Latest Cato Research on Trade Policy en Inu Manak discusses steel and aluminum tariffs on NPR’s Marketplace Mon, 27 Jan 2020 10:25:48 -0500 Inu Manak U.S. Ferry Systems Soaked by Maritime Protectionism Colin Grabow <div data-embed-button="image" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="e3022cb4-ed8e-4ff8-b1e7-3275a931372c" class="align-center embedded-entity" data-langcode="en"> <p><img srcset="/sites/ 1x, /sites/ 1.5x" width="700" height="467" src="" alt="Washington State Ferries" typeof="Image" class="component-image" /></p></div> <p><span>Some of the country’s leading ferry systems are facing an increasingly precarious outlook. In Alaska, <a href="">questions</a> loom over the state‐​run ferry system’s future after the governor and legislature last year endorsed <a href="">paring</a> <a href="">back</a> massive subsidies needed to keep it afloat. In Washington state, meanwhile, a spokesman for Washington State Ferries (WSF) last March <a href="">described</a> the ferry system — plagued by old vessels and a numerically insufficient fleet — as “hanging by a thread.” Users of the government‐​operated ferries <a href="">were hit</a> with a fare increase in October and will face another this May.</span></p> <p><span><span><span><span><span><span><span><span><span><span><span><span><span><span><span><span>These struggles can be at least partially explained by protectionist U.S. maritime laws. Ferries transporting vehicles — which is most such vessels in Alaska and Washington — are subject to the 1920 <a href="">Jones Act</a>, while those transporting people fall under the Passenger Vessel Services Act of 1886. Both laws mandate that vessels engaged in domestic transport be U.S.-built.</span></span></span></span></span></span></span></span></span></span></span></span></span></span></span></span></p> <p><span><span><span><span><span><span><span><span><span><span><span><span><span><span><span><span>Politicians in Olympia, meanwhile, have worsened matters by mandating that WSF vessels not only be U.S.-built but constructed in Washington state. Not coincidentally, the Washington State Institute for Public Policy <a href="">points out</a> that the state has “received only one to two bids on all new ferries constructed in the last 30 years.” That may be a windfall for Vigor Industrial’s <a href="">Seattle shipyard</a> that has won most of these contracts, but it’s a kick in the teeth to everyone else.</span></span></span></span></span></span></span></span></span></span></span></span></span></span></span></span></p> <p><span><span><span><span><span><span><span><span><span><span><span><span><span><span><span><span>Forcing vessels to be purchased from coddled and uncompetitive U.S. shipyards means unnecessarily higher prices. Indeed, a <a href="">2017 study</a> by the Hawaii Department of Transportation into the feasibility of establishing a ferry system noted that the cost of vessel construction in the United States can be “significantly larger” than those built abroad.</span></span></span></span></span></span></span></span></span></span></span></span></span></span></span></span></p> <p><span>Hawaii would certainly know.</span></p> <p><span><span><span><span><span><span><span><span><span><span><span><span><span><span><span>In 2004 a company called Hawaii Superferry signed <a href="">a contract</a> with Australia‐​headquartered Austal to build two catamaran ferries at its Alabama shipyard for <a href="">$178 million</a>, or $89 million each ($123 million in 2019 dollars). In comparison, Austal announced last year that it was building a new catamaran ferry at one of its non‑U.S. shipyards for </span></span></span></span></span></span></span></span></span></span></span></span></span></span></span><a href="">€</a><span><span><span><span><span><span><span><span><span><span><span><span><span><span><span><a href="">83.65 million</a> or approximately $93 million. That’s tens of millions of dollars less for a vessel with <em>twice the passenger and vehicle capacity</em>. </span></span></span></span></span></span></span></span></span></span></span></span></span></span></span></p> <p><span>Another Austal ferry with a similar capacity as the Hawaii Superferry vessels, the <em><a href="">Spirit of Ontario<span>,</span></a></em> was delivered in 2004 for <a href="">$42 million</a>, or roughly half the cost of the U.S.-built ferries. </span></p> <p><span><span><span><span><span><span><span><span><span><span><span><span><span><span><span><span>That local build requirements result in higher costs cannot be disputed. That, after all, is the entire point of such laws. If U.S. or Washington shipyards were able to compete on price then such measures would not exist.</span></span></span></span></span></span></span></span></span></span></span></span></span></span></span></span></p> <p><span><span><span><span><span><span><span><span><span><span><span><span><span><span><span><span>Maritime protectionism’s toll, however, does not stop with more expensive vessels. Faced with eye‐​popping acquisition costs, ferry systems often employ existing vessels well past their normal lifespan (WSF did not retire its 1927‐​built Steel Electric‐​class vessels until 2007, a full <em>eighty years </em>after they were built when their hand was suddenly forced by <a href="">recurring cracks</a> in the hulls). An aging fleet, in turn, leads to higher maintenance expenditures as the vessels inevitably degrade. As a <a href="">2019 report</a> from the Washington Department of Transportation notes:</span></span></span></span></span></span></span></span></span></span></span></span></span></span></span></span></p> <blockquote><p><span><span><span><em>The </em>[WSF]<em> fleet has an average age of 29 years. Twelve of our remaining 22 ferries are more than 30 years old. Of those, four are at least 50 years old. This aging fleet requires more maintenance to deal with problems such as steel corrosion, replacing or repairing obsolete equipment, and preservation projects that have been deferred, leading to a higher risk of vessel breakdown.</em></span></span></span></p> </blockquote> <p><span><span><span><span><span><span><span><span><span><span><span><span><span><span><span><span>A 45‐​year‐​old ferry in the Alaska Marine Highway System, the <em>LeConte</em>, offers a recent example. Sent for an overhaul last October, workers discovered <a href="">$4 million</a> in additional work that had to be performed. A 56‐​year‐​old ferry undergoing service around the same time, the <em>Malaspina</em>, rang up a <a href="">$16 million</a> repair bill. </span></span></span></span></span></span></span></span></span></span></span></span></span></span></span>Saltwater <a href="">is tough</a> on steel.</span></p> <p><span><span><span><span><span><span><span><span><span><span><span><span><span><span><span><span>These costly‐​to‐​purchase, costly‐​to‐​maintain vessels have to be paid for somehow. That means either more taxpayer‐​funded subsidies (all taxpayers in the case of Alaska — a new $244 million ferry is slated to be paid for with <a href="">$222 million</a> in federal dollars), higher fares, reduced service, or a combination thereof.</span></span></span></span></span></span></span></span></span></span></span></span></span></span></span></span></p> <p><span><span><span><span><span><span><span><span><span><span><span><span><span><span><span><span>There’s a better way.</span></span></span></span></span></span></span></span></span></span></span></span></span></span></span></span></p> <figure role="group" class="align-center filter-caption"><div data-embed-button="image" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="434d1220-5989-4d93-9916-89332be3f914" data-langcode="en" class="embedded-entity"> <p><img srcset="/sites/ 1x, /sites/ 1.5x" width="700" height="525" src="" alt="Coastal Inspiration" typeof="Image" class="component-image" /></p></div> <figcaption><div class="figure-caption text-sans-alternate">BC Ferries’ German‐​built Coastal Inspiration ferry </div> </figcaption></figure><p><span>Like their neighbors in Alaska and Washington, British Columbia is also home to large ferry system called BC Ferries. Indeed, <a href="">its fleet</a> is actually more numerous than that of Alaska and Washington’s ferry systems combined. Unlike WSF and the Alaska Marine Highway System, however, BC Ferries<span> can shop internationally for its vessels. As a</span> <span>result, they are typically purchased <a href="">from</a><a href=""> European</a></span> <span><a href="">shipyards</a><span><span><span><span><span><span><span><span> </span></span></span></span></span></span></span></span><span><span><span><span><span><span><span><span>where BC Ferries receives far more value for its money. Limiting BC Ferries to Canadian shipyards, explains CEO Mark Collins, would force it to pay prices </span></span></span></span></span></span></span></span><a href="">30</a></span><a href=""> <span>–</span> </a><span><a href="">50 percent</a><span><span><span><span><span><span><span><span> higher for the vessels it buys</span></span></span></span></span></span></span></span> <span>—</span> <span>and result in a</span> <span>25 percent fare hike. </span></span></span></p> <p><span><span><span>This alternative scenario is the reality faced by U.S. ferry systems as a result of the Jones Act and similar laws.</span></span></span></p> <p><span><span><span>Such protectionism is not only a disservice to taxpayers but harmful to the U.S. maritime sector itself. By raising the cost of waterborne transport such policies discourage Americans, the inhabitants of a country laced with mighty rivers and thousands of miles of coastline, from fully unlocking their maritime bounty. And it’s hardly been a boon to U.S. commercial shipbuilding, which<span><span><span><span><span><span><span><span><span><span><span><span><span>—</span></span></span></span></span></span></span></span></span></span></span></span></span>denied the tough competition which invigorates other sectors of the economy<span><span><span><span><span><span><span><span><span><span><span><span><span>—has fallen <a href="">well behind</a> its international counterparts.</span></span></span></span></span></span></span></span></span></span></span></span></span></span></span></span></p> <p><span><span><span><span><span><span><span><span><span><span><span><span><span><span><span><span>To fix the ills of U.S. ferries, as well as the broader maritime industry, repeal or serious reform of maritime protectionism must be firmly on the table. </span></span></span></span></span></span></span></span></span></span></span></span></span></span></span></span></p> Fri, 24 Jan 2020 12:48:04 -0500 Colin Grabow Simon Lester discusses U.S.-E.U. trade with the European Trade Commissioner on CGTN America Mon, 20 Jan 2020 11:05:43 -0500 Simon Lester Reasons for Concern in Two New Trade Deals Inu Manak, Simon Lester, Caleb O. Brown <p>Between the “starter” trade deal with China and the revamped North American trade deal just approved by the U.S. Senate, there are still reasons to be concerned that this administration will again launch trade wars. Simon Lester and Inu Manak comment.</p> Sat, 18 Jan 2020 15:19:46 -0500 Inu Manak, Simon Lester, Caleb O. Brown Simon Lester discusses U.S.-China trade and the USMCA on KNUS’ The Jimmy Sengenberger Show Sat, 18 Jan 2020 12:06:56 -0500 Simon Lester Agriculture Purchase Commitments Under the U.S.-China Trade Deal: The Case of Beef Simon Lester, Huan Zhu <p>Yesterday, President Trump and Chinese Vice Premier Liu He signed a “phase one” <a href="">U.S.-China trade deal</a>. A “phase two” deal may be coming, although the timing is unclear, and many people (including us) are skeptical that it will happen any time soon. There are some technical and complicated parts of the phase one deal, and it will take some time to digest it all and come up with an overall evaluation. But it’s worth exploring some specific aspects right away. One of the most talked about parts of the phase one deal is the commitments by China to purchase large amounts of U.S. products, including agricultural products. Article 6.2, paragraph 1 of the deal has broad details of these purchases:</p> <blockquote><p>During the two‐​year period from January 1, 2020 through December 31, 2021, China shall ensure that purchases and imports into China from the United States of the manufactured goods, agricultural goods, energy products, and services identified in Annex 6.1 exceed the corresponding 2017 baseline amount by no less than $200 billion.</p> </blockquote> <p>Given that U.S. exports to China in 2017 were about $180 billion, an additional $200 billion over two years would be a massive increase. The deal further divides up these purchases into manufactured goods, agricultural goods, energy, and services, with specified amounts for each. It then provides sub‐​categories, but it does not publicly break down the purchase amounts by sub‐​category (apparently it does so in a confidential version of the text).</p> <p>This is not a typical trade deal. A normal trade deal would focus on liberalizing trade in both directions (although modern trade deals have gone beyond that and do a lot of regulating). By contrast, this trade deal is an extreme version of managed trade, with China agreeing to buy designated amounts of U.S. products (supposedly “based on market conditions”).</p> <p>Beyond the problematic policy goals, it remains to be seen what all of this means in practice. Here are a few questions that arise: How exactly will China quickly ramp up its purchases? What is the role of the government in this shopping spree? What domestic process will the Chinese government use to induce companies to make these purchases? Are there accounting tricks they can rely on (e.g. reclassifying current Hong Kong imports as Chinese imports)? Will these companies shift current purchases of these products away from other countries’ producers and over to U.S. producers (and will those other countries be annoyed)? Can U.S. producers scale up production to meet these targets?</p> <p>A wide range of products have been mentioned in this context, and how this plays out might vary by product. To help assess this, we thought it might be useful to focus on one product in particular. We are going to use beef as an example (a former Trump administration trade official was recently <a href="">reported</a> as having confirmed that “there would be purchases of poultry and beef – estimated at US$1.5 billion apiece – in the phase one deal, with American farmers gaining re‐​entry to the market after years of being left out in the cold due to China’s ban on certain hormones and additives used in US farming.”)</p> <p>So how might U.S. beef exports to China fare as part of China’s promised purchases? Two years ago, <a href="">we wrote about</a> the possibility of increased U.S. beef exports to China. The removal of Chinese restrictions on U.S. beef — which had been put in place by many countries in 2003 after a BSE scare — was a key component of the 100‐​Day Action Plan reached between the Trump administration and Chinese officials in May 2017. As we explained then, China had become a big consumer of beef, and imports of beef into China were increasing. While many countries saw their beef sales rise, U.S. beef exports to China had been negligible due to the BSE restrictions. Removal of the Chinese restrictions was likely to help.</p> <p>Unfortunately, the U.S.-China trade war got in the way. As a result of the retaliatory tariffs that China imposed in response to U.S. tariffs, most U.S. beef exports to China faced additional tariffs, beyond the normal Chinese tariffs, of between 10 percent and 35 percent, much higher rates than faced by their competitors in other countries. (Some of those competitors had negotiated free trade agreements with China, giving them an even bigger advantage).</p> <p>As shown in Table 1, after the 100 Day Action Plan, the United States increased its beef exports to China from a negligible amount to $63 million in 2018. That was a good start. However, that number is only a small fraction of the total growth of imports of beef into China in that period, from $2.6 billion to $4.9 billion. Imports from other major beef‐​exporting countries, including Argentina, Australia, Brazil, New Zealand, and Uruguay, all witnessed a much larger jump than U.S. beef did.</p> <div data-embed-button="image" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="7bb700ad-2639-4da5-8955-542575ee6cd7" data-langcode="en" class="embedded-entity"> <p><img srcset="/sites/ 1x, /sites/ 1.5x" width="700" height="725" src="" alt="Table 1 Beef Imports in China (in Millions of USD)" typeof="Image" class="component-image" /></p></div> <p>For a long time, Chinese consumers preferred other meat products over beef, but as China has grown wealthier, their tastes have changed. As the table shows, their interest in beef has increased considerably. This is a development that U.S. producers should be able to take advantage of, but so far have done so only to a limited extent, whereas their rivals are moving much more quickly. Without a doubt, the Chinese retaliatory tariffs have been a significant factor.</p> <p>Now with the phase one deal in place, it is likely there will be a tariff waiver on the relevant agricultural products, which will give U.S. producers a better chance to compete. In addition, language in the deal on certain regulatory issues may also help boost beef exports to China. For instance, China promised to remove the age limit for U.S. cattle, which had prohibited sales of meat from cattle over 30 months old at the time of slaughter.</p> <p>However, U.S. beef sales will still face some hurdles: Their competitors have a big head start and have been developing relationships with Chinese customers for years; some competitors have free trade agreements with China and thus their products are subject to special, low tariffs; and China has had restrictions on sales of hormone‐​treated beef, which is a significant portion of U.S. production. (Under Annex 4 of Chapter 3, it looks like the issue of restrictions on hormone‐​treated beef will be addressed to some extent, which would be a big deal for U.S. producers.)</p> <p>Market‐​sharing managed trade arrangements are a bad way to approach trade agreements, but even putting that aside, there is still the question of whether they work. It will be interesting to see how the U.S. strategy is effective here. Regardless of how it plays out, a better strategy would have been to push for an agreement like the ones Australia and New Zealand have with China, in order to get China to lower its tariffs further, rather than just restoring them to the pre‐​trade war level.</p> Thu, 16 Jan 2020 17:17:56 -0500 Simon Lester, Huan Zhu Daniel J. Ikenson discusses the signing of a U.S.-China trade deal on WWL’s The Newell Normand Show Thu, 16 Jan 2020 13:09:45 -0500 Daniel J. Ikenson Simon Lester discusses U.S.-China trade on NPR’s All Things Considered Thu, 16 Jan 2020 12:36:17 -0500 Simon Lester Inu Manak discusses the Senate passing the USMCA on KURV’s The Drive Home Thu, 16 Jan 2020 12:34:03 -0500 Inu Manak USMCA Races Across the Finish Line, but Uncertainty Remains Inu Manak <p>The U.S.-Mexico-Canada Agreement (USMCA) passed the Senate by a&nbsp;vote of 89 – 10 today. Last week, it was unclear whether or not the vote could take place before the president’s impeachment trial due to the fact that seven Senate committees were tasked with reviewing the deal first. The process by which the deal is reviewed is referred to as a “mock markup” where the bill is discussed and voted on, but no amendments can be made. It was largely expected that the committees would quickly advance the implementing bill so that the USMCA could be brought to the Senate floor as soon as possible. But this rush to vote on USMCA was misguided. Not only has Congress failed to debate the merits of a&nbsp;deal with our closest trading partners, the entire process by which USMCA came to a&nbsp;vote raises serious questions about how U.S. trade policy will be handled in the future.</p> <p>The implementing bill for USMCA is over 200 pages long, and the text of the agreement itself includes 34 chapters, 13 annexes, and 16 side letters. While much has been retained from the original North American Free Trade Agreement (NAFTA), which this supersedes, and also from the Trans‐​Pacific Partnership (TPP) that the United States did not ratify, there are still a&nbsp;number of important changes that were made only about a&nbsp;month ago that warrant additional scrutiny. My colleague and I&nbsp;identified <a href="">three major issues</a>, which, taken by themselves, should be sufficient cause for an extended discussion of the deal — new auto rules of origin, labor reforms that were negotiated by House Democrats and seen for the first time last month, and the sunset clause.</p> <p>On the issue of autos, it is still largely unclear how the more stringent rules will be applied when the agreement comes into force, leaving plenty of uncertainty for the integrated North American automotive supply chain. In fact, Maria Curi from <em>Inside U.S. Trade </em><a href="">recently reported</a> that Mexico’s chief USMCA negotiator, Jesús Seade stated that how the rules will apply and be enforced still has to be sorted out, and that this process could take months. The major lingering question on the automotive provisions, which will in large part depend on how the rules are implemented, is whether this will raise the cost of production for autos in North America, shift supply chains, and hurt North American competitiveness in this sector. At the moment, we do not know. Meanwhile, other groups continue to lobby for protection they could not achieve through USMCA, with Amb. Lighthizer agreeing to review <a href="">potential trade remedies</a> for “certain unfair, non‐​market trade practices” of <a href="">seasonal produce</a> from Mexico. The passage of USMCA certainly does not guarantee an&nbsp;end to trade friction with our trading partners.</p> <p>Labor reforms that Mexico agreed to at the eleventh hour are also of general concern for the potential it creates for a&nbsp;new litigation bonanza on the part of U.S. labor groups and industries seeking protection. These changes were outlined in a&nbsp;<a href="">Protocol of Amendment</a>, which was issued by the Office of the United States Trade Representative on December 10, 2019 after the conclusion of negotiations between Amb. Lighthizer and House Democrats. It is <a href="">generally unclear</a> what impact these new requirements will have on Mexico, which has independently undertaken labor reforms under the leadership of their current President Andrés Manuel López Obrador, who made such reforms part of his campaign. Asking Mexico for additional guarantees through a&nbsp;trade agreement is not only unnecessary, but also could further diminish trust between Mexico and its northern neighbors.</p> <p>The third issue that should have been subject to far more scrutiny from Congress than it was afforded is the so‐​called sunset clause, which are a&nbsp;set of provisions that allow the agreement to automatically expire after 16&nbsp;years unless the parties agree to extend it. The first sunset review would take place at 6&nbsp;years after ratification, and the parties would have 10&nbsp;years to decide the question of whether to extend or terminate. Simon Lester and I&nbsp;have described this as the new NAFTA’s “<a href="">ticking time bomb</a>” because it bakes in uncertainty to the USMCA in perpetuity. Furthermore, the most troubling aspect of the sunset clause is that it leaves the decision of whether to continue the agreement entirely in the hands of the executive branch. This is a&nbsp;major concern regardless of who is president, because it makes the decision of the agreement’s extension even more vulnerable to the political whims of that office. House Democrats had an opportunity to ask for clarification on the role of Congress in terminating USMCA, but completely failed to do so. But perhaps one should not be surprised, given how readily Congress has been willing to cede its constitutional authority to regulate commerce to the president. As with President Trump’s tariffs against steel and aluminum from our trading partners, Congress has been unwilling to take concrete steps, and so far, <a href="">bipartisan efforts</a> to rein in the president, such as from Sens. Pat Toomey (R‑PA) and Rob Portman (D‑OH), have been put on the back burner by Sen. Chuck Grassley (R‑IA), chair of the Senate Finance Committee.</p> <p>In addition to the uncertainty regarding the substance of the deal, the way the final provisions were negotiated, and the process by which the USMCA has come up for a&nbsp;vote raises broader questions about the future of U.S. trade policy. While the USMCA was signed by the three countries in November 2018, it was not until a&nbsp;draft of the Statement of Administrative Action (which outlines the various changes to U.S. law for the agreement to take effect) was released in May 2019 that an effort to evaluate the deal by Congress really began. In June 2019, House Speaker Nancy Pelosi (D‑CA) established a&nbsp;<a href="">working group</a> of nine House Democrats to negotiate changes to USMCA, and that process was completed in December, which led to the Protocol of Amendments to the deal. With such a&nbsp;select group involved in the negotiations, however, one would have imagined that the final terms would be discussed with the broader House membership well before a&nbsp;vote would be held. That’s not what happened. Instead, House Democrats <a href="">rushed to vote</a> on the agreement before winter recess, and <a href="">approved USMCA</a> by a&nbsp;vote of 385 – 41, sending the bill to the Senate.</p> <p>The lack of debate on USMCA has also raised questions about the future of Trade Promotion Authority, also known as “fast‐​track” — the process by which trade agreements can move through Congress expeditiously, facing only an up and down vote. TPA establishes certain guidelines for how the executive consults with Congress, as well as the order and timing of various steps in the process. However, the process by which USMCA has advanced through Congress does not appear to meet TPA requirements, and as Halie Craig <a href="">argues</a>, this means USMCA should not be eligible for an up or down vote in the Senate. Sen. Toomey also raised concerns today regarding the vote on USMCA’s compliance with TPA, noting the fact that the USMCA includes an emergency designation for increasing spending, a&nbsp;break from past practice. With TPA so openly ignored by both USTR and Congress, the entire process may be called into question in the future. If anything, the current process has simply increased the leverage of the executive over trade policy and weakened congressional oversight.</p> <p>This all bodes poorly for the future of U.S. trade policy. The Senate’s affirmative vote of USMCA may have just solidified a&nbsp;new normal. In rushing to pass this <a href="">protectionist love‐​child</a>, Congress has further strengthened the executive in its ability to set trade policy, and left a&nbsp;great deal of uncertainty in its wake. Our future negotiating partners are surely taking note.</p> Thu, 16 Jan 2020 12:20:23 -0500 Inu Manak The UK and the EU Need a New Approach to Trade Remedies Simon Lester <div class="lead text-default"> <p>Whatever your view is on the merits of the European Union, it would be hard to dispute that it is one of the most innovative international economic arrangements ever created. Its founders had a&nbsp;general vision, but it took a&nbsp;wide range of institutional and policy innovations during implementation to make it all work.</p> </div> , <div class="text-default"> <p><strong>Seeking institutional innovation</strong></p> <p>As the UK and the EU undertake the difficult process of undoing their relationship and developing a&nbsp;new one, there will be a&nbsp;need for some additional innovation. Trying to use traditional trade agreement obligations as a&nbsp;replacement for this deep and complex economic relationship will be insufficient.</p> <p>One area of particular difficulty will be trade remedies, which include tariffs imposed in response to import prices that are deemed too low (anti‐​dumping duties) and to foreign government subsidies (countervailing duties).</p> </div> , <aside class="aside--right aside pb-lg-0 pt-lg-2"> <div class="pullquote pullquote--default"> <div class="pullquote__content h2"> <p>As the UK and the EU undertake the difficult process of undoing their relationship and developing a&nbsp;new one, there will be a&nbsp;need for some additional innovation.</p> </div> </div> </aside> , <div class="text-default"> <p>The term ‘dumping’ is sometimes thrown around loosely in trade policy discussions, but it has a&nbsp;technical meaning that involves a&nbsp;determination of whether the export price of a&nbsp;product is ‘unfairly’ low. A&nbsp;tariff can then be imposed to counteract the impact of this pricing. With regard to subsidies, there is a&nbsp;calculation of the amount of the subsidy, and, similarly, a&nbsp;tariff is imposed to counteract it.</p> <p>The EU is one of the rare trade agreements that eliminates the use of trade remedies on internal trade. As a&nbsp;result, trade between the UK and other EU countries is not subject to trade remedies.</p> <p>I have argued previously that tariffs imposed as trade remedies are unnecessary and problematic here, and should be kept out of the UK-EU economic relationship. This relationship would be permanently soured by recurring claims of ‘unfair trade’ by one side or the other.</p> <p>Nevertheless, trade remedies are an established part of domestic trade policy and are difficult to avoid. Interest groups demand them, and it is hard to have a&nbsp;proper debate over their merits.</p> <p>The UK has already set up a&nbsp;Trade Remedies Authority to oversee a&nbsp;domestic trade remedies regime, and trade remedies are likely to be part of the future UK-EU economic relationship.</p> <p>But perhaps there is room for some innovation here that can make the situation better.</p> <p>One of the issues with the imposition of trade remedies is allegations of bias on the part of the domestic agencies who oversee things. These agencies are thought by many to favour the point of view of domestic industries who complain about unfair foreign trade, and to discount the arguments of importers and foreign producers.</p> <p>But what if the these bias concerns could be addressed with an institutional innovation? Perhaps the trade remedy process could be moved to the international level, with neutral adjudicators, rather than domestic agency officials, deciding the issues.</p> <p><strong>The WTO and NAFTA approach to resolving trade remedy disputes</strong></p> <p>As things stand now, domestic trade remedies are subject to challenge pursuant to the rules of the World Trade Organization on these issues (the Anti‐​Dumping Agreement and the Agreement on Subsidies and Countervailing Measures).</p> <p>If a&nbsp;government does not like how its companies were treated in a&nbsp;domestic trade remedy proceeding, it can bring a&nbsp;WTO complaint against the government responsible. As part of this complaint, the determinations by domestic agencies are reviewed to see whether — loosely speaking — they were reasoned and adequate, and consistent with WTO obligations. That process is useful, but it takes a&nbsp;good deal of time, and given resource constraints only a&nbsp;few domestic determinations&nbsp;are challenged each year.</p> <p>In the North American Free Trade Agreement — NAFTA — there is a&nbsp;unique set of rules that allow the companies subject to the trade remedy proceedings to bring a&nbsp;complaint against the determination themselves. A&nbsp;NAFTA panel will be set up to review the domestic agency’s decision for consistency with domestic law.</p> <p><strong>Going further</strong></p> <p>The WTO/NAFTA approach still allows the domestic agency to hear the case first. But instead of domestic agencies hearing the case initially, and then an international body reviewing that decision, we could start with an international body that would take the place of the domestic agency and examine each of the trade remedy elements:&nbsp;Whether dumping and subsidization took place, and in what amounts; and whether the domestic industry suffered injury as result.</p> <p>To this end, an international Trade Remedies Tribunal could be established by the UK and the EU and staffed with experts who would evaluate all of these issues and render a&nbsp;decision.</p> <p>If we take the traditional approach to trade remedies, it is sure to create tension between the UK and the EU. Companies subject to trade remedies generally believe the foreign agency that is imposing tariffs on them is behaving unfairly.</p> <p>They see these determinations as inherently biased, and a&nbsp;years long process of review at the WTO is of only limited help. If, on the other hand, the initial determination was international in nature, and therefore seen as more objective, it would have more credibility.</p> <p>It might seem like the wrong moment for international tribunals in UK-EU relations. The people in the UK who support Brexit are looking to get out from under institutions such as the ECJ.</p> <p>But tariffs are a&nbsp;special situation. There is not much appetite in the UK or the EU for new tariffs, and people are going to be surprised and unhappy that a&nbsp;tariff‐​free, quota‐​free UK-EU relationship will still involve tariffs under the normal operation of trade remedies.</p> <p>Thus, an independent tribunal that oversees these tariffs and ensures that they are legitimate and necessary could be acceptable here. This tribunal would not interfere with domestic regulation, as the ECJ does; it would only act as a&nbsp;check on tariffs.</p> <p>Ideally, of course, there would be no trade remedies at all between the UK and the EU, as is the case now. But the political realities suggest there will be. If we can limit their abusiveness, the UK-EU relationship will be more peaceful and stable.</p> </div> Thu, 16 Jan 2020 08:34:01 -0500 Simon Lester Daniel J. Ikenson discusses the signing of a U.S.-China trade deal on Sirius XM’s The Press Pool with Julie Mason Wed, 15 Jan 2020 13:05:35 -0500 Daniel J. Ikenson Daniel J. Ikenson discusses the signing of a U.S.-E.U. trade deal on NPR’s Marketplace Wed, 15 Jan 2020 13:04:20 -0500 Daniel J. Ikenson Daniel J. Ikenson discusses the signing of a U.S.-China trade deal on WJR’s The Guy Gordon Show Wed, 15 Jan 2020 13:02:38 -0500 Daniel J. Ikenson Reading Trump’s Trade Tea Leaves Daniel J. Ikenson, A. Trevor Thrall, John Glaser <p>Dan Ikenson, director of Cato’s Herbert A. Stiefel Center for Trade Policy Studies, joins Trevor Thrall and guest host John Glaser to discuss the economic and foreign policy implications of Trump’s recent trade deals.</p> <ul> <li><a href="">Daniel J. Ikenson bio</a></li> <li>Daniel J. Ikenson, “<a href="" target="_blank">A Few Things to Like about the U.S.-China Trade Deal</a>,” <em>Cato at Liberty</em>, December 16, 2019</li> <li>Daniel J. Ikenson, “<a href="" target="_blank">Trump’s Alleged Trade Deal with China Would Fix Nothing</a>,” <em>Cato at Liberty</em>, December 13, 2019</li> <li>Simon Lester and Inu Manak, “<a href="" target="_blank">The USMCA Is Moving Forward (Too) Quickly</a>,” <em>Cato at Liberty</em>, December 16, 2019</li> </ul> Tue, 14 Jan 2020 03:00:00 -0500 Daniel J. Ikenson, A. Trevor Thrall, John Glaser Gains From Deregulation Undone by Tariffs Jeffrey Miron, Erin Partin <p>Optimism among U.S. manufacturers was near an all‐​time high in early 2017. Just eleven days into his presidency Trump signed <a href="">an executive order</a> specifically targeting overregulation. According to <a href="">a survey</a> by the National Association of Manufacturers, an advocacy group representing 14,000 U.S. companies, 93.3 percent of respondents felt optimistic about their company’s outlook. This optimism was driven by an expectation that the new administration would focus on deregulation, which would benefit the domestic manufacturing industry. The administration’s commitment to deregulation <a href="">kept industry confidence high</a> through much of 2017 and 2018 as <a href="">regulations</a> <a href="">continued to be repealed</a>.</p> <div data-embed-button="image" data-entity-embed-display="view_mode:media.blog_post" data-entity-type="media" data-entity-uuid="c5a478b6-9e83-4cb4-820d-6ddbce586eda" data-langcode="en" class="embedded-entity"> <p><img srcset="/sites/ 1x, /sites/ 1.5x" width="700" height="406" src="" alt="This figure shows the results of a NAM survey with the percent of respondents expressing a positive outlook each quarter from 2016-2019" typeof="Image" class="component-image" /></p></div> <p>However, the escalating trade war with China is erasing many of the gains from deregulation. Small and medium sized firms are being <a href="">hit hard</a> by high tariffs on steel and other imported components. The only hope for many companies is to apply for <a href="">tariff exemptions</a>, but the process is often opaque, arbitrary, and tilted heavily in favor of larger firms with strong lobbying power.</p> <p><a href="">Pro Publica reports</a>:</p> <blockquote><p>“Companies with enough resources and savvy can not only push their own cases, they can work to undermine those of competitors.”</p> <p>“With new tariffs being announced and lifted on a few days’ notice and trade agreements constantly being renegotiated, companies have scrambled to protect themselves. Tariff exclusions are highly sought after because they offer a huge competitive advantage — especially if a rival still has to pay. The review of exclusions is happening on a compressed time schedule, with little warning before tariffs and a complex set of rules that few people understand go into effect. And there are no second chances.”</p> <p>“The Commerce Department at first had projected that it would see only about 4,500 applications — a threshold that was passed almost instantly. According to a regulatory filing, USTR estimated that each exclusion request would take applicants two hours to prepare, at a cost of $200 each, and two and a half hours for USTR to process. For the China tariffs, adjudicating cases is expected to take 175,000 staff hours over the course of a year, at a cost of $9.7 million.”</p> </blockquote> <p>Trump’s trade war is harming U.S. manufacturers, their employees, and their customers. While it may be too soon to determine the damage to the economy, the thirty percent drop in manufacturer confidence over the past year does not bode well.</p> Thu, 09 Jan 2020 15:29:11 -0500 Jeffrey Miron, Erin Partin New Legislation Highlights Lack of Jones Act Competition Colin Grabow <p>Just before Christmas, Rep. Ed Case (D‑HI),&nbsp;citing the Jones Act’s contributions to Hawaii’s high cost of living,&nbsp;introduced&nbsp;three bills taking aim at the protectionist law. The first such bill, the <a href="">Noncontiguous Shipping Relief Act</a>, would exempt all non‐​contiguous U.S. locations from the Jones Act — essentially Alaska, Guam, Hawaii, and Puerto Rico — while the second bill, the <a href="">Noncontiguous Shipping Reasonable Rate Act</a>, would limit shipping rates to the noncontiguous states and territories to no more than ten percent above international shipping rates for comparable routes.</p> <p>Perhaps most interesting, however, is the third piece of legislation. Known as the <a href="">Noncontiguous Shipping Competition Act</a>, the bill would grant Jones Act exemptions to any state or territory not served by at least three Jones Act ocean carriers, each of which must have at least 20 percent of the market. The bill, in other words, would grant exemptions from&nbsp;the law to&nbsp;those states and&nbsp;territories that suffer from monopolies or duopolies in the Jones Act trades.</p> <p>Which is to say, all of them.</p> <p>Ocean transport between the U.S. mainland and noncontiguous states and territories offers very little to choose from. Only two carriers, Matson and TOTE Maritime, provide ship service to and from Alaska while the Hawaii trade is the province of Matson and Pasha Hawaii (Matson admits as much in its most recent <a href="">annual report</a>, noting that it only faces “one major U.S. flag Jones Act competitor” in both markets). In Puerto Rico, meanwhile, a&nbsp;<a href="">2018 report</a> sponsored by the pro‐​Jones Act American Maritime Partnership showed that 85 percent of the container capacity in its Jones Act&nbsp;trade is controlled by just two carriers, TOTE&nbsp;Maritime and Crowley.</p> <p>Duopoly after duopoly after duopoly.</p> <p>Compounding matters is that, due to the Jones Act’s U.S.-build requirement, the few carriers serving these areas must pay incredible sums for the ships they use. Matson, for example, paid approximately <a href="">$918</a> <a href="">million</a> for its four most recent vessel acquisitions, while&nbsp;two ships on order from Pasha&nbsp;are said to have a&nbsp;combined price tag of over <a href="">$400 million</a>. In a&nbsp;foreign shipyard, these vessels would likely cost anywhere from one‐​quarter to one‐​fifth as much. That’s hundreds of millions of dollars in extra costs to be borne by shippers, and ultimately consumers.</p> <p>Stifled competition and increased ship costs inevitably mean higher prices for transporting cargo to and from the U.S. mainland. That’s no small matter for the noncontiguous states and territories that overwhelmingly rely&nbsp;on shipping to acquire needed goods. And it’s not just more expensive transport. In some cases, the Jones Act fleet’s limited capabilities&nbsp;make the&nbsp;purchase of goods from the mainland <a href="">outright impossible</a>.</p> <p>At this time, Rep. Case’s effort to relieve&nbsp;Hawaii and other noncontiguous parts of the United States from the Jones Act’s burden faces the longest of odds. Indeed, when he&nbsp;<a href="">introduced</a> three Jones Act reform bills in 2003 during a&nbsp;previous stint in Congress they did not receive so much as a&nbsp;committee hearing. It’s not clear that the political ground has sufficiently shifted&nbsp;in the intervening years to make passage a&nbsp;realistic outcome.</p> <p>But encouragement can still be found&nbsp;in Rep. Case’s willingness to <a href="">speak</a> <a href="">out</a> about the issue in what is typically a&nbsp;pro‐​Jones Act echo chamber. While reforms to the Jones Act may not be imminent, perhaps the&nbsp;new legislation can help spark an&nbsp;overdue conversation about the costs stemming from this <a href="">failed relic</a>.&nbsp;</p> Mon, 06 Jan 2020 15:35:49 -0500 Colin Grabow Scott Lincicome discusses U.S.-E.U. trade issues on NPR’s Marketplace Wed, 25 Dec 2019 12:43:28 -0500 Scott Lincicome Just Say No To UK-EU Tariffs Simon Lester <p>It’s hard to figure out sometimes whether Twitter reflects reality, but I’ve seen some <a href="">discussion</a> there suggesting that as part of the Brexit negotiations, the UK and the EU may be negotiating about the extent to which they will impose tariffs on each other. My measured and calm response to this is as follows: Stop it, stop it, stop it! The following is a&nbsp;brief elaboration of that response.</p> <p>The debate over Brexit is a&nbsp;complex one. Oversimplifying quite a&nbsp;bit, from what I&nbsp;can tell, the majority of people in the UK hold the view that the economic integration aspect of the EU is good, but there is a&nbsp;sizable group that is concerned about the political integration aspect. Brexit is mainly a&nbsp;withdrawal from the political integration, but it necessitates a&nbsp;rethinking of the economic integration.</p> <p>There are several key components of the economic integration: Zero tariffs on trade between the UK and EU; a&nbsp;common external trade policy; and regulatory alignment (also some complicated stuff about <a href="">fishing rights)</a>. I&nbsp;want to focus here on the first one.</p> <p>EU economic integration involves zero tariffs and zero quotas on all trade among EU member states. That’s the status quo. That’s where we are now. And that’s a&nbsp;great achievement. You don’t often see that in economic integration agreements. Tariffs are generally lowered, but not eliminated.</p> <p>Normally, a&nbsp;trade negotiation would take place between countries who impose tariffs on each other, and they haggle over how much to bring them down. But the UK and EU are in a&nbsp;different situation, with a&nbsp;different starting point. There are no tariffs, so there should be nothing to haggle about it.</p> <p>What this means is that when the UK and EU start negotiating their new economic relationship, they don’t have to haggle about tariffs. They can declare at the outset that tariffs (and quotas) will stay at zero, and they can move on to other things.</p> <p>Now, there are some tariff‐​related issues they do have to talk about: Rules of origin (which products qualify as products of the UK or the EU and therefore benefit from the zero tariffs) and trade remedies (anti‐​dumping, countervailing duties, safeguards). I&nbsp;favor loose rules of origin and <a href="">no trade remedies</a>, but I&nbsp;acknowledge that these are hard issues and there is no way to avoid discussing them in the negotiations.</p> <p>But with regard to ordinary tariffs, there is nothing to talk about. The current situation is great. Don’t mess with it!</p> <p>I’ve heard two specific arguments for bringing up the possibility of ordinary tariffs in the UK-EU negotiations. First, the EU might want tariffs on agriculture, for instance if the UK deregulates food safety (e.g. the famous <a href="">chlorinated chickens</a>). But tariffs here make no sense. If the EU is concerned about imported UK products based on food safety issues, it can adjust its own regulations accordingly. Trying to set a&nbsp;tariff that accounts for the regulatory differences would be an ineffective approach.</p> <p>The second argument is that the UK’s new regulatory approach (whatever it may be) could lead to trade barriers, and tariff‐​free trade is a “bargaining chip” the EU can use as part of the negotiations on regulation. (This could go in the other direction as well). In my view, this is a&nbsp;dangerous tactic. The idea seems to be that the other side will be more afraid of losing tariff‐​free trade than you are, and thus will cave to your demands on other issues. But there is a&nbsp;big risk that by putting tariffs on the table, you don’t achieve your other goals and you just end up with tariffs.</p> <p>As hinted at in the previous two paragraphs, the really difficult issue is going to be regulation. As things stand now, the EU involves significant mutual recognition and some harmonization related to goods and services regulation, creating a “single market” for goods and many services. How do the two sides move to a&nbsp;new economic relationship that preserves as much of that as possible? There are no easy answers.</p> <p>But on tariffs, there is an easy answer:&nbsp;Stay away from the tariff haggling, and move directly to the real issues that need to be negotiated.</p> Mon, 23 Dec 2019 08:54:40 -0500 Simon Lester A Highly Restrictive North American Trade Pact Daniel J. Ikenson, Simon Lester, Caleb O. Brown <p>The USMCA trade agreement among the U.S., Mexico, and Canada is moving forward, but forward into what? Simon Lester and Dan Ikenson discuss the deal’s terms.</p> Sun, 22 Dec 2019 09:41:47 -0500 Daniel J. Ikenson, Simon Lester, Caleb O. Brown Veronique de Rugy discusses the U.S.’ approval of the U.S.-China trade deal on American Radio Journal Sat, 21 Dec 2019 12:19:53 -0500 Veronique de Rugy Simon Lester discusses the U.S.’ approval of the U.S.-China trade deal on CTV Fri, 20 Dec 2019 12:59:23 -0500 Simon Lester A Few Things to Like About the U.S.-China Trade Deal Daniel J. Ikenson <p>More clarity and more questions emerged over the weekend about the terms of the U.S.-China trade deal, which warrants an update to <a href="">this preliminary assessment</a> published on Friday.</p> <p>The deal is pretty good for what is seems to accomplish. That may sound like fingernails on a&nbsp;chalkboard to those more interested in preventing Trump from gaining traction with claims that he won the trade war than they are interested in actually ending the trade war.</p> <p>The deal is pretty good because it reduces business uncertainty, confirms that the administration realizes its approach was unsustainable, and — by formalizing terms to resolve the variety of issues that, frankly, distract attention from the most difficult problems in the relationship — creates needed space to shift focus to the genuinely challenging matters.</p> <p>That, of course, refers to the challenge for technological preeminence and its attendant considerations: industrial policy; technology subsidies; development and proliferation of standards; related security issues; and the impact on this race for primacy on commercial and strategic outcomes.</p> <p>So, what was agreed upon?&nbsp;In a&nbsp;nutshell, Washington agreed to cancel tariffs on about $160 billion of imports from China, which were scheduled to take effect yesterday; keep in place the 25 percent tariffs currently imposed on about $250 billion of Chinese goods (rather than increase them to 30 percent, as was scheduled); and reduce tariffs from 15 percent to 7.5 percent on about $110 billion of Chinese products.</p> <p>Relative to what was looming (higher tariffs on all imports from China), these terms should be welcome news to most consumers, workers, businesses, and investors in the United States and China, and throughout the world. The specter of an escalating tariff war, with all the commercial uncertainty that portends, is no longer casting such a&nbsp;large shadow on the global economy. That’s good.</p> <p>Relative to the way things were 18 months ago, we are still torso deep in costly taxes. About half of the value of U.S. imports from China remain subject to a&nbsp;25 percent tax (as opposed to an average tariff of about 2&nbsp;percent in June 2018) and about one‐​fifth of the value of those imports remain subject to a&nbsp;7.5 percent tax (as opposed to an average tariff of about 2&nbsp;percent in June 2018).</p> <p>Presumably, those tariffs are considered leverage and will be lowered or removed if, and when, Beijing demonstrates that it has held up its end of the bargain. Yes, it’s true that U.S. tariffs are taxes on U.S. consumers and businesses, which may raise questions about their value as leverage on Beijing. But the fact is that taxes on U.S purchasers dissuade purchases from Chinese producers. So, while the Chinese aren’t paying the taxes, those taxes are reducing demand for Chinese products. After all, <em>something</em> in the administration’s approach made Beijing agree to the “Phase 1” deal.</p> <p>Beijing made no explicit commitments to reduce the retaliatory tariffs it imposed over the last 18 months, but it did agree to purchase, over the course of the next two years, $200 billion more goods and services from the United States than it purchased in 2017. The value of U.S. exports of goods and services to China in 2017 was about $185 billion, so the pledge to purchase $200 billion more is very significant — an average annual increase of 45 percent, which is, first, unheard of for a&nbsp;large economy and, second, strong confirmation — as if it were needed — that China’s is not a&nbsp;market economy. Realistically, it is hard to imagine how the Chinese economy can absorb that much in two years but then again, maybe U.S. companies will jack up their prices by a&nbsp;factor of five or ten!</p> <p>U.S. goods exports to China year‐​to‐​date through October 2019 are down about 16 percent from where they were in the January‐​October 2017 period. Roughly translated, that means that U.S. exports to China are down about $25 billion from the pre‐​trade war period.</p> <p>Despite reports that this deal does nothing to make amends for lost market share suffered by U.S. exporters as a&nbsp;result of the trade war, a $200 billion aggregate increase in exports over two years would certainly seem to more than make up for the average financial losses incurred by U.S. firms so far. However, those U.S. export gains most likely would come at the expense of other countries’ exports, as Chinese buyers divert their purchases from other suppliers in line with Beijing’s demands. And that, of course, would have ripple effects throughout the global economy, including a&nbsp;likely reduction in demand for U.S. exports in third countries.</p> <p>So, what other commitments did China make to give Trump cover to begin lowering U.S. tariffs? Remember what started this whole trade war thing? In June 2018, the president first imposed tariffs as a&nbsp;result of a&nbsp;formal investigation conducted by the U.S. Trade Representative’s Office under Section 301 of the Trade Act of 1974, which found fault with a&nbsp;variety of Chinese practices, including intellectual property theft, cyber intrusions, discriminatory indigenous innovation policies, forced technology transfer requirements, and other related items.</p> <p>But ever since then, the focus of negotiations has been on tangential issues, such as market access in China, trade balances, currency practices — pretty much everything EXCEPT those objectionable IP and technology practices.&nbsp;Well, to my surprise, the agreement worked out,&nbsp;and summarized by the White House Friday includes commitments from China to undertake effective measures to curtail, prohibit, and punish some of the kinds of forced technology and intellectual property transgressions that the United States wants resolved. Beijing also agreed to refrain from directing or supporting outbound investments aimed at acquiring U.S. technology. It also agreed to fix problems that have created non‐​tariff barriers to U.S. agricultural products in China, such as circuitous licensing practices and opaque sanitary and phytosanitary requirements.</p> <p>China also committed to open wider and more transparently its financial services markets to allow more competition from U.S. banks, insurance companies, and brokerages. It also made certain commitments to ensure that it doesn’t intervene in currency markets in a&nbsp;way that suppresses the value of the Chinese yuan to secure a&nbsp;trade advantage. And, importantly, the parties agreed to create a&nbsp;mechanism that, ostensibly, will allow for rapid hearing, adjudication, and, hopefully, resolution of disputes.</p> <p>Skeptics of the deal are quick to point out that — in the provisions regarding intellectual property rights enforcement and disavowal of forced technology transfer — Beijing didn’t agree to anything they hadn’t already agreed to or weren’t already doing, as a&nbsp;result of obligations under previous agreements. That may be true, but Beijing’s and Washington’s definitions of “forced” technology transfer (to use one example) have been very different historically. If this agreement includes a&nbsp;broader understanding by the Chinese of the term “forced,” it will be a&nbsp;step in the right direction.</p> <p>Beijing’s pledge to stay away from backing or promoting technology acquisitions by state‐​owned enterprises is a&nbsp;nice gesture that amounts to very little, considering that U.S. policymakers are already ramping up scrutiny of these kinds of deals, as required under the new Foreign Investment Risk Review Modernization Act. It’s something that U.S. policymakers are intent on scrutinizing and, frankly, protecting sensitive U.S. technology in a&nbsp;systematic and transparent way is far superior to levying tariffs and encouraging divestment.</p> <p>Commitments on currency, of course, have nothing to do with the impetus for the trade war. This is perennial gripe that should be of very low priority on the U.S. list of concerns.</p> <p>Time will tell whether Beijing actually makes good on these commitments and whether the administration will work hard to address the outstanding issues. But for now (and probably through the 2020 elections), new or higher U.S. tariffs on imports from China seem to be unlikely. Of course, we will have to endure 25 percent tariffs on half of our imports from China and 7.5 percent tariffs on about one‐​fifth, but the uncertainty that has racked markets for over 18 months is likely to abate. This deal, for all its shortcomings, is an agreement to not escalate the trade war. There’s some value in that, right?</p> <p>The United States and China are locked in a&nbsp;race for technological preeminence, which raises all sorts of strategic and security concerns that can no longer be treated with indifference. Technology bestows first‐​mover advantages with significant commercial and strategic implications. As 2020 progresses, the U.S. debate over China policy should shift focus away from tariffs and trade measures to the broader strategies, tactics, and domestic measures needed to stay on top in the race for technological supremacy.</p> Mon, 16 Dec 2019 18:03:58 -0500 Daniel J. Ikenson The USMCA Is Moving Forward (Too) Quickly Simon Lester, Inu Manak <p>Despite some last‐​minute additions that make substantial changes to the deal, the congressional approval process for the <span>U.S.-Mexico-Canada Agreement (USMCA) </span> is hurtling forward. The House <a href=""><span><span><span>implementing bill</span></span></span></a><span> was posted late Friday afternoon. As per the </span><a href=""><span><span><span>Trade Promotion Authority</span></span></span></a><span> (TPA) rules under which the agreement was negotiated, Congress will cast an up or down vote on this bill, with no amendments. A&nbsp;vote is expected in the House on Thursday, with a&nbsp;Senate vote likely coming in January.</span></p> <p><span>There are over 200 pages of text in the implementing bill, and there is a&nbsp;lot of detail spelled out therein about how the agreement will operate as part of U.S. law. We want to highlight here three issues of importance</span>—<span>we offered a&nbsp;discussion of a&nbsp;broader range of issues <a href="">here</a></span>—<span>and how the implementing bill addresses them. T</span>hese issues warrant careful deliberation and consideration before a&nbsp;vote is cast, although they may not get it.</p> <p><span>First, one of the biggest trade issues in the USMCA is the extent to which the agreement pulls back</span>—<span>as compared to NAFTA</span>—<span>from free trade in autos and auto parts between the U.S., Canada, and Mexico. At least on paper, it will now be much harder to fulfill the conditions for qualifying for zero tariffs on these products. However, there is still a&nbsp;question of how these conditions will be applied in practice. The implementing legislation creates a&nbsp;new interagency committee for the purpose of reviewing the operation of the updated, and far more stringent, rules of origin (RoO) requirements for automotive goods. Rules of origin are part of every trade agreement and specify the amount of production that has to happen within the territory of the parties to the agreement in order to qualify for a&nbsp;preferential duty. RoO can have a&nbsp;big impact on whether or not companies even bother to utilize the preferential rates of a&nbsp;trade agreement (if they are </span><a href=""><span><span><span>too burdensome</span></span></span></a><span>, sometimes companies just pay the normal tariff rate). </span></p> <p><span>In Section 202A, Special Rules for Automotive Goods, the legislation creates an interagency committee to implement these rules. The Chair of the interagency committee is the U.S. Trade Representative. It also includes the Secretary of Commerce, the Commissioner of Customs and Border Protection, the Chair of the International Trade Commission, and “Any other members determined to be necessary by the Trade Representative.” This oversight mechanism places a&nbsp;significant amount of discretion in the hands of the executive branch in implementing these new rules. There is no role for Congress here. Such an important change to a&nbsp;highly integrated manufacturing sector across the three countries warrants, at the very least, a&nbsp;consultative role for Congress. How these provisions are implemented will have a&nbsp;significant impact on how much the new rules raise the cost of manufacturing autos in North America.</span></p> <p><span>The second issue is one of the biggest changes announced last week: There is a&nbsp;<a href="">vast and uncertain new process</a> created to oversee Mexican labor reforms, including special panels to review practices at specific Mexican factories (someone on Twitter referred to this as a&nbsp;<a href="">Labor Avengers Squad</a>). </span>Again, there will be an interagency committee to decide whether to pursue cases; there will be U.S. labor attach<span>é</span>s assigned to monitor the situation in Mexico (this caused some outrage in Mexico, resulting in a&nbsp;<a href="">letter</a> from Ambassador Lighthizer to smooth things over); there will be the possibility of “rapid response” panels made up of independent labor experts to evaluate specific complaints; and the remedy will be penalties applied to imports from the factories in question. There is definitely the potential here for a&nbsp;litigation boondoggle and a&nbsp;powerful new mechanism to restrict trade.</p> <p><span>And finally, with regard to congressional/​executive separation of power issues, one of the most important parts of the implementing bill is the provision that explains how the “sunset clause” will function. We addressed problems with the </span><a href=""><span><span><span>sunset clause</span></span></span></a><span> late last year when the USMCA was signed. The most troubling aspect of the legislation is that it appears the role of Congress will only be consultative, as described in Section 611, Participation in Joint Reviews with Canada and Mexico Regarding Extension of the Term of USMCA and Other Action Regarding USMCA. </span>Consultations are great, but t<span>he most important element of congressional involvement is not addressed: a&nbsp;vote. While USTR is obligated to <em><span>consult </span></em><span>with Congress regarding the review of the agreement, Congress does not have a&nbsp;final say on whether or not to extend the agreement. This is a&nbsp;problem, as it means that the executive has the sole power to decide whether or not to extend the USMCA as part of the joint review/​sunset clause process.</span></span></p> <p><span>Similarly, in Section 621 on Termination of USMCA, no additional clarity is provided with regard to USMCA Article 34.6 (the withdrawal provision). In the context of NAFTA and other trade agreements, there has been a&nbsp;big debate on who has the power to withdraw from trade agreements. Through this implementing legislation, there was a&nbsp;chance to clarify that Congress has a&nbsp;crucial role, and that a&nbsp;president cannot withdraw on his/​her own. A&nbsp;failure to clarify this issue here is a&nbsp;missed opportunity.</span></p> <p>Many politicians and interest groups involved in the debate over the fate of NAFTA seem eager to put everything behind them and ratify USMCA as quickly as possible. We think it is worth discussing and debating what’s in USMCA first. A&nbsp;lot of these changes will have serious consequences, and it’s worth understanding them better before plunging forward.</p> Mon, 16 Dec 2019 17:34:06 -0500 Simon Lester, Inu Manak A Few Details on the US‐​China “Phase One” Trade Deal Simon Lester, Huan Zhu <p>Last Friday, the U.S. Trade Representative’s Office released a “<a href="">fact sheet</a>” about the U.S. — China trade deal that it had just announced. Reports suggest that the deal will be signed in early January, with the text released some time after that. A&nbsp;full analysis of the deal will have to wait until then, but in this post, we offer some comments on the details set out in the fact sheet.</p> <p>The first issues mentioned are intellectual property and technology transfer. The fact sheet addresses these as follows:</p> <blockquote><p>• Intellectual Property: The Intellectual Property (IP) chapter addresses numerous longstanding concerns in the areas of trade secrets, pharmaceutical‐​related intellectual property, geographical indications, trademarks, and enforcement against pirated and counterfeit goods.</p> <p>• Technology Transfer: The Technology Transfer chapter sets out binding and enforceable obligations to address several of the unfair technology transfer practices of China that were identified in USTR’s Section 301 investigation. For the first time in any trade agreement, China has agreed to end its long‐​standing practice of forcing or pressuring foreign companies to transfer their technology to Chinese companies as a&nbsp;condition for obtaining market access, administrative approvals, or receiving advantages from the government. China also commits to provide transparency, fairness, and due process in administrative proceedings and to have technology transfer and licensing take place on market terms. Separately, China further commits to refrain from directing or supporting outbound investments aimed at acquiring foreign technology pursuant to industrial plans that create distortion.</p> </blockquote> <p>With regard to these issues, two points are worth noting. First, there are already rules on these issues at the World Trade Organization (the “For the first time in any trade agreement” claim related to forced technology transfer is <a href="">not accurate</a>). When the text of the U.S.-China&nbsp;deal is released, it will be interesting to compare and see if there is anything new here, or if the deal just restates existing WTO obligations.</p> <p>Second, China was in the process of making domestic law changes in these areas anyway (examples can be found in a&nbsp;new <a href="">Foreign Investment Law</a>, and in 2019 Chinese&nbsp;amendments to&nbsp;its Trademark Law and pending revisions to its Patent Law), so the commitments in this deal will not necessarily lead to any new legislative actions.</p> <p>Next up is agriculture:</p> <blockquote><p>• Agriculture: The Agriculture Chapter addresses structural barriers to trade and will support a&nbsp;dramatic expansion of U.S. food, agriculture and seafood product exports, increasing American farm and fishery income, generating more rural economic activity, and promoting job growth. A&nbsp;multitude of non‐​tariff barriers to U.S. agriculture and seafood products are addressed, including for meat, poultry, seafood, rice, dairy, infant formula, horticultural products, animal feed and feed additives, pet food, and products of agriculture biotechnology.</p> </blockquote> <p>With regard to “structural barriers to trade,” there are rules at the WTO as well. Again, when we see the text, we can see if there is anything new here. In addition, China is having some problems with meeting its demands for agricultural products (most famously pork, due to an outbreak of swine flu), so it would not be a&nbsp;surprise to see an increase in Chinese purchases of these products.</p> <p>And on financial services, the fact sheet says:</p> <blockquote><p>• Financial Services: The Financial Services chapter addresses a&nbsp;number of longstanding trade and investment barriers to U.S. providers of a&nbsp;wide range of financial services, including banking, insurance, securities, and credit rating services, among others. These barriers include foreign equity limitations and discriminatory regulatory requirements. Removal of these barriers should allow U.S. financial service providers to compete on a&nbsp;more level playing field and expand their services export offerings in the Chinese market.</p> </blockquote> <p>China was in the process of <a href="">changing its domestic law here as well</a>, and there are also some existing WTO obligations in this area to compare this with.</p> <p>With regard to other issues, the fact sheet talks about currency, which will probably mean provisions similar to those in the U.S.-Mexico-Canada Agreement.</p> <p>And then there is a&nbsp;section indicating that China will buy a&nbsp;massive additional amount of U.S. exports of goods and services, as follows:</p> <blockquote><p>• Expanding Trade: The Expanding Trade chapter includes commitments from China to import various U.S. goods and services over the next two years in a&nbsp;total amount that exceeds China’s annual level of imports for those goods and services in 2017 by no less than $200 billion. China’s commitments cover a&nbsp;variety of U.S. manufactured goods, food, agricultural and seafood products, energy products, and services. China’s increased imports of U.S. goods and services are expected to continue on this same trajectory for several years after 2021 and should contribute significantly to the rebalancing of the U.S.-China trade relationship.</p> </blockquote> <p>Total U.S. exports of goods and services to China in 2017 was <a href="">$188 billion</a>. Exceeding that amount over the next two years by “no less than $200 billion” is a&nbsp;little hard to fathom. Do U.S. producers have that much to sell to China? Will there just be a&nbsp;shift of purchases by buyers and sellers, so U.S. companies sell less to the rest of the world and more to China? In a&nbsp;press conference last Friday, Chinese officials&nbsp;<a href="">emphasized that trade expansion would be based on market principles and WTO rules</a>. How will this work when there is an express trade volume quota to meet?</p> <p>Finally, there is dispute resolution. The fact sheet tells us this:</p> <blockquote><p>• Dispute Resolution: The Dispute Resolution chapter sets forth an arrangement to ensure the effective implementation of the agreement and to allow the parties to resolve disputes in a&nbsp;fair and expeditious manner. This arrangement creates regular bilateral consultations at both the principal level and the working level. It also establishes strong procedures for addressing disputes related to the agreement and allows each party to take proportionate responsive actions that it deems appropriate.</p> </blockquote> <p>The fact sheet details are vague, but based on <a href="">other</a> <a href="">statements</a> by the Trump administration, it seems like this process will not involve neutral adjudication of disputes about compliance. Rather, if consultations fail, the United States will simply decide on its own whether China is in violation of the agreement, and then decide on its own what tariff penalties are appropriate. In our view, this is not really a&nbsp;dispute resolution mechanism, but simply a&nbsp;process to restart the tariff war if one side is unhappy with the arrangement (and which could have been restarted without such a&nbsp;provision in place). But this is still a&nbsp;bit speculative, and we need to see the final text first.</p> Mon, 16 Dec 2019 14:43:31 -0500 Simon Lester, Huan Zhu