend our rules exploited by Huawei and HiSilicon and prevent U.S. technologies from enabling malign activities contrary to U.S. national security and foreign policy interests.</p> </blockquote> <p>Although we have been skeptical from the start that this is the right way to proceed with China, the die most definitely has been cast and the technology trade war is moving ahead at full speed. Of course, the U.S. government (many in the Trump administration and many in the Congress) has its reasons (some factual; some presumptive; some political) for this course of action. So, instead of rehashing concerns already raised, we offer (in convenient bullet point fashion) the most relevant facts and assumptions culminating in the current policy, as well as the expected benefits and likely costs of that policy. Unfortunately, the list of likely costs is long.</p> <p><strong>Facts</strong></p> <ul> <li>The U.S. government sees the Chinese government as a&nbsp;bad actor.</li> <li>The U.S. government sees Huawei as an adjunct of the Chinese government.</li> <li>The U.S. government sees Huawei as the leader in 5G technology.</li> <li>The U.S. government sees Huawei’s leadership in 5G technology as a&nbsp;threat to U.S. national security.</li> <li>The U.S. government sees a&nbsp;vulnerability to Huawei’s 5G leadership in Huawei’s dependence on U.S. semiconductors and semiconductor technology.</li> <li>The U.S. government seeks to exploit that vulnerability by depriving Huawei of the technology it needs to continue to dominate 5G.</li> </ul> <p><strong>Assumptions</strong></p> <ul> <li>Targeting Huawei with export controls and entity list restrictions to deprive it of needed inputs will slow or stop Huawei’s progress.</li> <li>U.S. sanctions on Huawei from the supply side will compliment U.S. efforts to compel other governments to forego purchasing Huawei gear on the demand side.</li> <li>Slowing or stopping Huawei’s progress will enhance U.S. national security.</li> <li>U.S. national security will be enhanced because U.S. or U.S.-backed 5G companies will emerge and fill the void as standard‐​setters and dominant suppliers of 5G network gear and consumer products.</li> <li>Leadership in 5G begets leadership in the next generation of communications technology and other technologies; followership consigns to more followership.</li> <li>The expected benefits of the U.S. government’s approach outweigh its expected costs.</li> </ul> <p><strong>Benefits</strong> (if the assumptions are accurate)</p> <ul> <li>The Chinese government’s ability to control or have disproportionate influence over global information and communications networks (and whatever other currently unforeseen powers that control or influence would bestow upon Beijing) will be reduced.</li> <li>Reducing Beijing’s power is—in this context and with certain caveats—akin to enhancing U.S. national security.</li> <li>Impeding Huawei’s success (albeit, through compulsion of other governments and laws restricting private companies from engaging in commerce or research and development with Huawei) could buy time for U.S. companies or U.S.-backed companies to emerge and take leadership in 5G and 6G technology space, providing U.S. economic and security benefits that might not otherwise manifest.</li> </ul> <p><strong>Costs</strong></p> <ul> <li>Cutting off Huawei from U.S. semiconductors, semiconductor equipment, and software will expedite China’s development of indigenous semiconductor production capabilities and, ultimately, put the world’s largest market for semiconductors out of reach of U.S. producers within a&nbsp;few years.</li> <li>Cutting off Huawei from semiconductors made with U.S equipment in third countries will compel chipmakers in those third countries to purchase non-U.S. equipment, ultimately drying up current U.S. export markets.</li> <li>Cutting off Huawei will inject even more uncertainty into global information and communication technology (ICT) markets, which likelywill slow the process of standards setting, which likely will retard product development schedules, which likely will deter investment in new technologies, and which likely will be resolved only by bifurcation or even greater splintering of global technology standards.</li> <li>Bifurcation or splintering of technology standards would significantly limit scope for economies of scale in production, as firms all along the ICT supply chain would be producing for fewer customers or producing in separate production runs for customers that follow different sets of standards.</li> <li>U.S. supply chain warfare could prove contagious, encouraging Chinese restrictions on exports of rare earth minerals or other inputs and&nbsp;Chinese retaliation against U.S. technology companies, while&nbsp;opening the door to all countries to treat trade as a&nbsp;strategic weapon rather than as a&nbsp;tool of cooperation and economic betterment.</li> <li>Technology decoupling will inspire a&nbsp;cold‐​war style competition between the United States and China to win the hearts and minds of third countries through the offering of carrots and the threats of sticks.</li> </ul> Thu, 21 May 2020 16:36:15 -0400 Daniel J. Ikenson, Huan Zhu https://www.cato.org/blog/beware-costs-technology-trade-war-attrition Josh Hawley’s New Smoot‐​Hawley https://www.cato.org/publications/commentary/josh-hawleys-new-smoot-hawley Halie Craig, Clark Packard, Daniel J. Ikenson, Simon Lester, Bryan Riley, Brandon Arnold <div class="lead mb-3 spacer--nomargin--last-child text-default"> <p>Since the end of World War II, the United States has exerted outsized influence to shape the rules of global commerce. Recognizing the economic and strategic benefits of a&nbsp;rules‐​based trading system, every president from Harry Truman to Barack Obama supported U.S. leadership and engagement with the World Trade Organization (WTO) and its&nbsp;<a href="https://en.wikipedia.org/wiki/General_Agreement_on_Tariffs_and_Trade" target="_blank">predecessor institution</a>. Though imperfect, this system has paid enormous dividends for the United States.</p> </div> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>The current global trading system has its origins in the reaction to the infamous Smoot‐​Hawley tariff—named after its congressional sponsors. President Herbert Hoover was ambivalent about the final legislation, but with his party strongly backing it as a&nbsp;measure to fight the Depression, he signed it in June 1930. The disastrous impact of these tariffs on global trade and domestic economies ushered in an era of international trade agreements designed to limit protectionism.</p> <p>Now a&nbsp;new Hawley has entered the scene to bring protectionism back. With nationalism on the rise amidst the outbreak of a&nbsp;global pandemic, Senator Josh Hawley (R‐​Missouri) is advocating that the United States walk away from the WTO. That would hurt American families and businesses, undermine our strategic interests, and be counted as an economic and diplomatic victory for China.</p> </div> , <aside class="aside--right aside--large aside pb-lg-0 pt-lg-2"> <div class="pullquote pullquote--default"> <div class="pullquote__content h2"> <p>The potentially costly folly of the Missouri senator’s call to ‘abolish’ the WTO. </p> </div> </div> </aside> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>On May 7, two days after publishing a&nbsp;<a href="https://www.nytimes.com/2020/05/05/opinion/hawley-abolish-wto-china.html" target="_blank"><em>New York Times</em></a><a href="https://www.nytimes.com/2020/05/05/opinion/hawley-abolish-wto-china.html" target="_blank">&nbsp;op‐​ed</a>&nbsp;calling for the abolishment of the WTO, Senator Hawley&nbsp;<a href="https://www.hawley.senate.gov/senator-hawley-introduces-joint-resolution-withdraw-wto" target="_blank">introduced</a>&nbsp;a&nbsp;joint resolution in Congress to terminate U.S. membership in the organization.</p> <p>Fortunately,&nbsp;<a href="https://www.forbes.com/sites/beltway/2020/05/06/senator-hawleys-case-for-nationalism-strong-on-propaganda-weak-on-the-facts/" target="_blank">Congress can’t unilaterally abolish the WTO</a>: It is an international organization created by a&nbsp;treaty that has been ratified by its state members and observers. But Congress can end the United States’&nbsp;<em>participation in</em>&nbsp;the WTO. The&nbsp;<a href="https://www.congress.gov/103/bills/hr5110/BILLS-103hr5110enr.pdf" target="_blank">implementing law</a>&nbsp;that codifies U.S. participation in the WTO permits Congress to consider a&nbsp;joint resolution to terminate U.S. membership in the global trading body every five years, which is to be informed by the findings in&nbsp;<a href="https://ustr.gov/sites/default/files/2020_Trade_Policy_Agenda_and_2019_Annual_Report.pdf" target="_blank">a&nbsp;report</a>&nbsp;from the U.S. Trade Representative (USTR). If introduced, such a&nbsp;joint resolution is unamendable, does not require committee approval, and cannot be filibustered. In other words, Hawley’s resolution is not a&nbsp;messaging bill. It is a&nbsp;serious procedural mechanism that will––if it reaches the Senate floor within 90 legislative days after the submission of USTR’s February 28 report—force a&nbsp;Senate referendum on the merits of the United States remaining in the WTO.</p> <p>It is worth noting that USTR Robert Lighthizer, in&nbsp;<a href="https://www.finance.senate.gov/imo/media/doc/ARL%20Finance%20Testimony%20March%202019%203.12.2019%20FINAL.pdf" target="_blank">testimony</a>&nbsp;before a&nbsp;Senate Finance Committee hearing last year, wrote that “the WTO is a&nbsp;valuable institution, and offers many opportunities for the United States to advance our interests on trade. As I&nbsp;have said before, if we did not have the WTO, we would need to invent it.” Lighthizer is hardly a&nbsp;cheerleader for globalization—he has been the point man for President Trump’s trade war with China—but he is correct about the WTO. If the United States were to withdraw from the organization, the economic and diplomatic fallout would be devastating.</p> <p>The WTO has undoubtedly increased quality of life for Americans: In 2017, it&nbsp;<a href="https://www.piie.com/system/files/documents/pb17-16.pdf" target="_blank">was estimated</a>&nbsp;that global trade facilitated by the WTO increases the size of the U.S. economy by $2.1 trillion annually, the equivalent of about $7,000 per person. And if the WTO were to be eliminated entirely, the&nbsp;<a href="http://pages.iu.edu/~alashkar/BL2020_Production_Networks.pdf" target="_blank">result</a>&nbsp;could be a&nbsp;drastic $2.7 trillion loss in global GDP.</p> <p>The WTO includes 164 member states and its rules cover a&nbsp;staggering 95 percent of global trade. WTO members afford equal tariff treatment to all other members, which ensures that American exports can compete on a&nbsp;level playing field. But they also agree to the same set of legally binding measures, such as commitments on intellectual property rights. Unilateral withdrawal from the WTO would forfeit these benefits and put U.S. interests at a&nbsp;serious disadvantage.</p> <p>First, withdrawal from the WTO could result in higher U.S. tariffs, which would burden families and businesses that rely on foreign products. As&nbsp;<a href="https://www.nytimes.com/2020/01/06/business/economy/trade-war-tariffs.html" target="_blank">numerous studies</a>&nbsp;have confirmed, American consumers are paying for President Trump’s tariffs. Moreover, new tariffs likely would trigger foreign retaliation against American exports, the costs of which America’s farmers and ranchers well know. Under WTO rules, the United States is required to apply the same tariff rates to all WTO members (excepting those who are U.S. free trade agreement partners and eligible for preferential tariff treatment). Those uniformly applied tariffs are known as “most‐​favored nation” (MFN) tariffs. As trade economists Chad Bown and Doug Irwin&nbsp;<a href="https://www.piie.com/system/files/documents/pb18-23.pdf" target="_blank">have observed</a>, the average applied U.S. MFN tariff in 2017 was 3.3 percent, but the average applied non‐​MFN U.S. tariff (those applied to non‐​WTO members) was 32.3 percent. Absent WTO commitments, the&nbsp;<a href="https://www.piie.com/system/files/documents/pb18-23.pdf" target="_blank">president would be free to raise tariffs</a>&nbsp;to rates not seen since the disastrous Smoot‐​Hawley tariffs in the 1930s, hurting taxpayers and damaging American competitiveness in the global economy.</p> <p>Second, membership in the WTO entitles the U.S. government to bring complaints for resolution through consultation or adjudication if it believes other members are not living up to the commitments they’ve made. Although some modification to the dispute‐​settlement rules may be in order, the United States has benefited disproportionately from WTO arbitration:&nbsp;<a href="https://www.whitehouse.gov/wp-content/uploads/2018/02/ERP_2018_Final-FINAL.pdf" target="_blank">According to the White House,</a>&nbsp;the United States has won more than 85 percent of the cases it has initiated since 1995 (compared with China’s success rate of 67 percent). Notably, U.S. agricultural interests have been well served under the WTO dispute‐​settlement system, prevailing on major claims in a&nbsp;<a href="https://www.fas.usda.gov/newsroom/united-states-wins-wto-dispute-finding-china-provides-excessive-government-support-its" target="_blank">recent case</a>&nbsp;involving Chinese subsidies for grain production.</p> <p>Finally, Ambassador Lighthizer has also&nbsp;<a href="https://www.finance.senate.gov/imo/media/doc/SFC%20WTO%20Hearing%2003.12.19%20QFRs%20Responses%20FINAL.pdf" target="_blank">correctly noted</a>&nbsp;that “the WTO provides the United States with a&nbsp;platform to export its views on trade policy.” If the United States were to abdicate its seat at the table, it would play directly into China’s hands. A&nbsp;spokesman for Senate Finance Committee Chairman Charles Grassley (R‐​Iowa)&nbsp;<a href="https://twitter.com/sdonnan/status/1258556810497310720?s=20" target="_blank">put it succinctly</a>: “Withdrawing from the WTO would only leave a&nbsp;vacuum for China to fill and diminish America’s position of strength.” Moreover, if the United States were to depart from the 164 member‐​strong WTO, it would join the ranks of only 13 countries that are neither WTO members nor seekers of WTO membership, including North Korea and a&nbsp;handful of tiny countries like Turkmenistan, Eritrea, and Kiribati.</p> <p>Past congressional attempts to abrogate U.S. membership in the WTO&nbsp;<a href="https://twitter.com/snlester/status/1258513566748954624?s=20" target="_blank">failed by wide margins</a>, but Senator Hawley’s resolution should still be treated as live fire. The Hawley resolution, if adopted, won’t address the Senator’s&nbsp;<a href="https://www.hawley.senate.gov/senator-hawley-introduces-joint-resolution-withdraw-wto" target="_blank">legitimate grievances</a>&nbsp;about Chinese trade malpractice or the dire economic straits currently faced by millions of Americans as a&nbsp;result of COVID-19. Instead, it will voluntarily shut the United States out of the world’s largest trade agreement and will be remembered as one of the greatest economic missteps in modern history.</p> </div> Tue, 19 May 2020 09:31:06 -0400 Halie Craig, Clark Packard, Daniel J. Ikenson, Simon Lester, Bryan Riley, Brandon Arnold https://www.cato.org/publications/commentary/josh-hawleys-new-smoot-hawley Senator Hawley’s Muddled Case against the World Trade Organization https://www.cato.org/multimedia/cato-daily-podcast/senator-hawleys-muddled-case-against-world-trade-organization Daniel J. Ikenson, Caleb O. Brown <div class="mb-3 spacer--nomargin--last-child text-default"> <p>Senator Josh Hawley of Missouri wants the U.S. to exit the World Trade Organization, but it’s not clear how Americans would benefit. Dan Ikenson comments.</p> </div> Wed, 13 May 2020 11:55:53 -0400 Daniel J. Ikenson, Caleb O. Brown https://www.cato.org/multimedia/cato-daily-podcast/senator-hawleys-muddled-case-against-world-trade-organization Dispute Settlement and the US-UK Trade Agreement: Lessons from the NAFTA Renegotiation https://www.cato.org/publications/commentary/dispute-settlement-us-uk-trade-agreement-lessons-nafta-renegotiation Simon Lester <div class="lead mb-3 spacer--nomargin--last-child text-default"> <p>UK trade diplomats and their American counterparts have started negotiating a&nbsp;new transatlantic trade agreement.</p> <p>They will have their work cut out for them dealing with US demands to liberalize sensitive UK trade barriers, including both tariffs and regulations that affect trade, while at the same time pressing the United States to reduce its own tariffs and regulatory barriers.</p> </div> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>In a&nbsp;world run by free traders, both sides would come forward with an offer to remove all barriers, and the negotiation would be short and sweet. However, the political reality is that trade agreements are a&nbsp;careful balance of “concessions” on market access by each side.</p> <p>There are systemic issues related to the governance of trade agreements that are important as well. The UK negotiators should not ignore these, because they affect the long‐​term functioning of the agreement. In particular, the UK negotiators should be aware of two positions taken by the Trump administration in the renegotiation of the North American Free Trade Agreement*: to maintain weak dispute settlement and to add a “sunset clause” to the agreement.</p> <p>These issues may make an appearance in the US-UK trade talks and the UK negotiators should be ready.</p> <h3>Beware the NAFTA Precedent</h3> <p>On dispute settlement, a&nbsp;crucial element to a&nbsp;functioning process is that parties should be able to file complaints and get a&nbsp;neutral panel appointed to hear the dispute whenever needed. NAFTA was famous for <a href="https://www.cambridge.org/core/journals/world-trade-review/article/access-to-trade-justice-fixing-naftas-flawed-statetostate-dispute-settlement-process/833E151474CD2198068A6EB094759545">the problem of “panel blocking”</a> and was fundamentally flawed in this area.</p> <p>The dispute process worked for a&nbsp;few years, but then in 2000 the United States took advantage of a&nbsp;gap in the rules in order to stop a&nbsp;panel from being appointed to hear a&nbsp;complaint about US restrictions on imported sugar. No panels were appointed after that incident.</p> <p>There were calls to fix this issue in the NAFTA renegotiation, but the United States <a href="https://insidetrade.com/trade/qa-mexico%E2%80%99s-former-chief-nafta-negotiator-talks-usmca">resisted</a>, and the <a href="https://ielp.worldtradelaw.net/2018/10/the-us-mexico-canada-and-nafta-trade-deal-state-state-dispute-settlement.html">first version</a> of the new NAFTA (the USMCA) did not solve the problem. Eventually, in response to demands by the House Democrats, the Trump administration agreed to make changes, which appear to have <a href="https://ielp.worldtradelaw.net/2019/12/the-naftausmca-panel-blocking-issue-looks-like-it-has-been-fixed.html">dealt with the issue</a>.</p> <p>If confronted with this issue, the UK negotiators should insist on dispute settlement rules that function properly, including a&nbsp;guarantee of a&nbsp;dispute panel when needed.</p> </div> , <aside class="aside--right aside--large aside pb-lg-0 pt-lg-2"> <div class="pullquote pullquote--default"> <div class="pullquote__content h2"> <p>The United Kingdom should seek solid governance and dispute settlement provisions in its free trade agreement with the United States.</p> </div> </div> </aside> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>The Trump administration may fight hard to maintain the flexibility to block panels. The UK should be prepared to review the text of all U.S. proposals carefully and to demand an enforceable system.</p> <p>With regard to the sunset clause, <a href="https://ielp.worldtradelaw.net/2018/03/lighthizer-on-a-sunset-clause-in-nafta.html">initial</a> <a href="https://ielp.worldtradelaw.net/2018/06/trump-on-the-nafta-sunset-clause.html">reports</a> were a&nbsp;bit vague, but they seemed to suggest that the agreement would expire after five years unless the parties agreed to extend it. In the end, after push back from <a href="https://ielp.worldtradelaw.net/2018/05/the-sunset-clause-is-a-lost-cause.html">the other parties</a>, the <a href="https://ielp.worldtradelaw.net/2018/10/the-us-mexico-canada-nafta-trade-deal-the-sunset-clause.html">negotiated agreement</a> shifted to a&nbsp;more complex arrangement that has the agreement last for 16&nbsp;years, but at year 6&nbsp;the parties will review the agreement and decide whether to extend it for another 16&nbsp;year period.</p> <p>This provision will generate uncertainty and confusion, without offering any benefits. Parties are always free to withdraw from an agreement, so this additional termination option does not add much. Moreover, a&nbsp;presumption of termination unless the parties affirmatively agree to extend is a&nbsp;particular problem, as the uncertainty it creates would undermine the value of the agreement to the companies who trade or invest on the basis of the agreement.</p> <p>In addition, the six year review provision may mean less reviewing than is already possible. Reviews of trade agreements are valuable, and they should be undertaken regularly through the joint committees/​commissions that these agreements normally establish. However, a&nbsp;big, high profile six year review may preempt the normal schedule of meetings between the parties where these reviews should be conducted.</p> <p>Trade governance issues can be dry and technical and their impact difficult to assess. But they are important for the proper functioning of an agreement.</p> <p>The Trump administration has some unorthodox views in this area, and the UK negotiators should be ready to defend against the demands they may face.</p> </div> Tue, 12 May 2020 10:59:04 -0400 Simon Lester https://www.cato.org/publications/commentary/dispute-settlement-us-uk-trade-agreement-lessons-nafta-renegotiation A Proposal for a Committee on National Security at the WTO https://www.cato.org/publications/outside-articles/proposal-committee-national-security-wto Tue, 12 May 2020 10:23:45 -0400 Simon Lester, Inu Manak https://www.cato.org/publications/outside-articles/proposal-committee-national-security-wto The Rule of Precedent and the Role of the Appellate Body https://www.cato.org/publications/outside-articles/rule-precedent-role-appellate-body Tue, 12 May 2020 10:15:29 -0400 James Bacchus, Simon Lester https://www.cato.org/publications/outside-articles/rule-precedent-role-appellate-body The WTO Needs to Drag Itself into the 21st Century https://www.cato.org/blog/wto-needs-drag-itself-21st-century Inu Manak <p>The World Trade Organization (WTO) has recently been under fire. The Trump administration has called for its reform, but to date, its confrontational approach has aggravated allies and gotten in the way of any progress.</p> <p>Now, amid the COVID-19 pandemic, work at the WTO has ground to a&nbsp;halt, which puts the institution at risk of irrelevance. The only multilateral talks the WTO is conducting, that is, negotiations that include the entire 164 country membership, are on eliminating harmful <a href="https://foreignpolicy.com/2020/05/05/wto-global-trade-fisheries-fishing-subsidies/" rel="noreferrer noopener" target="_blank">fisheries subsidies</a>. These talks are now in jeopardy. A&nbsp;key obstacle is an inability to find a&nbsp;way to conduct negotiations remotely. As many of us are now working from home, it is fair to ask why the WTO can’t do so as well?</p> <p>Last month, the chair of the fisheries talks, Ambassador Santiago Wills of Colombia, was <a href="https://www.wto.org/english/news_e/news20_e/fish_15apr20_e.htm" rel="noreferrer noopener" target="_blank">hopeful</a> that negotiations would continue in order to meet the deadline for a&nbsp;deal by this summer’s now cancelled Ministerial Conference. But recent reports suggest that technical difficulties are the heart of the problem. Hannah Monicken from <em>Inside U.S. Trade</em> <a href="https://insidetrade.com/daily-news/wto-fisheries-chair-abandons-virtual-work-amid-member-reluctance" rel="noreferrer noopener" target="_blank">reported</a> the following:</p> <blockquote><p>The chair of the World Trade Organization negotiations to rein in harmful fisheries subsidies has concluded that members are not prepared to commit to virtual negotiations, telling members on Thursday that further work must be put on hold as they wait for pandemic‐​related restrictions to lift.</p> <p>Colombian WTO Ambassador Santiago Wills, in a&nbsp;communication to members, said he had been receiving questions about next steps, according to a&nbsp;Geneva‐​based trade official. Based on his consultations with members and views presented at the heads‐​of‐​delegations meeting last month, Wills concluded that members were not prepared to engage in virtual and written discussions, he wrote.</p> <p>Wills decided that the best course of action was to wait and see what comes next, the official said. </p> </blockquote> <p>The challenge is finding a&nbsp;way to replicate the face‐​to‐​face experience digitally as closely as possible so that these discussions may continue. This is no easy feat, since negotiations consist of countless meetings that happen not just with the entire membership, but also with a&nbsp;subset of countries. Lots of bilateral meetings also take place and are often critical in the last moments of securing a&nbsp;final deal. How to make this work in an age of telework is crucial, because even as restrictions put in place from the pandemic are lifted, it is not likely to be a&nbsp;smooth transition. In addition, if we are hit with a&nbsp;second wave of infections, stopping negotiations again is impractical if fisheries talks are to conclude this year, and worse still for our <a href="http://www.fao.org/state-of-fisheries-aquaculture" rel="noreferrer noopener" target="_blank">rapidly depleting</a> fish stocks.</p> <p>Last month, heads of WTO member delegations <a href="https://www.law360.com/articles/1264851/wto-grapples-with-telework-amid-coronavirus-pandemic" rel="noreferrer noopener" target="_blank">met virtually</a> to discuss this problem and noted that while members are generally willing to talk informally through digital platforms, they are reluctant about making&nbsp;binding decisions, as the WTO has no current procedure for this. There are several valid concerns here.</p> <p>Smaller delegations may rightly fear that they will be cut out of important discussions, there are also technological capacity gaps and security concerns. But finding a&nbsp;solution to these and other problems is not impossible. The <a href="https://news.un.org/en/story/2020/04/1061302" rel="noreferrer noopener" target="_blank">United Nations</a> quickly developed an interim decision‐​making procedure last month to allow countries to continue to vote on resolutions. And negotiations between the United Kingdom and the European Union on Brexit have <a href="https://www.telegraph.co.uk/politics/2020/04/15/uk-eu-hold-online-brexit-trade-talks-amid-coronavirus-crisis/" rel="noreferrer noopener" target="_blank">moved online</a> as well.</p> <p>The WTO should be able to find a&nbsp;way to do this. It should prioritize getting negotiations back on track as soon as possible. As my colleague James Bacchus and I&nbsp;have <a href="https://foreignpolicy.com/2020/05/05/wto-global-trade-fisheries-fishing-subsidies/" rel="noreferrer noopener" target="_blank">explained</a>, the fisheries talks are a&nbsp;crucial test case of the WTO’s ability to adapt to the changing realities of the global trading system. Getting these negotiations right is critical, and they won’t conclude unless delegations are willing to buckle down and put in the effort to make a&nbsp;deal.</p> <p>Last week, Sen. Hawley (R-MO) suggested “abolishing” the WTO, which he followed up with a&nbsp;joint resolution in Congress for the United States to withdraw. Much of what Senator Hawley said about the WTO was <a href="https://www.cato.org/blog/senator-hawleys-many-misunderstandings-wto" rel="noreferrer noopener" target="_blank">factually incorrect</a>&nbsp;and distracts from important conversations about how to make the WTO work better. There remain real challenges that the WTO faces, and the organization is far from perfect. The inability to conduct negotiations online is a&nbsp;key example of this and an area that is ripe for reform. If the WTO wants to survive the pandemic, its negotiating function needs to be brought into the 21st century.</p> Mon, 11 May 2020 15:33:40 -0400 Inu Manak https://www.cato.org/blog/wto-needs-drag-itself-21st-century Let’s Have That Much Needed Debate About the World Trade Organization https://www.cato.org/publications/commentary/lets-have-much-needed-debate-about-world-trade-organization Daniel J. Ikenson <div class="lead mb-3 spacer--nomargin--last-child text-default"> <p>In the&nbsp;<em>New York Times</em>&nbsp;on Tuesday, Senator Josh Hawley (R-MO)&nbsp;<a href="https://www.nytimes.com/2020/05/05/opinion/hawley-abolish-wto-china.html?smid=nytcore-ios-share" target="_blank" rel="nofollow noopener" data-ga-track="ExternalLink:https://www.nytimes.com/2020/05/05/opinion/hawley-abolish-wto-china.html?smid=nytcore-ios-share">proposed</a>&nbsp;abolishing the World Trade Organization. On Wednesday came a&nbsp;<a href="https://www.forbes.com/sites/beltway/2020/05/06/senator-hawleys-case-for-nationalism-strong-on-propaganda-weak-on-the-facts/#2ab7e6975e18" target="_blank" data-ga-track="InternalLink:https://www.forbes.com/sites/beltway/2020/05/06/senator-hawleys-case-for-nationalism-strong-on-propaganda-weak-on-the-facts/#2ab7e6975e18">flood</a>&nbsp;of fact&nbsp;<a href="https://www.cato.org/blog/senator-hawleys-many-misunderstandings-wto" rel="nofollow noopener" data-ga-track="ExternalLink:https://www.cato.org/blog/senator-hawleys-many-misunderstandings-wto">corrections</a>&nbsp;from trade experts exposing the senator’s idea as the spawn of fallacies. Then, on Thursday, conceding only that the United States can’t “abolish” the WTO, Hawley submitted a&nbsp;<a href="https://www.hawley.senate.gov/senator-hawley-introduces-joint-resolution-withdraw-wto" target="_blank" rel="nofollow noopener" data-ga-track="ExternalLink:https://www.hawley.senate.gov/senator-hawley-introduces-joint-resolution-withdraw-wto">joint resolution</a>&nbsp;to Congress calling for a&nbsp;formal withdrawal.</p> </div> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>Withdrawing from the WTO would be a&nbsp;monumental mistake. But that doesn’t mean we shouldn’t have a&nbsp;robust debate on the matter. In a&nbsp;press release announcing the resolution yesterday, Senator Hawley gave his opening statement:</p> <p>“The coronavirus pandemic has exposed deep, long‐​standing flaws in our global economic system that demand reform. International organizations like the W.T.O. have enabled the rise of China and benefitted elites around the globe while hollowing out American industry, from small towns to once‐​thriving urban centers. We need to return production to America, secure critical supply chains, and encourage domestic innovation. Pulling out of the W.T.O. is a&nbsp;good first step.”</p> </div> , <aside class="aside--right aside--large aside pb-lg-0 pt-lg-2"> <div class="pullquote pullquote--default"> <div class="pullquote__content h2"> <p>Withdrawing from the WTO would be a&nbsp;monumental mistake. But that doesn’t mean we shouldn’t have a&nbsp;robust debate on the matter. </p> </div> </div> </aside> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>It’s a&nbsp;mystery how WTO withdrawal would resolve any of the alleged problems Hawley mentions or facilitate implementation of his prescriptions. But he does scratch the surface of some valid points.</p> <p>Indeed, the WTO isn’t perfect. It is flawed in several respects. It is an institution built on post‐​war economic and geopolitical realities, which have changed considerably over the past couple of decades. Those changes have made the WTO’s mission—to facilitate global trade liberalization by encouraging its members to establish rules and to abide by those rules—more difficult.</p> <p>When the United States accounted for a&nbsp;larger share of global GDP and before it began to tire of its global leadership role, the rules of the trading system were shaped largely by U.S. input. Today, those rules remain at the heart of the WTO. But in an organization that responds to the consensus of its members, it is difficult to establish new rules when a&nbsp;growing number of its 164 members have become weighty enough to insist on their own demands, while resisting those of others.</p> <p>There has been very little multilateral trade liberalization since the WTO’s creation in 1995. As a&nbsp;result, large and important swaths of the global economy—most services trade, digital trade, many of the market distortions caused by state‐​owned enterprises, for example—remain outside WTO rules. Meanwhile, the existing rules haven’t helped discipline some of China’s egregious mercantilism. That’s not to say the rules don’t exist, but that the United States has been reluctant to use them more aggressively, opting instead for the vigilantism of unilateral trade wars.</p> <p>When Hawley says the WTO enabled China’s rise, he’s not wrong. China’s long march to join the WTO required it to deliver massive economic reforms. When Beijing demonstrated that it was serious about reforms and that the Chinese economy and some of its government’s practices would become subject to the rules of the global trading system, the rest of the world responded by investing in China and cultivating deeper economic ties. That legitimacy contributed importantly to the development of China. But that was the plan, and it succeeded.</p> <p>That conferred legitimacy, presumably, is how Hawley stretches to connect the WTO and the demise of industries across America’s cities and towns. Certainly, trade contributed to U.S. job churn. Jobs were lost, but many more were created. To pin blame on the WTO for the share of job losses attributable to imports from China two decades ago because it presided over implementation of the rules created largely at U.S. behest lacks all credibility.</p> <p>Likewise, the pandemic may have exposed vulnerabilities in supply chains that are insufficiently diversified. But the WTO didn’t force any business to put all its eggs in one basket. The WTO facilitated the reduction of administrative barriers to trade, which—in conjunction with revolutionary innovations in transportation and communications—rendered the diversification of production along cross‐​border supply chains plausible and, for some businesses in some industries, optimal.</p> <p>Trade liberalization helped make global supply chains possible, but the WTO didn’t force anyone to do anything. Moreover, the WTO is in no way preventing companies from repatriating, decoupling, or otherwise diversifying some or all their supply chains.</p> <p>Hawley is scapegoating the WTO for whatever he believes is ailing America. His suggestion that “pulling out of the W.T.O. is a&nbsp;good first step” to remedying those ills ignores the massive costs that that action would impose on U.S. businesses, consumers, investors, and workers.</p> <p>WTO rules provide reasonable assurances that U.S. exporters have access to foreign market on conditions no less favorable than those granted exporters from other countries. Unilaterally eschewing those benefits would subject U.S. companies to higher tariffs and greater uncertainty. Many other costs—including those associated with abdicated leadership—can be tallied, but the cost of the discrimination exporters would face in foreign markets alone would negate any short‐​term benefits Hawley can possibly expect to gain.</p> <p>The question of WTO withdrawal was put to votes in the House of Representatives in 2005 and 2010. Both times the measure was defeated overwhelmingly. The Senate has never voted on the question. Given the rise in nationalist sentiment and the recent tendency of Republican leadership to stare at its shoes as the president erects trade barriers, a&nbsp;debate on the Senate floor would be illuminating. The debate we deserve would produce a&nbsp;consensus not for WTO withdrawal, but for WTO reform.</p> </div> Fri, 08 May 2020 16:13:33 -0400 Daniel J. Ikenson https://www.cato.org/publications/commentary/lets-have-much-needed-debate-about-world-trade-organization Simon Lester discusses U.S.-China trade relations on VOA Mandarin Service https://www.cato.org/multimedia/media-highlights-tv/simon-lester-discusses-us-china-trade-relations-voa-mandarin-service Fri, 08 May 2020 11:17:57 -0400 Simon Lester https://www.cato.org/multimedia/media-highlights-tv/simon-lester-discusses-us-china-trade-relations-voa-mandarin-service Senator Hawley’s Case for Nationalism Is Strong on the Propaganda but Weak on the Facts https://www.cato.org/blog/senator-hawleys-case-nationalism-strong-propaganda-weak-facts Daniel J. Ikenson <p>Over at <em>Forbes</em>, I&nbsp;follow up on Simon Lester’s insightful <a href="https://www.cato.org/blog/senator-hawleys-many-misunderstandings-wto">analysis</a> of what Senator Hawley gets wrong about the World Trade Organization. Here are the first couple of paragraph:</p> <blockquote><p>On the opinion page of the <em>New York Times</em> yesterday, Senator Josh Hawley (R-MO) <a href="https://www.nytimes.com/2020/05/05/opinion/hawley-abolish-wto-china.html?smid=nytcore-ios-share">proposed</a> the abolition of the World Trade Organization (WTO). Fair enough. For those concerned about the United States, its future, and the nature of its relationship with the wider world, Hawley’s idea is worth considering. After all, nowhere is it set in stone that the post‐​war economic institutions established under U.S. tutelage would or should endure forever, impervious to evolving politics, geopolitics, and economic conditions.</p> </blockquote> <blockquote><p>But if we are going to have an honest debate about this important issue, those offering their views should rely on facts and truth, not on propaganda and dog whistles. Senator Hawley violates those conventions in his op‐​ed, which amounts mostly to a&nbsp;string of slogans intended more to inflame than inform.</p> </blockquote> <p>If you’re so inclined, you can read it in full right <a href="https://www.forbes.com/sites/beltway/2020/05/06/senator-hawleys-case-for-nationalism-strong-on-propaganda-weak-on-the-facts/#359021f75e18">here</a>.</p> Wed, 06 May 2020 16:27:51 -0400 Daniel J. Ikenson https://www.cato.org/blog/senator-hawleys-case-nationalism-strong-propaganda-weak-facts Senator Hawley’s Case for Nationalism: Strong on Propaganda, Weak on the Facts https://www.cato.org/publications/commentary/senator-hawleys-case-nationalism-strong-propaganda-weak-facts Daniel J. Ikenson <div class="lead mb-3 spacer--nomargin--last-child text-default"> <p>On the opinion page of the&nbsp;<em>New York Times</em>&nbsp;yesterday, Senator Josh Hawley (R-MO)&nbsp;<a href="https://www.nytimes.com/2020/05/05/opinion/hawley-abolish-wto-china.html?smid=nytcore-ios-share" target="_blank" title="https://www.nytimes.com/2020/05/05/opinion/hawley-abolish-wto-china.html?smid=nytcore-ios-share" data-ga-track="ExternalLink:https://www.nytimes.com/2020/05/05/opinion/hawley-abolish-wto-china.html?smid=nytcore-ios-share">proposed</a>&nbsp;the abolition of the World Trade Organization (WTO). Fair enough. For those concerned about the United States, its future, and the nature of its relationship with the wider world, Hawley’s idea is worth considering. After all, nowhere is it set in stone that the post‐​war economic institutions established under U.S. tutelage would or should endure forever, impervious to evolving politics, geopolitics, and economic conditions.</p> </div> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>But if we are going to have an honest debate about this important issue, those offering their views should rely on facts and truth, not on propaganda and dog whistles. Senator Hawley violates those conventions in his op‐​ed, which amounts mostly to a&nbsp;string of slogans intended more to inflame than inform.</p> <p>Hawley’s assertion that “we should abolish” the WTO indicates that he is unfamiliar with his subject, which should raise flags about the argumentation to follow. “We” cannot “abolish” the WTO. The United States can quit the WTO, which would free us from rules shaped largely by U.S. negotiators that have helped protect U.S. exporters and importers from the costs of what otherwise would be the whimsical, unpredictable, and often unaccountable trade policies of hundreds of foreign governments.</p> </div> , <aside class="aside--right aside--large aside pb-lg-0 pt-lg-2"> <div class="pullquote pullquote--default"> <div class="pullquote__content h2"> <p>Blaming foreigners for homemade woes is a&nbsp;staple of the nationalist’s diet and ditching the WTO—especially on the bases of the false pretenses Hawley offers—will serve to isolate further the United States and render what Hawley considers “the single greatest threat to American security in the 21st century, Chinese imperialism,” more difficult to counter. </p> </div> </div> </aside> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>Should we decide to take that leap, we can forswear the benefits of the rule of international trade law and consign ourselves to second‐​class status when it comes to assurances of market access. And, of course, we have every right to forfeit our seat at the center of the table where many important decisions will be made that shape the global economy for years to come.</p> <p>Yes, we can do all that unilaterally, as the senator seems to be advocating. But we cannot “abolish” the WTO. That would require convincing the WTO’s other 163 members to follow us over the cliff. Considering the economic losses associated with that outcome—just this week, two trade economists at Indiana University&nbsp;<a href="http://pages.iu.edu/~alashkar/BL2020_Production_Networks.pdf" target="_blank" title="http://pages.iu.edu/~alashkar/BL2020_Production_Networks.pdf" data-ga-track="ExternalLink:http://pages.iu.edu/~alashkar/BL2020_Production_Networks.pdf">estimated</a>&nbsp;that dissolving the WTO would erase 30 percent of the overall gains from trade, or $2.7 trillion in global GDP—withdrawal would be a&nbsp;lonely act of self‐​sabotage.</p> <p>Hawley’s summary of the founding and purpose of the WTO is a&nbsp;hodgepodge of clichés, slogans, and misinformed nationalist grievances. Notice the highlighted buzzwords (my emphasis) from Hawley’s first few paragraphs:</p> <p>“The W.T.O. was created in 1995 as the crown jewel of a&nbsp;new global market, a&nbsp;system designed by&nbsp;<strong>ambitious</strong>&nbsp;Western policymakers after the fall of the Soviet Union.&nbsp;<strong>Their aim was to create one giant, liberal international economy to support a&nbsp;new liberal international order</strong>.</p> <p>The reformers wanted all the world to follow the same economic rules, so that capital, products, and people could move easily across national boundaries.<strong>&nbsp;Nation‐​states themselves would become less important in setting economic policy and new, multilateral institutions, like the W.T.O., would take on the role of managing the global economy.</strong></p> <p>It was a&nbsp;bold vision, and&nbsp;<strong>a&nbsp;major departure</strong>.&nbsp;<strong>The economic system it replaced</strong>&nbsp;had been created by America and its allies at the close of the Second World War and pursued more modest aims.&nbsp;<strong>The Cold War system</strong>&nbsp;sought to build up the free nations’ economies and to contain the Soviet Union.&nbsp;<strong>It took the independent nation‐​state as its basic building block, and encouraged trade and investment between nations as equal sovereigns. This system allowed each country to set its own internal economic policy and control its borders and trade.</strong></p> <p>But in the early 1990s,<strong>&nbsp;with America’s principal adversary gone, Western policymakers were in a&nbsp;messianic frame of mind</strong>. President George H.W. Bush promised a “<strong>new world order” of “open borders, open trade … and open minds</strong>,” a&nbsp;new international system based on liberal values to bring peace to the world. He and other internationalists wanted a&nbsp;new economic system to match.”</p> <p>The senator’s portrayal of the WTO’s creation as the product of the conscious, collective striving of ambitious policymakers (read: opportunistic globalists) seeking to subvert the sovereignty of nation‐​states by empowering some monolithic, faceless bureaucracy of world government is a&nbsp;stock right wing trope of zero analytical utility. Juxtaposing what he implies are the questionable motives of the ideologically wayward, globalist, post‐​Cold War policymakers against those of the noble cold‐​warriors, Hawley romanticizes the pre‐​WTO trade architecture as though it were from a&nbsp;distinct era where deference to sovereign nation‐​states on trade policy was unique and that hewing to that norm summoned the national greatness necessary to bury the Soviet Union. It’s a&nbsp;riveting good‐​versus‐​evil narrative, fit for a&nbsp;Show‐​Me state drama like&nbsp;<em>Ozark</em>. But it’s not even&nbsp;<em>based</em>&nbsp;on a&nbsp;true story.</p> <p>Hawley’s claim that there were two distinct trade “systems”—one strong and heroic; one weak and villainous—is a&nbsp;fallacy. The modern trade system from its founding as the General Agreement on Tariffs and Trade (GATT) in 1947 through eight successful rounds of multilateral negotiations over five decades under the auspices of the GATT, culminating in the creation of the WTO in 1995, progressed along a&nbsp;continuum of deepening and broadening liberalization of trade barriers. Throughout that half century, the negotiators’ task was to commit nation‐​states to rein in their own protectionism without compelling them to do so. The task was to thread the needle with rules that encouraged governments to honor their commitments to trade liberalization without usurping national sovereignty.</p> <p>The creation of the WTO was not a&nbsp;departure, but a&nbsp;continuation of the GATT. Like the GATT, the WTO has no power to act outside the consensus of its members. It is a&nbsp;member‐​driven organization that cannot force its members to do anything. Like the GATT, the WTO enshrines the principles of “most‐​favored nation” (all trade liberalization by a&nbsp;member country should apply on a&nbsp;nondiscriminatory basis to all other members) and “national treatment” (foreign entities and their products and services should be accorded the same treatment under law as domestic entities and their products and services are accorded). And like the GATT, the WTO is deferential to its members.</p> <p>While it is true that under the WTO, the dispute resolution process was strengthened, that strengthening did not translate into an encroachment on the sovereignty of member governments. The furthest the WTO can go to “discipline” a&nbsp;member whose policy or practice has been found to be out of conformity with its commitments is to excuse the complaining member from honoring the concessions it has made (the lower tariffs or other market openings it committed to) with respect to the offending member, if the offending member’s policies are found be damaging to the complaining member and if those policies haven’t come into conformity with the commitments made within a&nbsp;reasonable period of time after the finding is rendered.</p> <p>Findings of the Dispute Settlement Body don’t command members to do anything. Rather, they&nbsp;<em>recommend</em>&nbsp;that members bring their policies or practices into conformity with their commitments under a&nbsp;specific agreement. To this day, the GATT/WTO has never compelled a&nbsp;member to do anything.</p> <p>Hawley continues:</p> <p>“Take the World Trade Organization. Its [<strong>WTO’s] mandate was to promote free trade, but the organization instead allowed some nations to maintain trade barriers and protectionist workarounds, like China, while preventing others from defending themselves, like the United States</strong>… Meanwhile,&nbsp;<strong>the W.T.O. required American workers to compete against Chinese forced labor but did next to nothing to stop Chinese theft of American intellectual property and products</strong>.”</p> <p>The WTO promotes free trade, but its member governments never fully embraced it. Protectionism endures because governments, such as our own, are always tempted to dole out favors to politically important domestic industries. In other words, it is precisely because the WTO has no powers of compulsion and that its members maintain their full sovereignty that protectionism persists.</p> <p>That said, tariffs and other trade barriers are much lower today than they were in 1947, as a&nbsp;result of the hard work of national governments cooperating under GATT/WTO architecture. There are asymmetries to the tariffs applied by WTO members—some members have higher tariffs on certain products and other members have lower tariffs. Hawley and other trade skeptics are always quick to identify the higher tariffs in China or Europe on imported automobiles, or the protectionist rules that prevail in other industries (and those are problems, to be sure!), but they never mention the higher U.S. tariffs on clothing, footwear, and pickup trucks, for example. Nor do they mention the steel industry’s out‐​of‐​control abuse of the U.S. antidumping law, trade‐​distorting subsidies lavished on U.S. farmers, or the Jones Act, which restricts foreign ships and shipping in the United States.</p> <p>Existing asymmetries are—to a&nbsp;large extent—vestiges of the GATT’s founding ethos. In order to attract as many members as possible and get those governments into the habit of constraining their protectionism, the GATT asked less of some countries than others. The idea was to get them to join the club by asking them to do what they could in terms of their own tariff reductions. In the subsequent rounds of multilateral liberalization over the decades, tariffs typically were slashed formulaically (reduced by certain percentages), which worked to preserve and, in some cases, accentuate the asymmetries.</p> <p>These matters of “<a href="https://www.cato.org/publications/policy-analysis/development-dimension-what-do-about-differential-treatment-trade" target="_blank" title="https://www.cato.org/publications/policy-analysis/development-dimension-what-do-about-differential-treatment-trade" data-ga-track="ExternalLink:https://www.cato.org/publications/policy-analysis/development-dimension-what-do-about-differential-treatment-trade">special and differential treatment</a>,” which have excused developing countries from implementing their commitments in a&nbsp;timely manner and from liberalizing at the same pace as developed countries, are important concerns that the WTO is trying to grapple with presently.</p> <p>But, contrary to Hawley’s assertion, the WTO has not prevented the United States from defending itself against Chinese practices that violate China’s WTO commitments. The United States has brought about two dozen cases against China in the WTO and&nbsp;<a href="https://www.cato.org/publications/policy-analysis/disciplining-chinas-trade-practices-wto-how-wto-complaints-can-help" target="_blank" title="https://www.cato.org/publications/policy-analysis/disciplining-chinas-trade-practices-wto-how-wto-complaints-can-help" data-ga-track="ExternalLink:https://www.cato.org/publications/policy-analysis/disciplining-chinas-trade-practices-wto-how-wto-complaints-can-help">obtained a&nbsp;favorable outcome</a>&nbsp;nearly every time.</p> <p>But instead of building on that success by filing more cases in areas where concerns about violations remain—and, perhaps, enlisting the support of other WTO members whose exporters face similar problems in China—the United States went rogue in 2018, casting the WTO’s rule of law aside, and applied tariffs on imports from China unilaterally.</p> <p>Hawley continues:</p> <p><strong>“That new order’s universal peace never quite arrived. Instead, the internationalists embroiled America in one foreign war after another</strong>. And their liberal economic order fared little better.&nbsp;<strong>It sent American production overseas, compromised American supply chains, and cost American jobs, all while enriching Communist China</strong>.”</p> <p>It seems a&nbsp;stretch to blame the WTO for George W. Bush’s invasion of Iraq and the residual wars in Syria and North Africa, but Hawley seems to want to conflate every institution that isn’t American and every event that happens outside the United States as the workings of some internationalist cabal.</p> <p>It’s tough to argue that U.S. job churn didn’t accelerate over the past few decades with millions of jobs created and lost each month. But that churn is the consequence of a&nbsp;confluence of factors, which includes trade but also—more explanatorily—the decline in demand for manufactured goods relative to services and increasing automation. It’s an article of faith among protectionists that sending “production overseas” resulted in U.S. job losses. Of course, that is an obvious consequence. Less obvious, but essential to the analysis, is that outsourcing frees up resources to create jobs in the United States (yes, outsourcing is typically a&nbsp;complement to domestic production, not a&nbsp;substitute for it) and, over this same period, millions of Americans gained employment with foreign headquartered companies through the process of&nbsp;“insourcing.”</p> <p>Hawley concludes:</p> <p>“Abandoning the W.T.O. is a&nbsp;start. The United States must seek new arrangements and new rules, in concert with other free nations,&nbsp;<strong>to restore America’s economic sovereignty and allow this country to practice again the capitalism that made it strong.</strong>&nbsp;It means building a&nbsp;new network of trusted friends and partners to resist Chinese economic imperialism.</p> <p>We must face facts. The only sure way to confront&nbsp;<strong>the single greatest threat to American security in the 21st century, Chinese imperialism</strong>, is to rebuild the U.S. economy and to build up the American worker. And that means reforming the global economic system.”</p> <p>There’s nothing objectionable about the United States building relationships with “a network of trusted friends and partners.” The WTO expressly acknowledges that some members may want to achieve deeper liberalization than is possible within the WTO. As long as certain core conditions are met—especially that the liberalization between or among the countries party to the agreement applies to substantially all of their trade and that the agreement does not raise barriers to external trade—these preferential (bilateral or regional) agreements won’t run afoul of WTO commitments. So, building these alliances in no way requires ditching the WTO.</p> <p>As sovereign people in a&nbsp;sovereign nation, Americans are free to decide whether and to what extent their government should be involved with international institutions, such as the WTO. Blaming foreigners for homemade woes is a&nbsp;staple of the nationalist’s diet and ditching the WTO—especially on the bases of the false pretenses Hawley offers—will serve to isolate further the United States and render what Hawley considers “the single greatest threat to American security in the 21st century, Chinese imperialism,” more difficult to counter.</p> <p>Whether or not one thinks Chinese imperialism is a&nbsp;priority scourge, taking on that challenge alone—as an isolated, international pariah—would significantly diminish the likelihood of success. Just ask President Trump, who launched a&nbsp;trade war against China after alienating our trade partners with steel and aluminum tariffs and other threats. He’d surely agree…in private.</p> </div> Wed, 06 May 2020 09:27:51 -0400 Daniel J. Ikenson https://www.cato.org/publications/commentary/senator-hawleys-case-nationalism-strong-propaganda-weak-facts The Fate of the WTO and Global Trade Hangs on Fish https://www.cato.org/publications/commentary/fate-wto-global-trade-hangs-fish James Bacchus, Inu Manak <div class="lead mb-3 spacer--nomargin--last-child text-default"> <p>The World Trade Organization (WTO) is struggling to maintain its relevance. Protectionism has been rising for more than a&nbsp;decade as a&nbsp;growing number of countries have openly flouted WTO rules. Many are having second thoughts about the wisdom of allowing China into the organization, where it retains special developing‐​economy rights that help shield its domestic economy from foreign competition. Recent trade agreements have been bilateral or regional, undermining the WTO’s purpose of maintaining a&nbsp;global trading order. In the wake of the coronavirus pandemic, impediments to trade are only expected to grow.</p> </div> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>This sorry state of affairs in the global trading order is mirrored in the lack of progress in the only major global trade negotiations still actively underway—WTO talks intended to impose discipline on fisheries subsidies, which have led to depleted fish stocks in the world’s oceans. These talks have been going on for nearly two decades, have missed yet another deadline, and seem to be in limbo.</p> <p>The obstacle standing in the way of a&nbsp;meaningful agreement is not just the reluctance of countries to give up subsidies. It also does not help that a&nbsp;deal requires unanimous approval of every clause and stipulation by all 164 WTO member countries—including landlocked ones without a&nbsp;marine fishing fleet, such as Hungary, Mongolia, and Mali. At the root of the fisheries problem, however, lies the WTO’s own preferred negotiating approach: As long as the WTO continues to approach trade using two different sets of rules—one for developed countries, the other for developing ones—the fisheries talks are all but certain to continue to produce only irreconcilable conflict.</p> </div> , <aside class="aside--right aside--large aside pb-lg-0 pt-lg-2"> <div class="pullquote pullquote--default"> <div class="pullquote__content h2"> <p>Tuna, cod, and mackerel are going to decide the future of the global trading order as the WTO struggles to complete a&nbsp;deal. </p> </div> </div> </aside> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>Fish do not respect territorial boundaries. Overfishing, which continues to deplete fish stocks worldwide despite decades of attempts to make fishing sustainable, is by definition a&nbsp;global problem requiring a&nbsp;global solution. An estimated 37 percent of all the seafood produced in the world is traded internationally—which makes the WTO the logical forum to take the lead in finding a&nbsp;solution.</p> <p>More than 3&nbsp;billion people depend on fish and fish products—including shrimp and other seafood—for about 20 percent of their animal protein consumption. Since the 1960s, global per‐​capita fish consumption has more than doubled, while the absolute total has more than quadrupled. Many of the people most dependent on fish live in the poorest and least‐​developed nations. At least 140 million people depend on fishing for their livelihood, and the demand for fish has been growing with a&nbsp;rising global population. We now eat more fish than beef.</p> <p>But subsidies for fisheries continue to create overcapacity in fishing fleets, spur illegal fishing, and contribute to the degradation and depletion of wild fish stocks. Total subsidies amount to <a href="https://www.sciencedirect.com/science/article/pii/S0308597X19303677" target="_blank">$35 billion</a> annually, or approximately 30 to 40 percent of the value of all fish landed by marine vessels worldwide. The largest part of these subsidies—22 percent—consists of fuel subsidies, which make it cheaper for fishing vessels to range ever farther beyond their own coastal waters into the global commons of the high seas.</p> <p>It’s not just fuel subsidies that encourage unsustainable fishing. Some countries provide subsidies to construct and purchase new vessels, free facilities to land fish, and subsidies to buy, transport, or store fishing equipment. Each of these subsidies make it less costly and more profitable to fish, thereby encouraging more fishing than there would be without subsidies. There is also another, more ambiguous category of subsidies which, if used properly, can help manage fish stocks, but which increase fishing in other contexts. For example, when governments buy back fishing licenses, it can reduce fishing by taking vessels out of service—but these subsidies are ineffective if the licenses are subsequently resold, or if the vessels taken out of service are only smaller, older ones with very little catch.</p> <p>The Global Ocean Commission has estimated that <a href="https://www.some.ox.ac.uk/wp-content/uploads/2016/03/GOC_2016_Report_FINAL_7_3.low_1.pdf" target="_blank">60 percent</a> of all fisheries subsidies directly encourage “unsustainable, destructive and even illegal fishing practices.” Illegal fishing practices include fishing by unregistered vessels, in another country’s exclusive economic zone in violation of regulations, and in international waters when it breaks international agreements or the laws of the country under whose flag the vessel operates. China, in particular, has been <a href="https://www.businessinsider.com/us-warns-chinas-aggressive-fishing-boats-could-start-a-war-2019-1" target="_blank">under fire</a> for illegal fishing practices, both with respect to other countries’ exclusive economic zones as well as the open seas.</p> <p>Late last year, the WTO talks were inching toward success on a&nbsp;subset of the issues on the table—specifically, new rules to eliminate subsidies for illegal, unreported, and unregulated fishing, and to prohibit certain other subsidies for fishing of stocks mutually recognized as being overfished, such as Atlantic cod, Alaska pollock, and Argentine hake. However, subsidies that contribute to overcapacity and overfishing more generally—not focused on a&nbsp;small number of specific stocks—have been much more difficult to address, and remain the main obstacle to an agreement. This is troubling because, as the United Nations Food and Agriculture Organization has <a href="http://www.fao.org/state-of-fisheries-aquaculture" target="_blank">reported</a>, “the percentage of stocks fished at biologically unsustainable levels increased from 10 percent in 1974 to 33.1 percent in 2015.”</p> <p>At the center of this impasse are the five main providers of fisheries subsidies: China, the European Union, the United States, South Korea, and Japan. These five WTO members account for <a href="https://www.sciencedirect.com/science/article/pii/S0308597X19303677" target="_blank">58 percent</a> of all global fisheries subsidies. If they can agree, then other members of the WTO will be much more likely to move toward the consensus needed for a&nbsp;global agreement.</p> <p>Here as elsewhere on the WTO agenda, a&nbsp;key sticking point is a&nbsp;lack of consensus on how the rules under consideration should apply to countries at different stages of development. The WTO has traditionally had two sets of rules for developed and developing countries, but the fisheries talks demonstrate exactly why this binary approach no longer works: A&nbsp;division into these two groups blurs large differences between various developing countries, and, by holding some countries to a&nbsp;lower standard than others, would reduce the overall benefit from any new rules.</p> <p>In fisheries negotiations, as elsewhere in the WTO, China lies at the heart of the dispute, and perfectly illustrates how a&nbsp;blanket application of “special and differential treatment” for developing countries in trade <a href="https://www.cato.org/publications/policy-analysis/development-dimension-what-do-about-differential-treatment-trade">no longer makes sense</a>. For instance, in <a href="http://www.fao.org/state-of-fisheries-aquaculture" target="_blank">2016</a>, China ranked first in the world with just over 14 percent of the total share of world exports of fish and fish products. Yet China remains one of the most ardent defenders of “special and differential treatment” for itself and all other developing countries, regardless of their stage of development.</p> <p>Strong arguments can be made that small‐​scale, artisanal, and subsistence fishers in developing countries could safely be granted some subsidies. The reality, however, is that nearly <a href="https://www.sciencedirect.com/science/article/pii/S0308597X1730177X" target="_blank">85 percent of all fisheries subsidies</a>, including those paid by China and many other emerging countries, go to large‐​scale industrial fleets. These fleets are the cause of virtually all overfishing, and are where fisheries subsidies must be cut—no matter whether the subsidies are granted by a&nbsp;developed or a&nbsp;developing country.</p> <p>Reaching global agreement to limit fisheries subsidies is not just essential for preserving fisheries and the world’s marine fishing stocks. Because it can only be resolved if one of the WTO’s core problems—its blanket distinction between two groups of countries—is addressed, it is also a&nbsp;crucial test for the future of the WTO. Progress on fisheries would be a&nbsp;sign that the world has a&nbsp;chance to preserve—and perhaps even strengthen—the global, multilateral trading order at a&nbsp;time when so many forces are arrayed against it.</p> </div> Tue, 05 May 2020 11:47:26 -0400 James Bacchus, Inu Manak https://www.cato.org/publications/commentary/fate-wto-global-trade-hangs-fish Senator Hawley’s Many Misunderstandings of the WTO https://www.cato.org/blog/senator-hawleys-many-misunderstandings-wto Simon Lester <p>Senator Josh Hawley has a&nbsp;NY Times op‐​ed today entitled “<a href="https://www.nytimes.com/2020/05/05/opinion/hawley-abolish-wto-china.html">The W.T.O. Should Be Abolished</a>.” Debates about the scope and nature of the World Trade Organization (WTO)&nbsp;and the trading system in general are important, but this op‐​ed gets so many facts wrong that it cannot serve as the basis for a&nbsp;useful discussion. In this blog post, I’ll go through a&nbsp;few of them. If the early response on Twitter is any indication, plenty of other pro‐​trade folks will be doing a&nbsp;similar exercise, so keep an eye out for other commentary on this.</p> <p>Hawley starts off with this:</p> <blockquote><p>The W.T.O. was created in 1995 as the crown jewel of a&nbsp;new global market, a&nbsp;system designed by ambitious Western policymakers after the fall of the Soviet Union. Their aim was to create one giant, liberal international economy to support a&nbsp;new liberal international order.</p> <p>The reformers wanted all the world to follow the same economic rules, so that capital, products, and people could move easily across national boundaries. Nation‐​states themselves would become less important in setting economic policy and new, multilateral institutions, like the W.T.O., would take on the role of managing the global economy.</p> </blockquote> <p>One crucial point missing here is that the WTO carried over the previous system that existed under the General Agreement on Tariffs and Trade (GATT), which was created after World War II. The GATT covered trade in goods, and the WTO expanded that system to cover trade in services and intellectual property protection. The WTO also strengthened the dispute settlement system a&nbsp;bit and created a&nbsp;better monitoring system for evaluating governments’ trade policies.</p> <p>But what the WTO certainly does <em>not </em>do is “manage the global economy.” Under both the GATT and the WTO, nation‐​states are in charge of “setting economic policy.” Thus, Hawley’s expressed concerns are moot, and he could have stopped writing at this point.</p> <p>The way I&nbsp;like to think of the main function of the GATT and then the WTO is as mutually agreed constraints on protectionism. Governments recognize their weakness in giving in to protectionist interest groups, and they all agree, through the GATT and WTO, to limit their protectionism. Not to eliminate it (which would be nice!), because protectionism is still allowed. There are plenty of famous examples, such as the 25% U.S. tariff on imported trucks.</p> <p>Thus, nation‐​states are still clearly in charge of their economic policy, as there is flexibility for governments to act within the rules and protect their domestic industries if they choose to do so. But through their actions in the WTO, nation‐​states have chosen to moderate their protectionism. It’s a&nbsp;small, sovereign step towards trade liberalization.</p> <p>Hawley seems to want to downplay the continuity between the GATT and the WTO. He says: “[The WTO] was a&nbsp;bold vision, and a&nbsp;major departure. The economic system it replaced had been created by America and its allies at the close of the Second World War and pursued more modest aims.” The reality is that the GATT and all of its various agreements were carried over into the WTO. The WTO is not a “major departure.” Rather, it was a&nbsp;modest expansion, and it’s worth noting that key aspects of this expansion — adding trade in services and IP protection — were pushed by the United States.</p> <p>Hawley then explains his understanding of the WTO as follows:</p> <blockquote><p>Its mandate was to promote free trade, but the organization instead allowed some nations to maintain trade barriers and protectionist workarounds, like China, while preventing others from defending themselves, like the United States. Foreign agriculture won concession after concession, while American farmers struggled to get fair access to markets. Meanwhile, the W.T.O. required American workers to compete against Chinese <a href="https://www.cecc.gov/sites/chinacommission.house.gov/files/documents/CECC%20Staff%20Report%20March%202020%20-%20Global%20Supply%20Chains%2C%20Forced%20Labor%2C%20and%20the%20Xinjiang%20Uyghur%20Autonomous%20Region.pdf" target="_blank">forced labor</a> but did next to nothing to stop Chinese theft of American intellectual property and products.</p> </blockquote> <p>For what it’s worth, the <a href="http://worldtradelaw.net/uragreements/wtoagreement.pdf">WTO Agreement</a> does not refer to “free trade,” but rather “entering into reciprocal and mutually advantageous arrangements directed to the substantial reduction of tariffs and other barriers to trade and to the elimination of discriminatory treatment in international trade relations.” But he is right that “the organization instead allowed some nations to maintain trade barriers and protectionist workarounds.” What he gets wrong is that WTO rules allow <em>all nations</em> to do this. Remember the 25% U.S. truck tariffs I&nbsp;mentioned earlier? Again, those are permitted.</p> <p>Now, there is a&nbsp;real issue with China and other nations who are less wealthy taking on fewer commitments, and an op‐​ed by Hawley arguing that China should do more as it has gotten wealthier (like <a href="https://www.cato.org/publications/commentary/what-trump-gets-right-about-china-trade">this one</a> from me and one of my colleagues) would be useful. But pulling out of the WTO would be counterproductive for the goal of opening up the Chinese market. Chinese tariffs were higher before it joined the WTO, and if the U.S. pulls out of the WTO, U.S. producers would face higher tariffs on their exports to China than their competitors do.</p> <p>Along the same lines, Hawley complains that “the W.T.O. … did next to nothing to stop Chinese theft of American intellectual property and products.” He has it backwards here. In fact, the GATT did next to nothing here, whereas the WTO, with its agreement on <a href="http://worldtradelaw.net/document.php?id=uragreements/tripsagreement.pdf">Trade‐​Related Aspects of Intellectual Property Rights</a>, does a&nbsp;lot. If the U.S. pulls out of the WTO, it loses one of the key mechanisms to press China to improve its protection of these rights.</p> <p>So what does Hawley want instead of the WTO? Here is his vague prescription:</p> <blockquote><p>The United States must seek new arrangements and new rules, in concert with other free nations, to restore America’s economic sovereignty and allow this country to practice again the capitalism that made it strong. History can be our guide. For nearly 50&nbsp;years before the W.T.O.’s founding, the United States and its allies maintained a&nbsp;network of reciprocal trade that protected our national interests and the nation’s workers. We can do it again, for the 21st century. That means returning production to this country, securing our critical supply chains and encouraging domestic innovation and manufacturing. It means striking trade deals that are truly mutual and truly beneficial for America and walking away when they are not. It means building a&nbsp;new network of trusted friends and partners to resist Chinese economic imperialism.</p> </blockquote> <p>As I&nbsp;mentioned above, “for nearly 50&nbsp;years before the WTO’s founding,” we had the GATT. Does Hawley want to go back to that? If so, that means he loses the IP protection that he was concerned about. But he doesn’t mention the GATT by name, so it’s not really clear what his vision is here. And to the extent that he offers a&nbsp;vision, it is pretty cloudy. He talks about “returning production to this country,” but also mentions “building a&nbsp;new network of trusted friends and partners.” But you kind of have to pick one of these. You can’t really have both. If you adopt a&nbsp;trade policy that forces production back to the United States, you will aggravate your friends and partners (and also raise prices for U.S. consumers). In doing so, you will lose their trust.</p> <p>Now, he doesn’t say this, but I&nbsp;can imagine a&nbsp;policy that fulfills his goals. Basically, the United States would negotiate trade liberalizing agreements with our European and Asian friends, building up trust with allies in both places and putting China on the defensive a&nbsp;bit. Does that strategy sound familiar? It’s pretty close to what President Obama did with the Transatlantic Trade and Investment Partnership and the Trans‐​Pacific Partnership. It’s actually not a&nbsp;bad strategy, although it obviously needs some tweaking to make it work this time. But of course, Hawley doesn’t want to seem like he is endorsing&nbsp;an Obama initiative, so he has to obfuscate a&nbsp;bit here.</p> <p>Ultimately, you are not going to learn much about the WTO, its actual problems, or its future by reading the Hawley op‐​ed. But it will probably generate a&nbsp;number of useful tweets, blog posts, and op‐​eds explaining the real issues. I&nbsp;hope this blog post was a&nbsp;start, but keep an eye out for all the others.</p> Tue, 05 May 2020 09:35:14 -0400 Simon Lester https://www.cato.org/blog/senator-hawleys-many-misunderstandings-wto Regulatory Barriers in a Crisis, Canada Edition https://www.cato.org/blog/regulatory-barriers-crisis-canada-edition Inu Manak <p>Anyone who grew up in Canada (outside of Quebec) will likely remember spending mornings reading the back of cereal boxes, first in English, and then in French. In fact, almost everything you buy has bilingual packaging. As a&nbsp;kid, I&nbsp;never thought much about this. It was just a&nbsp;fun way for me to practice French every morning. But as an adult who spends almost all her time researching regulatory barriers to trade, product requirements like these take on a&nbsp;whole new meaning. When I&nbsp;read a&nbsp;story about how Canada was relaxing this requirement for some products, I&nbsp;was naturally intrigued.</p> <p>In a&nbsp;recent online <a href="https://www.cato.org/events/trade-pandemic-traditional-issues-new-concerns-optimal-policy-responses">event</a>, I&nbsp;spoke about how government regulations can act as barriers to trade, even if they are not protectionist in intent. Canada’s bilingual packaging requirement is a&nbsp;great example of this. But there are also countless other examples, such as testing requirements for makeup or medicines, and even whether you can call a&nbsp;<a href="https://www.cato.org/blog/government-should-keep-its-hands-our-tofu-sausages">veggie burger</a> a&nbsp;<em>burger, </em>or <a href="https://www.cato.org/blog/yes-virginia-almond-milk-can-be-called-milk">almond milk</a>, <em>milk</em>. While as consumers we may not notice these barriers in day to day life, producers certainly do. Particularly now, amidst the COVID-19 pandemic, where there are product shortages all over the world, this trade problem is more relevant than ever.</p> <p>This is exactly why Canada <a href="https://globalnews.ca/news/6877124/trudeau-health-canada-french-labeling-coronavirus/">recently relaxed</a> bilingual labeling requirements for some cleaning products coming from the United States. Just like in the United States, grocery store shelves in&nbsp;Canada have noticeable empty spaces in the cleaning aisle. Prime Minister Justin Trudeau thus defended the action, citing the need for access to disinfectants and hand sanitizers where suppliers face shortages or logistical challenges in their supply chains. This makes a&nbsp;lot of practical sense. Though Canada will revert back to strict enforcement of bilingual packaging after the current crisis is over, its willingness to relax this requirement will undoubtedly help Canadian consumers get the products they need to feel safe now.</p> <p>This is an important lesson for how to address regulatory barriers in a&nbsp;crisis situation, when every day that passes is critical. Delay is incredibly costly. For instance, as countries around the world race to create a&nbsp;vaccine, medical treatments, or test kits for COVID-19, making sure that we can have access to these innovations as quickly as possibly should be a&nbsp;top priority for policymakers. My colleague, Dr. Jeffrey Singer, has been closely following the <a href="https://www.cato.org/publications/commentary/coronavirus-testing-delays-caused-red-tape-bureaucracy-scorn-private">regulatory failures</a> that have impeded testing capacity in the United States, including preventing the use of tests developed abroad. Why should we not accept tests developed in South Korea, a&nbsp;trusted ally, for instance?</p> <p>While COVID-19 may bring attention to these issues now, even once the crisis is over, we should work towards limiting the burden of regulatory barriers on trade wherever possible. Repatriating global supply chains is <a href="https://www.cato.org/publications/commentary/supply-chain-repatriation-its-buyer-nation-beware">not the answer</a> to shortages. Instead, we should look at the barriers we have at home that impede our ability to respond quickly and to help our citizens stay safe. If Canada can relax something so sacrosanct as its <a href="https://www.canada.ca/en/canadian-heritage/services/official-languages-bilingualism.html">bilingual</a> labelling requirements,<em> un élément fondamental de notre identité nationale</em>, then perhaps other barriers can be addressed too.</p> Mon, 04 May 2020 14:42:24 -0400 Inu Manak https://www.cato.org/blog/regulatory-barriers-crisis-canada-edition Simon Lester discusses trade policy on The Personal Responsibility Lawyer podcast https://www.cato.org/multimedia/media-highlights-radio/simon-lester-discusses-trade-policy-personal-responsibility Mon, 04 May 2020 12:57:09 -0400 Simon Lester https://www.cato.org/multimedia/media-highlights-radio/simon-lester-discusses-trade-policy-personal-responsibility Energy Industry Desperation Leads to Jones Act Tanker Use https://www.cato.org/blog/energy-industry-desperation-leads-jones-act-tanker-use Colin Grabow <p>Something strange is afoot in the energy industry. According to <a href="https://uk.reuters.com/article/uk-global-oil-storage-tankers-exclusive/exclusive-traders-book-jones-act-tankers-for-storage-foreign-trips-as-u-s-fuel-glut-swells-sources-idUKKCN2292NM">Reuters</a>, demand for tankers has reached such stratospheric levels that traders are resorting to that most desperate of measures—using <a href="https://www.cato.org/project-jones-act-reform">Jones Act</a> ships:</p> <blockquote><p>Oil traders are hiring expensive U.S. vessels, normally only used for domestic shipments, to store gasoline or ship fuel overseas, five shipping sources said, in a&nbsp;sign of the energy industry’s desperation for places to park petroleum amid a&nbsp;30% drop in worldwide demand.</p> <p>Billions of people worldwide are living under confinement rules due to the coronavirus pandemic, destroying demand for gasoline and other fuels and creating a&nbsp;supply glut. Storage tanks onshore and floating storage in tankers on the water are rapidly filling, leaving fewer options for traders looking to sock away oil.</p> <p>Several shippers said they have started to book Jones Act (JA) vessels for foreign voyages or to store refined products. The century‐​old Jones Act requires that vessels traveling between domestic ports be owned and operated by U.S. crews, and they are generally more expensive than other vessels.</p> <p>“It’s very unusual to use JA tankers for international trips,” one shipping source said.</p> </blockquote> <p>Pause for a&nbsp;moment to reflect on this. International traders with a&nbsp;wide range of vessels to choose from consider Jones Act ships a&nbsp;last gasp option. But these costly vessels are the <em>only</em> option when transporting goods by water within the United States. Which helps explain&nbsp;why Americans largely avoid water transport. Despite <a href="https://coast.noaa.gov/states/fast-facts/economics-and-demographics.html">40 percent</a> of the U.S. population living along coasts, ships are used to transport just <a href="https://fas.org/sgp/crs/misc/R44367.pdf">2&nbsp;percent</a> of the country’s freight (barges account for another 4&nbsp;percent). In contrast, <a href="https://op.europa.eu/en/publication-detail/-/publication/ec937c8f-4b6d-462e-9278-8a2d092d24c2/language-en">40 percent</a> of the European Union’s internal freight is moved by sea.</p> <p>This is in large part the Jones Act’s handiwork. Instead of being able to select&nbsp;from a&nbsp;vast&nbsp;array of ships offering competitive rates, those seeking domestic waterborne transport are restricted to a&nbsp;<a href="https://www.cato.org/blog/want-americans-buy-us-products-dump-jones-act">limited</a>, <a href="https://www.cato.org/blog/old-ships-still-abundant-jones-act-fleet">old</a>, and expensive fleet undesired by the rest of the world. And what should be a&nbsp;leading means of transporting goods within a&nbsp;country as vast as the United States is a&nbsp;last resort.&nbsp;Americans deserve better.</p> Mon, 04 May 2020 09:55:13 -0400 Colin Grabow https://www.cato.org/blog/energy-industry-desperation-leads-jones-act-tanker-use Is The Jones Act a Help or Hindrance in Confronting China? https://www.cato.org/blog/jones-act-help-or-hindrance-confrontation-china Colin Grabow <p>I recently <a href="https://www.cato.org/blog/jones-acts-primary-victim-united-states-not-china">explained</a> why concerns about China are no reason to allow the Jones Act status quo to fester. But the analysis can be taken a&nbsp;step further. If China is assumed to be a&nbsp;grave geopolitical threat, is the 100‐​year‐​old <a href="https://www.cato.org/jonesact">Jones Act</a> an asset? If the United States and China are on a&nbsp;collision course—be it a&nbsp;Cold War‐​style confrontation or worse—does the law&nbsp;leave the United States better prepared or at a&nbsp;disadvantage? Here are some reasons to suspect it’s the latter.</p> <p><strong>Shipping</strong>: In the (hopefully unlikely) event of a&nbsp;U.S.-China military conflict, access to commercial ships will be a&nbsp;prized commodity. Any large‐​scale sealift operation will require such vessels to transport U.S. military supplies and equipment. But the Jones Act’s U.S.-build requirement means fewer U.S.-flag ships available than would otherwise be the case.</p> <p>Any vessels engaged in the domestic waterborne transport of goods must be built in the United States. In other words, U.S. domestic ship operators have been effectively subjected to an international embargo for the purchase of vessels—all without China having to lift a&nbsp;finger. Instead of Americans having access to efficient foreign shipyards that offer competitive prices, they are restricted to domestic producers that charge up to <a href="https://fas.org/sgp/crs/misc/R45725.pdf">five times</a>&nbsp;as much as&nbsp;their international counterparts while <a href="https://www.cato.org/publications/policy-analysis/rust-buckets-how-jones-act-undermines-us-shipbuilding-national#costlier-ships">taking longer</a> to deliver the contracted vessels.</p> <p>Such vessels must charge higher rates to compensate for their costly acquisition, and, thus, there is less demand for their services. The result is&nbsp;fewer of them. Anyone&nbsp;in China rooting for a&nbsp;decline in the U.S. commercial fleet can hardly believe their luck.</p> <p><strong>Shipbuilding</strong>: Jones Act supporters often claim the law’s&nbsp;U.S.-build requirement helps&nbsp;foster U.S. shipbuilding, which is often deemed key to U.S. national security. But here too the Jones Act plays the role <a href="https://www.cato.org/publications/policy-analysis/rust-buckets-how-jones-act-undermines-us-shipbuilding-national#jones-act-national-security-asset-or-liability">of saboteur</a>. Low demand for pricey U.S.-built ships means that the combined output of U.S. shipyards is&nbsp;typically in the low <a href="https://fas.org/sgp/crs/misc/R45725.pdf">single digits</a>. This is entirely predictable. By handing U.S. shipyards a&nbsp;captive domestic market, the Jones Act nearly guarantees their inferiority to shipbuilders abroad. These shipyards don’t need to be world‐​class to win Jones Act business—they simply need to better than the handful of&nbsp;other U.S. builders.</p> <p>U.S. shipyards find themselves caught in a&nbsp;vicious cycle. Their lack of competitiveness results in minimal export business (exports accounted for just <a href="https://www.maritime.dot.gov/sites/marad.dot.gov/files/docs/resources/3641/maradeconstudyfinalreport2015.pdf">4.6 percent</a> of industry revenue in 2014) and little demand in the captive domestic market. This lack of demand means lower economies of scale, leading to reduced efficiencies and higher costs, further dampening the appetite for U.S.-built ships. And so it goes.</p> <p>The Jones Act also harms U.S. shipbuilders in more direct ways. The law, for example, imposes severe limits on the amount of foreign‐​modified steel that can be used in vessel construction. In contrast, high‐​wage Norwegian shipyards are able to stay competitive in shipbuilding by <a href="https://www.oecd.org/sti/ind/PeerReviewNorway_FINAL.pdf">outsourcing</a> hull construction to cheaper yards in Eastern Europe. This allows the country’s shipyards&nbsp;to specialize in higher value‐​added aspects of the vessel construction process. Jones Act restrictions, however, make such an approach&nbsp;impossible for U.S. shipyards.</p> <p>The Jones Act not only disincentivizes shipyards to achieve excellence but actively hamstrings their ability to reduce costs. Chalk this up too as a&nbsp;win for China.</p> <p><strong>Maritime Infrastructure</strong>: While China expands its investments in ports around the world, the Jones Act increases the difficulty and expense of maintaining such critical maritime infrastructure in the United States. Acting in concert with the 1906 Foreign Dredge Act, the Jones Act restricts dredging operations to vessels that are U.S.-flagged, U.S.-crewed, U.S.-built, and U.S.-owned. But the U.S. dredging fleet is comparatively <a href="https://twitter.com/cpgrabow/status/1254839749975703554">small</a>, <a href="https://twitter.com/cpgrabow/status/1250081603189080064">aging</a>, and <a href="https://www.cato.org/blog/louisiana-efforts-defend-its-coastline-undermined-protectionism">costly</a>. This translates into&nbsp;more time and money to remove the sand and silt that impedes the efficient operation of U.S. waterways.</p> <p><strong>Economic Impact</strong>: U.S. economic might is the sine qua non of both the country’s soft and hard power. Without its massive economy, the United States would be diminished in influence and less able to fund its large military. But the Jones Act undermines U.S. prosperity. Indeed, a&nbsp;<a href="https://read.oecd-ilibrary.org/science-and-technology/local-content-requirements-and-their-economic-effect-on-shipbuilding_90316781-en#page21">2019 study</a> performed by the Organization for Economic Cooperation and Development found that the law’s repeal would boost U.S. value‐​added (essentially GDP) by up to $64 billion.</p> <p>It’s easy to understand why. Although typically viewed as a&nbsp;foreign trade barrier, the Jones Act is perhaps best understood as an impediment to domestic trade. By raising the cost of transportation the law hampers Americans’ ability to trade with each other across the country’s vast expanse. It is figurative sand in the gears of the U.S. economy (more literally in the case of U.S. ports).</p> <p>A lack of competitive shipping rates, or even sometimes actual ships, means that Americans purchase products from abroad despite a&nbsp;domestic abundance. New England ports <a href="https://www.washingtonpost.com/business/economy/tanker-carrying-liquefied-natural-gas-from-russias-arctic-arrives-in-boston/2018/01/28/08d3894c-0497-11e8-8777-2a059f168dd2_story.html">receive</a> liquefied natural gas (LNG) originating in Russia rather than&nbsp;the United States, Puerto Rico <a href="https://www.gao.gov/assets/660/653046.pdf">imports</a> agricultural&nbsp;products instead of buying them domestically, and Hawaii meets its liquefied petroleum gas (LPG) needs from <a href="https://www.enverus.com/blog/dislocations-in-the-us-propane-market-and-the-jones-act/">West Africa</a> instead of the U.S. mainland.</p> <p>China imports U.S. <a href="https://www.eia.gov/dnav/ng/ng_move_poe2_dcu_NUS-NCH_a.htm">LNG</a> and <a href="https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&amp;s=MPAEX_NUS-NCH_1&amp;f=M">LPG</a> while Americans in places such as Hawaii and New England&nbsp;cannot. That’s not defensible on the grounds of either economic efficiency or national security.</p> <p><strong>The Verdict is Clear: the Jones Act is Hurting U.S. Interests</strong></p> <p>This is far from&nbsp;an exhaustive list of harms caused by the Jones Act. Nonetheless, it’s hard to escape the conclusion that—assuming the worst about the path of U.S.-China relations and intentions of China’s leadership—the Jones Act actually serves Beijing’s interests. The law is a&nbsp;classic example of economist Henry George’s maxim that “What protection teaches us, is to do to ourselves in time of peace what enemies seek to do to us in time of war.” Concerns over China are not only a&nbsp;false justification for the status quo, but they actually make reform or repeal of this law even more imperative.</p> <p>For the record, I&nbsp;do not believe that framing U.S.-China tensions as a&nbsp;neo‐​Cold War or China as the Soviet Union reincarnate is a&nbsp;useful or accurate depiction of the relationship. But there is a&nbsp;clear&nbsp;element of competition. The United States has traditionally been seen as a&nbsp;champion of free markets and free people while China’s leadership has chosen the path of&nbsp;authoritarianism and a&nbsp;greater role for economic central planning. Other countries are&nbsp;watching and deciding which is best.</p> <p>To be an effective advocate and model, the United States must hew to its&nbsp;principles in both word and deed. The embrace of laws such as the Jones Act serves as a&nbsp;disturbing indicator that the United States lacks confidence in the ideals it espouses.&nbsp;The Jones Act isn’t just about what’s best for the U.S. maritime sector or even U.S. economic efficiency and prosperity, but what the country stands for. Free people ought to use foreign ships in domestic transport, or at the very least foreign‐​built ships. The United States does not prevail in an&nbsp;ideological clash&nbsp;by embracing policies that are at clear odds with its stated values. It only undercuts and undermines itself.</p> <p>Regardless of how one views the U.S.-China relationship, be it a&nbsp;battle&nbsp;of ideals or something more foreboding, the case for the Jones Act’s repeal or reform is overwhelming. The law is not only failing to achieve its stated objective of promoting a&nbsp;strong maritime sector but&nbsp;is actively working against U.S. interests. After 100&nbsp;years change is long overdue.&nbsp;</p> Tue, 28 Apr 2020 13:55:55 -0400 Colin Grabow https://www.cato.org/blog/jones-act-help-or-hindrance-confrontation-china On ‘Supply‐​Chain Repatriation,’ It’s Buyer (And Nation) Beware https://www.cato.org/publications/commentary/supply-chain-repatriation-its-buyer-nation-beware Scott Lincicome <div class="lead mb-3 spacer--nomargin--last-child text-default"> <p>One&nbsp;of the most fashionable COVID-19 proposals being circulated by Washington politicians and pundits these days is the “<a href="https://www.aei.org/economics/trump-adviser-reclaim-global-supply-chain-and-manufacturing-capabilities/" target="_blank">repatriating</a>” of global supply chains for pharmaceuticals, medical devices, and “personal protective equipment” that have been “outsourced” over the past three decades, leaving America utterly dependent on foreign countries, especially China, for these essential products. Bringing that manufacturing back home, so the story goes, is the only way to ensure future “resiliency” in the face of the next global pandemic. Otherwise, we’ll once again be left empty‐​handed and helpless — and, even worse, at the mercy of China and other untrustworthy foreigners.</p> </div> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>It’s a&nbsp;dire prediction. Fortunately, it is also mostly wrong. While COVID-19 has revealed certain products or policies that need a&nbsp;second look, full‐​scale repatriation — via protectionism, industrial policy, and other state micromanagement of private behavior — would leave us less, not more, prepared for the next national emergency.</p> <p>The first way repatriation plans go wrong is by relying on bogus data. The terrifying and oft‐​repeated claim that “80 percent of America’s pharmaceutical drug supply comes from China” is, as&nbsp;<em>Reason</em>’s Eric Boehm details,&nbsp;<a href="https://reason.com/2020/04/06/why-you-shouldnt-trust-anyone-who-claims-80-percent-of-americas-drugs-come-from-china/" target="_blank">essentially baseless</a>. A&nbsp;<em>Washington Free Beacon&nbsp;</em>piece provides an excellent case study in how easy it is to misunderstand the data:</p> </div> , <blockquote class="blockquote"> <div> <p>China … makes many American generic drug imports, including 95 percent of ibuprofen, 70 percent of acetaminophen, and 40 to 45 percent of penicillin. The slowdown attributable to the coronavirus’s effect on Chinese manufacturing has already created the possibility of a&nbsp;shortage of over 150 drugs, according to an FDA report.</p> </div> </blockquote> <cite> </cite> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>Those percentages sound very bad. But isolated import‐​share figures tell us very little about actual “vulnerabilities,” because they omit domestic production and local inventories. According to a&nbsp;new study from the&nbsp;<a href="https://www.stlouisfed.org/on-the-economy/2020/april/us-rely-other-countries-essential-medical-equipment" target="_blank">St. Louis Federal Reserve</a>, 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&nbsp;percent of total domestic consumption because&nbsp;<em>American</em>&nbsp;producers supplied the vast majority (more than 70 percent) of these products. The U.S. does indeed need better data on pharmaceutical production (something the CARES Act seeks to remedy), but it’s clear that the United States still makes a&nbsp;lot of generic drugs — and even plays host to one of the largest ibuprofen plants in the world (in Texas). So China’s share of imports, without more context, is pretty meaningless.</p> <p>At the same time, we have massive stockpiles of other critical drugs to prepare for crisis‐​related spikes in demand. When India temporarily banned hydroxychloroquine exports, for example, everyone freaked out because India makes a&nbsp;lot of it. The freakout quickly dissipated, however, when it was revealed that we already had&nbsp;<a href="https://www.statnews.com/2020/04/06/trump-hydroxychloroquine-fact-check/" target="_blank">31 million doses</a>&nbsp;(donated by multinational drug companies) in the Strategic National Stockpile. State and local governments have since stockpiled&nbsp;<a href="https://abcnews.go.com/Health/wireStory/us-states-build-stockpiles-malaria-drug-touted-trump-70334274" target="_blank">30 million</a>&nbsp;more pills, and local pharmacies have their own inventories. Should hydroxychloroquine turn out to be a&nbsp;miracle drug (please consult your doctor!), it looks like we’ll be just fine, regardless of what India does next. (Though it certainly wouldn’t hurt to stop picking needless trade fights with India, the EU, and other allies.)</p> </div> , <aside class="aside--right aside--large aside pb-lg-0 pt-lg-2"> <div class="pullquote pullquote--default"> <div class="pullquote__content h2"> <p>While the data on drug production are far from perfect, the numbers we do have aren’t nearly as bleak as the politicians and pundits claim. </p> </div> </div> </aside> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>Days after that scary‐​sounding FDA story about the “possibility” of drug “shortages” was leaked in late February, the agency published a&nbsp;formal “<a href="https://www.fda.gov/news-events/press-announcements/coronavirus-covid-19-supply-chain-update" target="_blank">Coronavirus (COVID-19) Supply Chain Update</a>,” finding no serious threats at that time. In fact, according to the FDA, there were 109 drugs “currently in shortage” on December 19, 2019 — weeks before the coronavirus hit; on February 28, 2020, in the middle of China’s crisis, that number was 103; last weekend, in the middle of our crisis, it was .&nbsp;.&nbsp;. 108. Maybe major vulnerabilities in the drug‐​supply chain will materialize in the future, but so far, so good.</p> <p>While the data on drug production are far from perfect, the numbers we&nbsp;<em>do</em>&nbsp;have aren’t nearly as bleak as the politicians and pundits claim. As already noted, more than 70 percent of essential medical supplies consumed in the United States in 2018 were made here (so much for that “deindustrialization” we hear so much about). Meanwhile, according 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> <p>A new report from the&nbsp;<a href="https://www.pacificresearch.org/wp-content/uploads/2020/04/BuyAmerica_F.pdf" target="_blank">Pacific Research Institute</a>&nbsp;provides more good news: China accounted for just 1&nbsp;percent ($1.5 billion) and 18 percent ($1.2 billion) of finished pharmaceutical imports and APIs, respectively, into the United States in 2019, and “combined, the United States had a $1.6 billion trade surplus with China for these pharmaceutical products and ingredients.” Within the United States, moreover, there are about 1,300 plants making drugs (often using imported inputs) employing about 120,000 American workers. According to the&nbsp;<a href="https://twitter.com/scottlincicome/status/1246136368595681281" target="_blank">World Trade Organization</a>, the United States is not just a&nbsp;top global producer and importer of medical goods but also a&nbsp;top exporter (No. 2&nbsp;overall, right behind Germany).</p> <p>Some crisis!</p> <p>Yet even if the data were as scary as claimed, widescale repatriation and “self‐​sufficiency” policies defy basic economic sense. For starters, there is the problem of maintaining pandemic‐​level capacity in non‐​pandemic times. According to&nbsp;<em>Politico</em>, for example, the United States could use 20 times the number of N-95 masks (500 million) that it used last year, and U.S. hospitals expect demand to multiply “8.6 times for face shields, 6&nbsp;times for swabs, 5&nbsp;times for isolation gowns and 3.3 times for surgical masks.” Maintaining that much excess capacity in times of normal demand is extremely costly (for many industries, profitability usually kicks in around 80 percent capacity utilization), and running at that level when there’s no pandemic would produce a&nbsp;global glut — ironically, quite similar to the ones we complain about when China subsidizes “global excess capacity,” and certain to cause new trade tensions.</p> <p>At the same time, there is burgeoning evidence of American manufacturers (and small‐​business owners) adapting their operations to meet the explosion in U.S. demand, but this often entails moving from higher‐​value products (e.g., cars or designer jeans) to products that are, in normal times, much lower‐​value products (e.g., ventilators or face masks) that can be made much more cheaply elsewhere. Redirecting this productive capacity to lower‐​value goods reduces these companies’ and their workers’ welfare and also raises prices for American consumers. That’s acceptable during a&nbsp;crisis, but not permanently. Long‐​term public health in the United States will not be advanced by forcing American doctors and their patients to pay five times as much for “Made in Texas” face masks as for the same thing made in China. Indeed, it’s precisely for this reason that dozens of&nbsp;<a href="https://accessiblemeds.org/sites/default/files/2020-03/AAM-Letter-to-President-Buy-American-EO-3-27-20.pdf" target="_blank">health and medical associations</a>&nbsp;recently wrote to the president opposing new “Buy American” restrictions on medical goods.</p> <p>Moreover, there is a&nbsp;thick historical record showing that protectionism, in whatever form, fails to produce a&nbsp;lean, thriving, and innovative domestic industry. Instead, past cases such as steel tariffs and Jones Act shipping restrictions show that government efforts to protect industries deemed “essential” to national security result not only in foreign retaliation and higher consumer costs but also in bankruptcies, layoffs, lower&nbsp;<em>domestic</em>&nbsp;output (e.g., fewer ships), and a&nbsp;small cadre of politically connected zombie companies whose overcompensated executives divert corporate resources from innovation and efficiency to lobbying and executive (not worker) pay. That’s precisely what you don’t want from an industry making life‐​saving pharmaceuticals or medical devices.</p> <p>On the other hand, there is ample evidence that “globalization” (i.e., the free flow of goods, services, capital, and information) has been an absolute blessing for the medical field and, thus, humanity — well beyond simply cheap PPE and generic drugs. Today, doctors and researchers from around the world work together to cure diseases that once killed hundreds of thousands of people each year. And it’s just this type of collaboration that might help to beat the current pandemic: as recently documented by the&nbsp;<a href="https://www.cato.org/blog/american-businesses-tackle-coronavirus?utm_source=twitter&amp;utm_medium=social-media&amp;utm_campaign=addtoany">Cato Institute’s Chris Edwards</a>, “globally, dozens of biotech and pharmaceutical companies are rushing to develop vaccines and treatments for covid‐​19 using a&nbsp;diversity of approaches.” Some of this might even involve (gasp!) China, as the Martin Sandbu of the&nbsp;<em>Financial Times</em>&nbsp;notes: “Within weeks of the new coronavirus’s emergence, Chinese scientists had sequenced its genome and shared their knowledge with the entire world.” Sandbu rightly adds that such a&nbsp;move “was made possible by our unprecedented degree of globalisation of technology, knowledge and communication, which in turn had piggybacked on expanding economic exchange.” Indeed.</p> <p>Of course, none of this happy talk changes the fact that a&nbsp;global pandemic raises unique problems that a&nbsp;normal market economy can’t (indeed, that no kind of economy can) immediately address. Fortunately, there are far easier solutions than fundamentally changing the U.S. and global economies via broad‐​based protectionism and industrial policy. The most obvious place to start is better government stockpiling of essential medical goods — something&nbsp;<a href="https://www.ft.com/content/b6ca9ded-00d5-4eed-a9b7-ed76a5df818a" target="_blank">Switzerland</a>, for example, has used to great effect during the current crisis (and something the United States is now quietly trying to fix in the CARES Act). Stockpiling is precisely the type of government action that even libertarians can support, and it’s also relatively cheap: For example, keeping pandemic‐​level quantities (500 million) of two‐​cent N-95 masks costs a&nbsp;whopping $10 million (a rounding error in D.C. these days).</p> <p>Other policies include requiring domestic manufacturers to maintain larger inventory levels for critical inputs; following&nbsp;<a href="https://twitter.com/scottlincicome/status/1247681857812078594" target="_blank">Korea’s lead</a>&nbsp;and implementing “pandemic preparedness” regulations that allow for the swift approval and production of testing and other essential medical equipment; entering into new&nbsp;<a href="https://www.cato.org/blog/withdrawing-tpp-was-senseless-act-wanton-destruction">trade agreements</a>&nbsp;with Vietnam, India, and other countries that can serve as alternatives to China; or, as already noted, collecting and publishing better data on medical‐​goods production and trade. All of these policies — along with private companies’ post‐​COVID efforts to fortify and diversify their supply chains — are infinitely better than forcefully “repatriating” them via something like the “Jones Act for Medical Goods” (shudder to think).</p> <p>Maybe these moves would still leave small holes in the system, requiring heavier‐​handed government planning, but maybe they won’t. Right now, we just don’t know. We know enough, however, to be skeptical of big new programs,&nbsp;<em>especially</em>&nbsp;when they just so happen to be the same ones that these same politicians have been pushing for years, often in response to imagined crises such as&nbsp;<a href="https://thedispatch.com/p/the-man-who-cried-wolf" target="_blank">trade deficits</a>&nbsp;or sugar — yes,&nbsp;<a href="https://www.nationalreview.com/2015/08/rubio-sugar-subsidies/" target="_blank">sugar</a> — imports.</p> <p>COVID-19 is a&nbsp;real crisis and has raised real concerns. It demands real solutions — not protectionism.</p> </div> Tue, 28 Apr 2020 09:27:56 -0400 Scott Lincicome https://www.cato.org/publications/commentary/supply-chain-repatriation-its-buyer-nation-beware Pandemic Protectionism Gone Wrong https://www.cato.org/blog/pandemic-protectionism-gone-wrong Jeffrey Miron, Erin Partin <p>Tariffs, despite what their proponents seem to believe, harm domestic consumers and manufacturers. And this damage is especially bad in difficult economic times</p> <p>So a&nbsp;<a href="https://www.cbp.gov/document/rulings/temporary-postponement-time-deposit-certain-estimated-duties-taxes-and-fees-during?mod=article_inline">new policy</a> that postpones tariff payments for select products might seem like <a href="https://www.wsj.com/articles/u-s-suspends-tariffs-for-some-importers-affected-by-coronavirus-11587348348">a&nbsp;step</a> in the right direction:</p> <blockquote><p>“The Trump administration said it would allow some companies to delay payment of import tariffs due to economic hardship triggered by the new coronavirus.”</p> </blockquote> <p>Importantly, however,</p> <blockquote><p>“President Trump’s special tariffs on Chinese goods and steel and aluminum imports weren’t included in the tariff‐​deferral offering, and other punitive tariffs on dumped and subsidized products also can’t be delayed, according to the temporary rule.”</p> </blockquote> <p>So the relief is temporary, complicated, and different across industries, correlating with countries the administration dislikes or industries the administration wants to protect; in other words, thinly disguised crony capitalism. Lifting tariffs – in a&nbsp;clean, simple, and neutral way across industries – is the better policy.</p> Wed, 22 Apr 2020 14:59:51 -0400 Jeffrey Miron, Erin Partin https://www.cato.org/blog/pandemic-protectionism-gone-wrong Simon Lester discusses COVID-19 and globalization on CBN’s The 700 Club https://www.cato.org/multimedia/media-highlights-tv/simon-lester-discusses-covid-19-globalization-cbns-700-club Wed, 22 Apr 2020 10:43:48 -0400 Simon Lester https://www.cato.org/multimedia/media-highlights-tv/simon-lester-discusses-covid-19-globalization-cbns-700-club Colin Grabow participates in the event, “Un Puerto Rico Exento del Cabotaje: Perspectivas de Desarrollo Económico,” hosted by the Boricuas Unidos en la Diáspora — BUDPR https://www.cato.org/multimedia/media-highlights-tv/colin-grabow-participates-event-un-puerto-rico-exento-del-cabotaje Wed, 22 Apr 2020 10:19:03 -0400 Colin Grabow https://www.cato.org/multimedia/media-highlights-tv/colin-grabow-participates-event-un-puerto-rico-exento-del-cabotaje China Concerns Are No Reason to Maintain the Jones Act Status Quo https://www.cato.org/blog/jones-acts-primary-victim-united-states-not-china Colin Grabow <p>As scrutiny of the <a href="https://www.cato.org/jonesact">Jones Act</a> intensifies, defenders of the 100‐​year‐​old law have come up with ever more imaginative justifications for keeping it in place. One argument currently en vogue is casting the Jones Act as a&nbsp;bulwark against Chinese expansionism. Such framing is not difficult to understand given the poisoned state of U.S.-China relations.</p> <p>But is it actually true? Would China take over or dominate domestic shipping in the Jones Act’s absence? There is considerable reason for skepticism.</p> <p>It’s perhaps first worth noting that China, while a&nbsp;major shipping player, hardly dominates the field. Measured by deadweight tonnage (carrying capacity by weight), China and Hong Kong collectively own approximately <a href="https://unctad.org/en/PublicationsLibrary/rmt2019_en.pdf">15.5 percent</a> of the world’s ships. Ships flying the China and Hong Kong flags, meanwhile, account for less than 9&nbsp;percent of the world’s total (or&nbsp;15 percent as measured by deadweight tonnage).</p> <p>In international shipping, Americans are free to use ships from any country for exporting and importing. Yet the overwhelming majority are from countries other than China. Of the <a href="https://www.joc.com/maritime-news/container-lines/joc-top-40-container-carrier-rankings-first-half-2019_20190916.html">top 40</a> shipping lines that carry U.S. exports, only a&nbsp;single one is headquartered in China. That line, Cosco/​OOCL, has a&nbsp;9.4 percent market share of U.S. exports. For the shipping of U.S. imports Cosco/​OOCL weighs in at 12.3 percent.</p> <p>Similarly, ships built in any country can be registered in the United States for the purpose of transporting goods internationally (but not domestically due to the Jones Act). But of <a href="https://www.maritime.dot.gov/sites/marad.dot.gov/files/oictures/DS_USFlag-Fleet_20200312_Bundle_1.pdf">the 86</a> U.S.-flagged ships engaged in foreign trade, only 12 were built in China. The rest come from the shipyards of U.S. friends and allies including Japan, South Korea, Taiwan, Singapore, Denmark, Germany, and Poland.</p> <p>This use of Chinese‐​built ships and Chinese shipping has come at no obvious detriment to U.S. national security. Indeed, seven Chinese‐​built ships participate in the <a href="https://www.maritime.dot.gov/national-security/strategic-sealift/maritime-security-program-msp">Maritime Security Program</a> that provides sealift to the U.S. military. One of these vessels, the <a href="https://www.balticshipping.com/vessel/imo/9437335"><em>Ocean Giant</em></a>,&nbsp;has&nbsp;been used to supply U.S. military <a href="https://twitter.com/MSCSealift/status/888419765777248256">bases</a> and government <a href="https://twitter.com/MSCSealift/status/1095699174618812419">installations</a>.</p> <p>If Chinese‐​built ships and Chinese shipping fail to dominate U.S. international trade and the U.S.-flagged foreign trading fleet, what reason is there to think they would occupy such a&nbsp;position in domestic trade should the Jones Act be repealed?</p> <p>But even if Chinese domination of U.S. domestic trade in the Jones Act’s absence was a&nbsp;realistic possibility, that’s still no reason to leave the law intact. The Jones Act does not specifically prohibit Chinese ships from engaging in domestic trade, but rather <em>all</em> foreign‐​flagged and foreign‐​built ships.</p> <p>This means that Americans cannot buy competitively‐​priced ships built in Japan or South Korea⁠ and use them to facilitate domestic trade. It means that Americans cannot contract with leading shipping companies such as Denmark‐​headquartered Maersk Line to move goods domestically. It means that Americans cannot use Spanish‐​flagged LNG carriers—a type of ship that does not exist in the Jones Act fleet—to transport U.S. natural gas to New England or Puerto Rico. It means that Americans cannot employ advanced dredging vessels from the Netherlands and Belgium⁠ to maintain the country’s ports and waterways.</p> <p>These are all countries that have signed defense treaties with the United States.&nbsp;</p> <p>If keeping Chinese‐​built ships and shipping out of domestic trade is deemed a&nbsp;national security imperative, the current Jones Act blanket ban could be discarded in favor of a&nbsp;narrower approach that still grants access to U.S. partners and allies. One possibility would be to restrict the use of foreign‐​built ships or the provision of domestic waterborne transport to those countries with whom the United States has defense treaties or free trade agreements. Constraining one country by banning all&nbsp;countries from offering their ships and services is a&nbsp;profoundly&nbsp;inefficient approach.</p> <p>This assumes, of course, that concerns about China are being made in good faith and aren’t just a&nbsp;convenient excuse&nbsp;for maintaining an archaic piece of protectionism.</p> <p>The Jones Act is an outdated law that <a href="https://www.cato.org/publications/policy-analysis/jones-act-burden-america-can-no-longer-bear">burdens</a> the U.S. economy and <a href="https://www.cato.org/publications/policy-analysis/environmental-costs-jones-act">despoils</a> our environment while <a href="https://www.cato.org/publications/policy-analysis/rust-buckets-how-jones-act-undermines-us-shipbuilding-national">failing</a> mightily to bolster national security. It is <a href="https://www.realclearpolicy.com/articles/2020/04/06/the_jones_act_is_american_self-sabotage_488360.html">self‐​sabotage</a> on a&nbsp;grand scale. If the employment of Chinese‐​controlled or Chinese‐​built ships in domestic commerce is indeed a&nbsp;national security threat then far less damaging ways of mitigating it are available. But this alleged menace&nbsp;is no excuse for maintaining an intolerable status quo.</p> <p>The Jones Act’s primary victim is not China, but the United States.</p> Wed, 22 Apr 2020 10:02:52 -0400 Colin Grabow https://www.cato.org/blog/jones-acts-primary-victim-united-states-not-china Does Trade Integration Contribute to Peace? https://www.cato.org/publications/research-briefs-economic-policy/does-trade-integration-contribute-peace Jong-Wha Lee, Ju Hyun Pyun <div class="lead mb-3 spacer--nomargin--last-child text-default"> <p>Globalization has been one of the most salient features of the world economy over the past century. Emerging markets and developing countries continue to integrate into the global trading system. World trade has increased rapidly, particularly since World War II—from 17.8 percent of worldwide gross domestic product (GDP) in 1960 to 47.4 percent of GDP in 2005.</p> </div> , <div class="mb-3 spacer--nomargin--last-child text-default"> <p>There has been a&nbsp;long tradition among social scientists to try to understand the economic, political, and social consequences of globalization. It has always been a&nbsp;hotly debated topic—not merely within academia but among the general public as well—whether globalization significantly affects economic growth, income inequality, national identity, and so on.</p> <p>Our research focuses on the effect of trade integration on international relations, specifically military conflict between individual states. Recent literature shows that military conflict can be extremely disruptive to economic activity and impede long‐​term economic performance. In particular, empirical studies on the effect that military conflict has on international trade find that conflict between countries significantly reduces international trade and thus seriously damages national and global economic welfare. However, the opposite relationship between international trade and the probability of interstate military conflict— that is, whether international trade has any significant impact on conflict—is still controversial.</p> <p>There is ongoing debate among scholars whether the increase of bilateral economic interdependence reduces interstate conflict. The “liberal peace” view in political science emphasizes that mutual economic interdependence can be a&nbsp;conduit of peace. It suggests that a&nbsp;higher degree of bilateral economic interdependence limits the incentive to use military force in interstate relations.</p> <p>While the liberal peace view is convincing, there are numerous counterarguments. For instance, dependency theorists and neo‐​Marxists argue that asymmetric economic interdependence could lead to negative consequences in a&nbsp;country—such as exploited concession and threatened national autonomy—thereby creating interstate tensions and conflicts. Many conflicts in the mercantilist era evolved out of trade disputes.</p> <p>Empirical studies have also investigated whether bilateral trade interdependence increases or reduces the likelihood of military conflict between trading partners. Similar to the theoretical literature, the findings of these studies are ambiguous. Some earlier studies and subsequent research show that there is a&nbsp;negative relationship between bilateral trade volume and the frequency of interstate military conflict. However, other studies have found that a&nbsp;measure of bilateral trade interdependence has a&nbsp;positive impact on reducing military conflict.</p> <p>In contrast to the numerous studies on the impact of bilateral trade interdependence on military conflict, there are only a&nbsp;few studies examining the role of global trade integration. If global trade integration increases trade interdependence uniformly with all bilateral trade partners, the distinction between bilateral and global trade integration is not critical. However, deeper integration into global markets can take place unevenly, lowering trade interdependence with some trading partners. The overall impact of trade integration on interstate conflict is likely to depend not only on the change in bilateral trade interdependence but also on global trade integration.</p> <p>An increase in global trade openness is expected to reduce the probability of military conflict, as it leads to an increase in the extent of bilateral trade interdependence. However, when the level of bilateral trade interdependence is controlled, the effect of increased global trade openness on the probability of bilateral conflict is not clear. Some research has found that trade openness has a&nbsp;significantly negative impact on the probability of military conflict. This suggests that global trade openness of the dyad can increase the opportunity cost of provoking a&nbsp;bilateral conflict because countries in the global market would prefer to do business with a&nbsp;peaceful partner, and a&nbsp;dyadic conflict can hurt the dyad’s trade with other countries. In contrast, a&nbsp;2008 study by Philippe Martin, Thierry Mayer, and Mathias Thoenig shows that multilateral trade openness—that is, global trade openness— increases the probability of interstate military conflicts. They argue that countries more open to global trade have a&nbsp;higher probability of conflict because an increase in multilateral trade openness reduces relative bilateral dependence to any given country and thus lowers the opportunity cost of military conflict.</p> <p>There is little systematic empirical research assessing the peace‐​promotion effect of both bilateral and global trade integration and how it relates to the geographical characteristics of states. There remains a&nbsp;lack of consensus in these findings. We attempt to fill this gap and produce novel results.</p> <p>We conduct an empirical assessment of the impact of trade integration on military conflict based on regressions utilizing a&nbsp;panel data set of observations of trade relationships between pairs of countries from 1950 to 2000. The results show that an increase in bilateral trade interdependence and global trade integration significantly promotes peace between countries. The strong positive effect of global trade openness on peace is a&nbsp;novel finding, contrasting the results of Martin, Mayer, and Thoenig. We also find that the impact of trade integration on military conflict varies depending on the geographical proximity between countries. Bilateral trade interdependence promotes peace more significantly for contiguous countries, whereas global trade openness contributes more to peace between distant countries. The results also show that geopolitical factors—such as bilateral distance, joint democracy, relative military capability, UN voting correlation, oil exports, religious similarity, and economic institutions such as free trade agreements and regional trade agreements—influence the probability of military conflict among pairs of states.</p> <p><strong>NOTE</strong>:<br> This research brief is based on Jong‐​Wha Lee and Ju Hyun Pyun, “Does Trade Integration Contribute to Peace?,” <em>Review of Developmental Economics</em> 20, no. 1 (2016): 327–44, <a href="https://onlinelibrary.wiley.com/doi/abs/10.1111/rode.12222" target="_blank">https://​doi​.org/​1​0​.​1​1​1​1​/​r​o​d​e​.​12222</a>.</p> </div> Wed, 22 Apr 2020 00:00:00 -0400 Jong-Wha Lee, Ju Hyun Pyun https://www.cato.org/publications/research-briefs-economic-policy/does-trade-integration-contribute-peace The Central Role of the WTO in the World Trading System https://www.cato.org/publications/outside-articles/central-role-wto-world-trading-system Tue, 21 Apr 2020 14:36:11 -0400 Simon Lester https://www.cato.org/publications/outside-articles/central-role-wto-world-trading-system Trump Grudgingly Concedes That Certain Tariffs Are Paid by U.S. Importers https://www.cato.org/blog/trump-grudgingly-concedes-certain-tariffs-not-ones-he-imposed-course-which-are-paid-china-are Daniel J. Ikenson <p>Yesterday, to help businesses stay afloat and keep workers on payrolls, President Trump <a href="https://www.cbp.gov/document/rulings/temporary-postponement-time-deposit-certain-estimated-duties-taxes-and-fees-during?mod=article_inline">authorized</a> the deferral of tariff payments on imports of <em>certain</em> products by <em>certain</em> companies for a&nbsp;<em>certain</em> amount of time. Before you smile broadly and, perhaps, engage in a&nbsp;few moments of gloating over the fact that, in this gesture, the president has finally conceded that U.S. importers pay the tariffs, first be reminded that Trump sees no cost too big for others to bear and no collateral damage too catastrophic for the economy to endure to ensure he doesn’t have to admit to a&nbsp;mistake.</p> <p>Trump’s action will provide a&nbsp;little breathing room for some businesses, but many, many more will asphyxiate at the altar of “China Pays the Tariffs.” Here’s what happened.</p> <p>The United States, like nearly every other country, imposes MFN (most‐​favored nation) tariffs on imported goods. The U.S. MFN tariff rate for a&nbsp;particular product is the same, regardless of which WTO‐​member country the product comes from. For example, the duty applied to imported automobiles is 2.5 percent ad valorem. China, the European Union, South Korea, and every other WTO member have their own MFN tariff rate for imported automobiles. The rates charged by each country may differ from each other’s (and they do), but the MFN rate each applies to every other country is the same.</p> <p>Now, to add a&nbsp;layer of complexity, the duty rates applied to imports from countries with which the United States has a&nbsp;separate free trade agreement can be—and typically are—lower. For example, under NAFTA, auto imports come in duty‐​free (provided the auto meets the necessary rules of origin—that it qualifies as originating in North America). So, there are MFN rates and preferential rates of duty. (There is also something called “Column 2” rates, which are the duties that apply to imports from countries that do not enjoy “normal trade relations” status with the United States. That list, today, includes only North Korea and Cuba.)</p> <p>Finally, sometimes imports from particular countries are subject to additional and conditional tariff rates because those imports have been found to be dumped (under the Antidumping Law), subsidized (under the Countervailing Duty Law), otherwise “unfair” (under Section 301 of the Trade Act of 1974), not necessarily “unfair,” but “injurious” (under Section 201 of the Trade Act of 1974) or a&nbsp;threat to national security (under Section 232 of the Trade Expansion Act of 1962).</p> <p>In the years preceding Trump up through 2017, duties collected were in the neighborhood of $30–36 billion per year (~1.4% of import value). Those were all MFN and preferential FTA duties, as well as about $1–2 billion of duties collected on imports subject to antidumping and countervailing duty orders.</p> <p>Then, in early 2018, Trump imposed safeguard tariffs (Section 201) on solar panel components and large washing machines from most countries. Later that year, the president imposed “national security” tariffs (under Section 232) on steel and aluminum from most countries. Then, in the summer of 2018, he began imposing (in phases) tariffs on imports from China under Section 301.</p> <p>The duties collected by Customs and Border Protection doubled from $36 billion in 2017 to $72 billion in 2019. So, about half of that $72 billion are tariffs collected from Trump’s noted protectionist measures, as well as antidumping and countervailing duty orders imposed during and before Trump’s presidency.</p> <p>That brings us to yesterday’s executive order. Trump’s decision to grant a&nbsp;3‐​month reprieve on tariff collections extends only to the MFN and preferential FTA duties in effect before Trump came into office. The duties from his protectionist actions (solar components, large residential washers, steel, aluminum, China, and the numerous AD/CVD orders) do not qualify for the deferral. Why? This is presumably to inoculate Trump from having to concede that his duties on China (and the other duties that he so wisely and strategically deployed) are actually paid by U.S. importers. The burden on importers, according to this Trump contortion (if logic’s not your strong suit or you’re just willfully ignorant) is caused by the MFN and FTA tariffs, and not by the tariffs associated with Trump’s protectionist actions.</p> <p>To qualify for the 90‐​day tariff deferral, which applies only to imports made in March and April, companies must demonstrate that they’ve suffered financial hardship and meet other opaque requirements. My back of the envelope estimate is that this action would put up to $6 billion back into the cash flow of businesses for 90&nbsp;days, giving them some room to continue operating and keeping workers on payroll. But this is no more than a&nbsp;cosmetic, political gesture being taken when doing something more meaningful—such as deferring payment of all tariffs for one year and scrapping the corrupting conditions—would be possible, but for Trump’s obsession about winning the argument about who pays the tariffs.</p> Mon, 20 Apr 2020 15:35:40 -0400 Daniel J. Ikenson https://www.cato.org/blog/trump-grudgingly-concedes-certain-tariffs-not-ones-he-imposed-course-which-are-paid-china-are