Wednesday, February 12, 2014

Oil & Gas Exports Event: Video and Materials (and Two Important Updates)

If you weren't lucky enough to hear me, Mark Perry and Jim Bacchus opine on the "shale revolution" and the myriad problems with current US policy on oil and gas exports, you're in luck: Cato just posted the video, which is also imbedded below.

If you'd like a closer look at Mark's or my presentation, you can download them here and here, respectively.  They remain up to date, except for two big developments that warrant mention:
  • First, a few minutes after the Cato event ended, Senator Ted Cruz announced a comprehensive energy plan, one of the core planks of which is the liberalzation of both crude oil and natural gas exports.  (Boy, we were effective!)  Cruz also will be sponsoring formal legislation to implement the plan in the coming days.  Shortly thereafter, Senator Rand Paul stated his opposition to the current export restrictions.  Thus, there now is a more robust reform proposal on the table in Congress and, soon, legislation along those lines.  This is a far more ambitious approach than any before it, including that hinted by Senator Murkowski last month. Thus, it seems like Congress may be catching up to the rest of the policy and business world far more quickly than we imagined just a few short weeks ago.  Giddyup.

  • Second, the non-partisan outfit Resources for the Future published an extensive new study which, echoing previous studies, finds that eliminating the current restrictions on US crude oil exports would lower - yes lower - domestic gasoline prices.  Here's the money line: "Given our projections for the change in crude oil prices and increased efficiency in refinery operations [caused by lifting the crude oil restrictions], we estimate US gasoline prices would be reduced by 2.8 to 6.9 cents per gallon."  This, of course, makes perfect sense if you understand domestic and global oil markets, current US policy (which permits unlimited exports of refined petroleum products), and, well, basic economics. (See my Cato presentation for more.)
More to come, I'm sure.

Thursday, January 23, 2014

Upcoming Cato Event on Oil & Gas Exports

The Cato Institute will be hosting a great event on February 10, 2014 on oil and gas exports.  Details are below, and registration information is available at Cato's website.

Hope you can make it.

Boom to Bust? How Export Restrictions Imperil America’s Oil and Gas Bonanza

February 10, 2014 11:30AM
Hayek Auditorium

Featuring James Bacchus, Former WTO Appellate Body Jurist and Former U.S. Congressman; Scott Lincicome, Cato Institute Adjunct Scholar and International Trade Attorney; and Mark Perry, Professor of Economics, University of Michigan–Flint, and American Enterprise Institute Scholar; moderated by Daniel Ikenson, Director, Herbert A. Stiefel Center for Trade Policy Studies, Cato Institute.

A once-in-a-generation supply shock is transforming global energy markets, lowering crude oil and natural gas prices, and quickly making the United States the world’s largest producer of oil and gas. But energy politics threatens to short-circuit this American economic boom. Of immediate concern are federal regulations — in particular, discretionary export-licensing systems for natural gas and crude oil — that were implemented during the 1970s, an era of energy scarcity. By restricting exports and subjecting approvals to the whims of politicians, the current licensing systems distort energy prices and deter investment and employment in these promising sectors of the U.S. economy. They also irritate global trading partners, likely violate U.S. trade treaty obligations, and undermine other U.S. policy objectives. Ernest Moniz, President Obama’s energy secretary, recently stated that these export restrictions are deserving of “some new analysis and examination in the context of… an energy world that is no longer like the 1970s.” Please join us at the Cato Institute for our examination of these issues.

If you can’t make it to the Cato Institute, watch this event live online at and follow @CatoEvents on Twitter to get future event updates, live streams, and videos from the Cato Institute.

Tuesday, January 7, 2014

Are Liberalized US Crude Oil Exports Finally on the Horizon?

As I mentioned a few weeks ago, a large segment of the energy policy world has suddenly realized that America's archaic crude oil export restrictions are really, really bad policy.  But things have just been kicked into an even higher gear with two new developments:
  • In a much-publicized speech today, Sen. Lisa Murkowski (R-AK), ranking member of the Senate Energy Committee, advocated modernizing US policies for energy exports, particularly natural gas and crude oil.  Accompanying her speech was a new white paper on the same topic, which (among other things) highlights the serious economic problems caused by the current crude oil export licensing system (which is effectively a ban on exports to all countries except Canada), confirms the growing economic consensus that exports won't cause higher gas prices, and recommends that the President, the Commerce Department or (if the first two continue to do nothing) Congress relax the ban.  Just as importantly, Murkowski's views were recently echoed by Sen. Mary Landrieu, (D-LA) who stands to take over the Senate Energy Committee this year. That means that we could have bi-partisan support for easing the US crude oil ban on the Senate committee arguably most integral to any such reforms.
  • Also today, the American Petroleum Institute's President and CEO Jack Gerard reiterated his organization's support for lifting the crude oil export ban: Gerards's formal announcement echoes a few previous statements from folks at API (which is the largest US energy trade association and a big player on Capitol Hill) and is a good sign that they're going to push harder on this issue in the future. (API's related blog post, which calls the crude export ban "obsolete," certainly indicates as much.)
So, given these two big developments, does this mean that the US crude oil export ban will finally die the fiery death that it deserves in 2014?  I'm a bit pessimistic for two reasons.  First, Murkowski is not calling for a complete overhaul of the crude oil export licensing system (or its natural gas cousin): her white paper merely recommends that the Commerce Department or the President exercise their discretion within the current system and thereby approve crude exports to countries other than Canada (which, as noted above, enjoys a presumption of approval). And, according to the Financial Times, Murkowski stated today that any legislation from her on this issue would be “small, targeted bills” to “move the ball forward” - clearly not the overhaul (or total elimination of the system) that free traders, supporters of US energy production and our trading partners would ideally want.  Indeed, the maintenance of an ad hoc, discretionary export licensing system would do little to provide energy markets with the consistency and predictability that they need to operate most effectively, and probably wouldn't quell concerns that the export restrictions violate WTO rules.

Second, while API's support is obviously a big deal, there will undoubtedly be intense opposition to any reform efforts.  As the National Journal reported yesterday, some uninformed politicians and certain domestic refiners - who benefit greatly from the ban - have already come out against reform. Combine that opposition with the inevitable push-back from fossil fuel-averse environmentalists who, in John Podesta, now have a sympathetic ear in the White House, and you have a recipe for a big political battle in Washington and diminished hopes for quick resolution to this problem.  (Indeed, that Podesta's former digs, the Center for American Progress, immediately "blasted" Sen. Murkowski's remarks may be a good indication of what he's thinking.)

In short, crude oil exports could end up being like KeystoneXL or natural gas exports all over again - a frustrating and cripplingly slow process that's subject not to rational market forces but the mercurial whims of our political class.

And, make no mistake, the crude oil situation really is a problem.  As I've repeatedly noted over the last year, the current export restrictions raise a host of legal, economic and policy concerns:
  • Original Cato paper on America's crude oil and natural gas licensing systems (and their economic, legal and policy concerns).
  • Cato podcast on the need for free trade in energy.
  • Reuters oped on the specific trade and economic problems caused by the US crude oil ban.
And, unfortunately, the serious oil supply disruptions contemplated in my Reuters piece - already experienced for natural gas - could be happening a lot sooner that anyone thought:
Oil is a global commodity; therefore, the global supply-demand balance is the primary driver of its price. However, transportation and refining capacity affect local pricing, which is what we as producers care about. The first red flag was pipeline capacity from the Permian to the Gulf Coast. While Permian oil production has risen from 850,000 barrels per day (bpd) in 2007 to an estimated 1.3 million bpd currently, the five inland refineries buying our crude have a capacity of approximately 410,000 bpd. That means almost 900,000 bpd needs to find its way to the Gulf Coast refining complex that stretches from Corpus Christi to New Orleans, or to Cushing, most of which ends up in the Gulf Coast. There is 450,000 bpd of pipeline capacity from Midland to Cushing, and once the four pipeline projects are all completed in 2015, almost 1.5 million bpd of capacity from the Permian to the Gulf Coast will be in service. Problem solved.

Well, not so fast. The problem is that refiners, including Shell/Pemex, Lyondell/CITCO, Exxon Mobil, and Valero, spent billions of dollars each primarily in the 1990s, as domestic sweet production declined, to modify their refineries to process heavy, sour crude from sources including Mexico (Maya), Venezuela (Orinoco), and Saudi heavy-sour. It is not coincidental that Pemex, CITCO (Venezuela), and Aramco (Saudi Arabia) formed joint ventures with refiners in the Gulf Coast in the 1990s to secure outlets for their poorer quality crude. It will cost hundreds of millions to convert each refinery back to sweet service, and the EPA is unlikely to approve a permit for a new refinery in the United States. It remains to be seen whether refiners will invest money to switch back to sweet service, but rest assured they will want a price that is competitive with the heavy sour grades from our Latin neighbors and the Middle East.

E&P companies have long dealt with gas-on-gas competition. Our industry drilled and developed natural gas so efficiently that we drove the price of gas down to a point where drilling for gas was marginal except in the most prolific plays in the best locations relative to consumer markets (e.g., the Marcellus). In addition, the Permian Basin and Eagle Ford have long suffered a glut of NGLs, especially ethane, the lightest and lowest valued component of the NGL stream. In 3+ years, the construction of ethane crackers and olefins complexes in the Gulf Coast for the export of products ranging from ethylene and propylene to plastics and fabrics will help alleviate the NGL glut. Between now and then, “Houston, we have a problem,”–a glut of NGLs.

The same phenomena will occur with the light, sweet crude oil and condensate that is produced from the Eagle Ford, Wolfcamp, and Leonard-aged formations that include the Bone Spring, Spraberry, and Avalon. The price at the wellhead in the Permian will likely be $10-30 per barrel below that of Brent crude, the new global benchmark for oil prices. The price of Brent or WTI Cushing will be irrelevant to Permian or Eagle Ford producers, as it will take discounting to induce an oversupplied sweet refinery to take one producer’s crude over another’s.

There are at least three market-based solutions to this quandary. One, the federal government should lift its ban on exports of crude oil. There are simple, “tea kettle” refineries in Mexico and other Central and Latin American countries that would buy our sweet crude if permitted to do so. We, in turn, import heavy, sour Latin crude to be processed in our complex Gulf Coast refineries. This amounts to a crude swap with our Latin neighbors. Two, refiners invest billions in the aggregate to convert their refineries back to sweet service. The impediment to this strategy is the fact that most of the incremental oil to be developed outside the U.S. is heavy sour, whose producers are willing to discount and enter long-term contracts to sell it. Three, prices fall into the $70s or worse at the wellhead and the investment and the rig count drops, reducing oil production, alleviating the problem. You see, E&P companies primarily reinvest their cash flow into leasehold, drilling, and completions. Few of the most active drillers in the United States pay a dividend.

Lower oil and gas prices mean lower cash flow and reduced rates of return on investment, thus reduced reinvestment, and slower production growth. It is a brutal self-correction mechanism that would have worked for natural gas if not for the large amounts of rich associated gas produced with the oil in our unconventional plays. None of us hopes to resort to the third option.
If the US government were smart, it would pursue the first option - completely lifting the ban on crude oil exports - as soon as possible.  Doing so would restore a little sanity to US energy policy (although more definitely needs to be done), and provide ample benefits for the economy.  However, if the aforementioned concerns and the government's track record with KeystoneXL and natural gas exports are any indication, US energy producers, consumers and market more broadly may endure a lot more pain before any serious, long-term solution is implemented.

If it ever is.

Thursday, January 2, 2014

My International Trade Policy Course: Description & Syllabus

As eagerly mentioned a while ago, I'll be teaching an undergraduate course at Duke University this semester on international trade policy and politics.  For those of you who aren't lucky enough to be Duke students (or live in the area and have the ample time/energy needed to audit the course), I've posted the syllabus below after the jump with the basic course descrption and materials.  As you'll see, almost all of the materials that we'll be covering in class are available for free online, so you can poke around the links and follow along if you're so inclined.  (Or you can just complain vociferously about my obvious confirmation bias - whatever floats your boat.)


Thursday, December 12, 2013

I, Nutella

Via Radley Balko, these pieces never get old:
Some 250,000 tons of Nutella are now sold across 75 countries around the world every year, according to the OECD. But that’s not what’s amazing about it. Nutella, it turns out, is a perfect example of what globalization has meant for popular foodstuffs: Not only is it sold everywhere, but its ingredients are sourced from all over the place too.

Even though Ferrero International, which makes the stuff, is headquartered in Italy, it has factories in Europe, Russia, North America and South America. And while certain inputs are supplied locally—like, say, the plastic for the bottles or milk—many others are shipped from all over the world. The hazelnuts are from Turkey; the palm oil is from Malaysia; the cocoa is from Nigeria; the sugar is from either Brazil or Europe; and the vanilla flavoring is from France.

The OECD mapped it all out. Have a look:

The whole OECD study is available here.

Friday, December 6, 2013

American Media Finally Starting to Notice the Problems Caused by US Export Restrictions on Oil & Gas

Decades-old US laws currently prevent the free exportation of American crude oil and natural gas, thus raising a host of economic, legal and policy problems.  This is not a good thing, but it fortunately appears that the stalwart American media are starting to notice.  Unfortunately, it took them a heckuva long time to do it, as two recent news stories make clear.

First, several media outlets picked up a new National Association of Manufacturers analysis which finds that US natural gas export restrictions likely violate WTO rules.  This Reuters clip is pretty indicative of the media coverage:
A lobbying group pressing the U.S. government to speed approval of U.S. natural gas and coal export proposals released a report on Tuesday contending that long delays in the approval process may violate global trade rules.  
The National Association of Manufacturers commissioned James Bacchus, a former Democratic Congressman and World Trade Organization judge, to pen the report, which it says sends a message to the Obama administration and Congress that they should accelerate the approval process and lift regulatory barriers…  
The NAM asked Bacchus to consider whether delays by the Department of Energy in issuing licenses to export liquefied natural gas to certain countries violate obligations under World Trade Organization rules.  
In the report Bacchus concluded that both actions violate the General Agreement on Tariffs and Trade, which forbids export restrictions. "The United States has always been a strong advocate of rules that forbid export restrictions and has been forceful in challenging export restrictions imposed by other countries," said Bacchus, warning that "the tables may be turned on the United States directly in the WTO."
NAM and Bacchus are right to raise this issue (and on the legal merits), and it’s good to see the media report the problem.  However, it’s surprising that this new analysis is treated as some sort of revelation, given that a certain Cato Institute scholar first warned of the WTO and other policy problems surrounding the natural gas export system (and a similar one for crude oil) almost ten months ago:
Beyond the economic problems, both export licensing systems raise serious concerns under global trade rules. First, the U.S. export licensing regimes for natural gas and crude oil likely violate U.S. obligations under the General Agreement on Tariffs and Trade (GATT). Under GATT Article XI:1, WTO Members are generally prohibited from imposing quantitative restrictions on imports and exports. Under Article XI and related WTO jurisprudence, “discretionary” licensing systems (i.e., those in which the administering authority has the freedom to grant or deny a license) and systems in which applications are delayed for several months constitute impermissible restrictions on export quantities. On the other hand, licensing systems in which approval is automatic and relatively quick (e.g., five days) have been found to be lawful.

Based on these standards, both the U.S. natural gas and crude oil licensing systems appear to violate GATT Article XI:1. Each system provides the administering agency (DOE or BIS) with the discretion to grant or deny an export license based on subjective and nonbinding criteria (the “public interest” or “national interest” standards). Moreover, the pending export license applications have been delayed for several months (and, in a few cases, years). Both of these facts support findings of GATT violations.
Another think tank expert came to similar conclusions around the same time.  Thus, these legal concerns have been pretty common knowledge now for quite a while (and originally weren’t pushed by a “lobbying group”).  It’s really odd that they’re today being treated as novel.

Second, the Wall Street Journal reported this week that startling increases in US crude oil production, combined with onerous export restrictions, have led to a glut of domestic oil, a host of potential problems for domestic oil producers and newfound focus on the 1970s era export law:
The U.S. Gulf Coast—home to the world's largest concentration of petroleum refineries—is suddenly awash in crude oil.  So much high-quality U.S. oil is flowing into the area that the price of crude there has dropped sharply in the past few weeks and is no longer in sync with global prices.  In fact, some experts believe a U.S. oil glut is coming. "We are moving toward a significant amount of domestic oversupply of light crude," says Ed Morse, head of commodities research at Citigroup….  
And the glut on the Gulf Coast is likely to grow. In January, the southern leg of TransCanada Corp.'s Keystone pipeline is set to begin transporting 700,000 barrels a day of crude from the storage tanks of Cushing, Okla., to Port Arthur, Texas.
The ramifications could be far-reaching, including lower gasoline prices for American drivers, rising profits for refineries and growing political pressure on Congress to allow oil exports. But the glut could also hurt the very companies that helped create it: independent drillers, who have reversed years of declining U.S. energy production but face lower prices for their product….  
"Not one person saw this coming," says Paul Sankey, an energy analyst at Deutsche Bank. He says he expects growing production to eventually push prices of West Texas Intermediate crude, the U.S. benchmark, below $80 a barrel, down from $97.38 Thursday. The industry "will start screaming" for Congress to lift the export moratorium, he says.  
Adam Bedard, a market analyst for High Sierra Energy, a subsidiary of NGL Energy Partners, agrees that pressure will rise on the federal government to loosen crude-oil export restrictions, which date back to the 1973 OPEC oil embargo. Oil storage in the Gulf region appears to be filling up, he says. "It's like someone built a superhighway where there wasn't one before."
Again, the WSJ should be commended for highlighting this important story and the serious economic and legal problems caused by US export restrictions on crude oil.  However, it’s laughable to say that “not one person saw this coming.”  Indeed, that very same Cato scholar warned of this problem back in February:
[B]y depressing domestic prices and subjecting export approval to the whims of government bureaucrats, the U.S. licensing systems retard domestic energy production, discourage investment in the oil and gas sectors, and destabilize the domestic energy market. Artificially low prices prevent producers from achieving a sustainable rate of return on the massive up-front costs required to drill and extract oil and gas, and investors lack any assurances under the discretionary licensing systems that domestic prices will not collapse when output increases.  Such concerns have led the IEA to recently warn that U.S. export restrictions put the “American oil boom” at risk. 
This modern day Nostradamus then drilled down (pun intended!) on the problem for Reuters in June:
[A] bipartisan swath of federal and state officials is pressing for new infrastructure, like the Keystone XL pipeline, to move a glut of domestic oil from the center of North America to Gulf ports. This is a crucial step, but unless Congress reforms archaic restrictions on crude oil exports, all that black gold’s going nowhere….  
[B]y curtailing exports and subjecting license approvals to the whims of bureaucrats, the current system slows domestic production, breeds economic distortions, discourages investment and destabilizes energy markets.  
U.S. oil producers, for example, lose an estimated $10 billion a year due to their inability to sell crude in foreign markets. They’ve also spent hundreds of millions of dollars building “mini-refineries” in the Midwest and Gulf region to circumvent the current restrictions and export a slightly processed, cheaper product — leaving another $1.7 billion in potential profit on the table.  
As Rube-Goldbergian as this sounds, producers have few alternatives, given that U.S. oil consumption has collapsed in recent years and building new refinery capacity is virtually impossible in many “environmentally friendly” states. These problems prompted the head of the International Energy Agency to warn recently that U.S. export restrictions put the “American oil boom” at risk….
Given these problems, it’s clear that the current crude oil export licensing system needs to go. Congressional supporters of the U.S. energy boom must lead the charge.
If advocates really want to develop our vast energy resources and expand the economy, they should craft a licensing policy that reflects the new energy landscape and the immense U.S. export potential.  They’d also be restoring some overall coherence to U.S. trade and energy policy — and avoiding potentially embarrassing trade conflicts. If they ignore these restrictions, and their many flaws, the nascent U.S. oil boom could be snuffed out.
Sounds familiar, eh?  If only there were some sort of “search engine” or something that would allow curious journalists to find such things on the internet.  Alas, maybe next year.

Sour grapes aside, these news items raise two far-more-important points.  First, it’s good to see that the media are finally, after only a year, catching on to the many unnecessary problems created by US oil and gas export restrictions.  Hopefully, they’ll keep at it (even if they continue to ignore me). 
Second, and maybe more obviously, these export restrictions – dating back, in the case of gas, to the 1930s! – are causing serious, serious problems for the United States: distorting energy markets, eliminating jobs, depressing economic growth, creating global trade frictions and undermining other, worthwhile US government policies.  They reflect a bygone era of US energy homogeneity and scarcity.

Isn’t it time that our laws – and our political leaders – caught up?

Wednesday, December 4, 2013

And Now for a Brief, but Important, Lesson on Trade Promotion Authority

Claude Barfield's latest piece emploring the GOP to advocate free trade has a great rejoinder to the persistent-yet-silly arguments from some on the right that Trade Promotion Authority is unconstitutional or unconservative:
Two arguments explain the incipient dissent: one, though not stated openly, is a reaction against giving any kind of victory to the Obama administration; and two, on more substantive grounds, broader constitutional arguments have been raised against TPA as ceding congressional power to the executive and eroding national sovereignty. As for the personal and political distaste for giving Obama a victory, opposition to TPA - and thus, by extension ratifying TPP and TTIP - for Republicans is akin to the proverbial "cutting off your nose to spite your face." Ultimately, a defeat for TPP and TTIP, if and when they come before Congress, would represent a defeat for longstanding Republican policies and principles and a victory for those elements of the Democratic party that are deeply suspicious of globalization and global free enterprise (The Elizabeth Warren wing of the party would be ecstatic).

On the constitutional questions, despite claims from anti-global activists on the left (and right: viz., Pat Buchanan and Clyde Prestowitz), conservative judicial experts have consistently defended the limited grant of authority on trade from Congress to the Executive as within the bounds of the division of powers envisioned by the Founding Fathers.

They make two points: first, through the TPA process, Congress exercises the power to dictate specific negotiating goals, and it mandates constant consultations with congressional leaders during the course of extended bargaining sessions. Second, and of paramount importance, Congress through TPA reaffirms that the provisions of trade agreement cannot force changes in US domestic law. Legislation implementing trade agreements all contain the following language:

"No provision of the Agreement...which is inconsistent with any law of the United States shall have effect." "Nothing in this Act shall be amend or modify any law of the United States...unless specifically provided for in this Act."

A decade ago when similar questions were raised about the constitutionality of similar trade legislation, two legal experts with impeccable conservative credentials - former Attorney General Edwin Meese and Judge Robert Bork - both endorsed the Executive-Legislative partnership on trade agreements. As Bork wrote at the time: "No treaty or international agreement can bind the United States if it does not wish to be bound. Congress may at any time override such an agreement or any provisions of it by statute."

As Meese and Bork affirm, US sovereignty and congressional prerogatives are not threatened by TPA or the proposed new trade agreements. Thus, Republicans should get on with the job of reaffirming their traditional commitment to open markets and vigorous international competition.
The whole Barfield piece is worth reading, so be sure to check it out.  My only quibble: Republicans should support all forms of free trade, not just free trade agreements which require TPA.  Indeed, as I argued recently, unilateral liberalization of US trade barriers is not only an economic no-brainer, but also a manifestly constitutional, conservative and moral policy that any fan of free markets and limited government (I think that still means Republicans) should strongly support.  And, of course, my preffered free trade policy doesn't require messy reciprocal trade agreements, politically difficult TPA or the costly, Big Government things (*cough*TAA*cough*) that are so often attached to such measures.

Yet here we are, debating TPA and hoping against hope that somehow the President can complete new FTAs.  That seems... misguided.

(p.s. Bill Watson's recent review of Republicans and TPA is also worth your time.)

Tuesday, December 3, 2013

Global Supply Chains Are Freakin' Amazing

The folks at NPR's Planet Money have an excellent new series on a simple T-shirt's journey from a cotton field in Mississsippi to your dresser drawer.  In the process, they demonstrate the complex, amazing and, at times, difficult world of modern trade, development and global supply chains.  The teaser video is below, and the whole series is available here.  Take the time and watch/read the whole thing. They have really outdone themselves.

Friday, November 1, 2013

VIDEO: Me on Trade Politics, Messaging & Policy

The Cato Institute has (finally) published the third video that I recorded for them a few weeks ago on U.S. trade policy.  This one actually covers many of the same things that I discussed in yesterday's piece for The Federalist, so be sure to read that too for the total consumer experience.  Enjoy!

Thursday, October 31, 2013

New Article: "America’s Horrible, No Good, Messed-Up Trade Policy (and How to Fix It)"

[Ed. note: This article was first published in The Federalist, which you really should be reading by now.]

Americans currently pay high taxes on food, clothing, automobiles, industrial inputs and other goods and services, and their own United States Trade Representative is vigorously fighting other countries to keep it that way. Even worse, the government’s efforts all but ensure that removing such taxes – and easing the artificial burdens they place on American families and businesses – will remain unnecessarily, and irrationally, difficult for years to come.
This is the awful state of American trade policy, and serious reform is long overdue.
Americans tend to think of the United States as some sort of free trade bastion in which unfettered globalization is – for better or worse – simply a way of life. However, while many U.S. tariffs were lowered decades ago, several tariff “peaks” remain in certain politically-connected areas like food, clothing, footwear and automobiles. Moreover, “non-tariff barriers” to trade – subsidies, regulations, etc. – have proliferated in recent years, and many “trade remedies” duties – based on allegations of “unfair” trade – also remain in place, particularly for industrial inputs like steel and chemicals.

The pros and (mostly) cons of these government measures vary, but one thing remains constant: their staunch and unflinching defense by the U.S. government in global free trade agreement negotiations. In these venues, gains are viewed as coming only from new access for U.S. exports and investment, while imports are the unfortunate price that America must pay for such “victories.” For example, as negotiations in both the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP) gained momentum earlier this year, blubbering American journalists were quick to proclaim President Obama’s supposed “free trade renaissance” and strong support for expanding U.S. exports, but uniformly failed to report on the fact that his firm resistance to negotiating partners’ calls for lower U.S. trade barriers was a major reason for the agreements’ continuing difficulties. Nor did any such reports delve into the fact that those barriers, while certainly good for certain well-connected companies in the United States, injured the vast majority of American individuals and firms. And when TPP negotiators inevitably miss their much-ballyhooed and over-promised 2013 deadline for completing the agreement, you can bet that these facts will not receive top billing (or maybe even passing mention). Instead, only trading partners’ refusal to heed U.S. export demands will be blamed.

Trade and Reciprocity

The Obama administration, of course, is not the first to engage in such negotiating tactics and instead is simply the latest White House to do so. In fact, since the 1930s, American trade policy has utilized a “reciprocity” model of trade negotiations in which the United States treated any trade liberalization (e.g., the reduction of tariffs), no matter how smart or moral, as a “concession” that is only to be traded for another nations’ own acceptance of new U.S. exports or investment. Moreover, the diplomatic origins of the reciprocity model have ensured that trade liberalization is treated as a foreign, rather than domestic, policy area in which trade negotiations take on a zero-sum, war-like mentality where benefits are “won” or “lost”, instead of mutually achieved. Put most simply, exports are an unquestioned good to be pursued, while imports are an unmitigated bad to be resisted. Full stop.

Even though U.S. foreign and domestic policy – as well as economics, politics and society more broadly – has changed dramatically in the intervening decades, U.S. trade policy remains mired in this 20th century, cold-war framework, as the current TPP and TTIP negotiations make abundantly clear. Unfortunately, some things to not get better with age, and U.S. trade policy is certainly one of those things. In fact, there are at least five fundamental problems with the United States’ mercantilist, reciprocity-based approach to international trade.
First and most basically, it is economically ignorant. Since Adam Smith first penned The Wealth of Nations, there has been a near-universal economic consensus in support of the elimination of trade barriers regardless of whether other nations do likewise. For this reason, there is quite literally no policy issue on which more economists – left, right and center – agree more, and the supposed death of the “free trade consensus” in academia has been wildly exaggerated.
This support, however, goes far beyond mere economic theory: there is also an endless array of empirical and historical evidence demonstrating the value of free trade and free markets. In fact, just last week the Heritage Foundation rounded up a lot of the latest data in order to (once again) resoundingly conclude that trade and investment liberalization is awesome, and that Congress should unilaterally eliminate tariffs on a wide range of products in order to boost the U.S. economy (including U.S. manufacturers). Heritage is certainly not alone: policy shops across the political spectrum, including Brookings, AEI and my colleagues at the Cato Institute, have produced similar studies in the past. And, as Dan Ikenson and I explained in a 2009 paper for Cato, the facts not only support free trade, but also destroy the various myths used by protectionists to undermine public support for such policies, including the greatly-exaggerated “death” of American manufacturing; the alleged link between imports, the trade deficit and U.S. jobs; and the idea that foreign companies and governments routinely cheat in order to gain an “unfair” advantage over their American counterparts.

Second, the reciprocity model has proven increasingly ineffective in producing tangible trade liberalization gains for U.S. businesses and consumers. The biggest example of this failure is WTO’s Doha Round of multilateral trade negotiations, which remains comatose after 12 years of missed deadlines, unkept promises and angry finger-pointing among stubborn nations that refuse to make further “concessions” to finalize the multi-trillion-dollar deal. Even the WTO’s “mini package” of supposedly-low-hanging fruit – intended to jump-start Doha during this December’s ministerial meetings in Bali, Indonesia – appears in doubt.
Smaller, regional/bilateral deals aren’t faring much better. Indeed, according to a recent report from the Asian Development Bank, the entire TPP is at risk of collapsing due to nations’ demands for various protectionist exceptions (or “carve-outs”) from the deal’s general free trade and non-discrimination rules:
The need to provide exemptions, or “carve outs,” to avoid a collapse in negotiations also raises concerns over the final form the TPP will take. The secrecy surrounding the negotiations makes it difficult to assess progress, but—from what is known—there is the risk of degenerating into a series of loosely tied bilateral deals. Indications are that the two largest TPP members—the U.S. and Japan—are proceeding along bilateral lines, threatening the demanding single-undertaking approach the TPP is supposed to adopt. 
Although the number of countries involved in these negotiations is much lower than at the WTO, for instance, it does not translate to a commensurate reduction in diversity in terms of disparate interests. These interests often conflict, especially in a context where the agenda is far more ambitious than any other proposed thus far. The recent round of negotiations that took place in Brunei Darussalam in August 2013 was reported to have made very little progress, highlighting the difficulties being faced as the TPP moves toward finding common ground on the more difficult issues.

Bloomberg has more on the ADB report and the TPP’s current problems here. Among the carve-outs demanded by TPP participants are Japan’s agricultural protectionism and Malaysia’s imposition of discriminatory regulatory barriers to tobacco, but many such demands originate in Washington, including three of the negotiations’ most contentious issues:
  • Sugar protectionism. The United States has not only resisted calls to liberalize archaic tariffs and quotas on sugar imports, but also refused to reopen the current U.S.-Australia FTA, which completely excludes sugar from the Agreement.
  • Textiles, apparel and footwear. The Obama administration has repeatedly refused requests from Vietnam and other large exporters to lower U.S. tariffs on textiles, clothing and shoes, and has demanded complicated “rules of origin” that will dramatically narrow the goods that could qualify for preferential access to the U.S. market.
  • Automobiles. The United States also has vigorously fought Japan over U.S. tariffs on automobiles (2.5% for cars and a whopping 25% for light trucks) – a nearly-identical request that delayed the implementation of the U.S.-Korea FTA for several years after it was originally signed by the Bush Administration.
Each of these issues not only hurts U.S. consumers (more on that below), but threatens the completion of the TPP itself – an absolutely dumbfounding prospect, given these sectors’ relative insignificance for both the agreement and the U.S. economy.

The third flaw in the current system is that it’s needlessly messy and archaic. Every U.S. FTA, from NAFTA to KORUS, contains a different “schedule” which dictates the level and timing new market access for individual FTA partners’ goods and services. Rules of origin and other commitments also vary widely across agreements, thus creating an impenetrable web of rules and regulations and making the U.S. tariff code look like the Rosetta Stone. As a result, the exact same product will be subject to different taxes and rules based solely on its origin and the year in which it enters the country, and U.S. businesses often make sourcing decisions based on FTA rules rather than a product’s actual value. (And, of course, they must spend millions of dollars annually to determine those rules!)

Not only is this process costly and inefficient, but it is wholly out of step with the 21st century world of seamless and ever-changing global supply chains. Today, product components are often sourced from multiple countries and assembled in another, and sourcing patterns routinely change based on market developments. (See, e.g., the evergreen “origins” of the iPhone and its competitors.) Arcane trade rules prevent such dynamism and thus hurt U.S. companies and consumers. Put another way, goods today are “made on earth,” but our trade agreements reflect a bygone era of vertical manufacturers, simplistic designs and old-fashioned notions of bilateral trade among individual nations. It makes no sense. None.

Fourth, the United States’ “free trade” policy has proven to be a horrible tool for actually achieving and sustaining public support for trade liberalization and free markets. For one thing, focusing on exports, FTAs and arcane market access issues (e.g., pharmaceutical patent protections) gives many Americans the not-totally-unwarranted impression that our trade policy is little more than a tool of large multinational exporters and investors at the expense of American workers. That is hardly a way to achieve grassroots support for important economic policy!
More importantly, the constant focus on exports and resistance to any type of import liberalization actually breeds public misunderstanding and distrust of trade liberalization. As Dan Ikenson and I explained in 2011:
The pervasive view that exports are good and imports are bad is a central misconception upon which rests the belief that trade negotiations and “reciprocity” are essential to trade liberalization. Under this formulation, an optimal trade agreement, from the perspective of U.S. negotiators, is one that maximizes U.S. access to foreign markets and minimizes foreign access to U.S. markets. An agreement requiring large cuts to U.S. tariffs, which would thus deliver significant benefits to consumers, would not pass political muster unless it could be demonstrated that even larger export benefits were to be had. This misguided premise that imports are the cost of exports and should be minimized lies at the root of public skepticism about trade. Ironically, it is also a prominent feature of the favored pro-trade argument.

There is nothing, of course, wrong with exports or pursuing new market access for U.S. businesses. The political appeal of that message is obvious, and exports do contribute to economic growth and, thus, job creation. However, the U.S. government’s relentless obsession with exports and reciprocity not only confuses the public and reinforces bad economics, but also creates a large and unnecessary opening for misleading protectionists:
[The mecantilist] message invites the following retort: if exports help grow the economy and create jobs, then imports must shrink the economy and cost jobs. In failing to explain why that conclusion about imports is wrong, trade proponents have yielded the floor to trade skeptics, who have been more than happy to manufacture talking points about the “deleterious” impact of imports on the U.S. economy. Most of those talking points are misleading or plain wrong, but there has been inadequate effort to correct the record. As a result, too many Americans accept the mercantilist fallacy that exports are good, imports are bad, and the trade account is a scoreboard.

Birdcages across the country are lined with op-eds from protectionist union leaders, businessmen and “consumer protection” groups that turn FTA proponents’ mercantilist message against them. Indeed, just this month I was treated to a piece in my hometown paper from the NC AFL-CIO, arguing that the U.S.-Korea FTA – and U.S. free trade policy more broadly – was a clear disaster for North Carolina because imports from Korea increased in the agreement’s first year, while U.S. exports declined. (Nevermind the fact that Korea’s economy was struggling mightily in 2012 and thus represented a low-demand export market, or that free trade resoundingly benefits the Tarheel state.) Sadly, using the Obama administration’s own misguided metric for gauging an FTA’s success (i.e., exports and the trade balance), the union had a point and thus capably hoisted the administration on its own mercantilist petard. And until the U.S. government changes this shortsighted, incorrect approach to trade policy and messaging, this rhetorical weapon will be readily available to protectionists, and public opinion will remain subject to the whims of meaningless statistics instead of economic consensus and actual historical fact.

Trade and Morality

Finally, the current approach to U.S. trade policy is manifestly immoral. Government intervention in voluntary economic exchange on behalf of some citizens necessarily comes at the expense of others and is inherently unfair, inefficient, and subverts the rule of law. At their core, trade barriers like those for sugar, clothing, footwear and automobiles are the triumph of coercion and politics over free choice and economics. The protectionist policies that USTR fights to maintain are the result of productive resources being diverted to achieve political ends and, in the process, taxing unsuspecting consumers to line the pockets of the special interests that succeeded in enlisting the weight of the government on their side.
This immorality has a clear and tangible cost. In 2011, Americans paid over ten billion dollars in tariffs on clothing alone, and another two billion each for shoes and automobiles – $29 billion total that year and $40 billion total in 2012. These taxes also raise the prices of goods made here at home and, as a result, American families pay much more for everyday staples like butter, milk, ice cream, sugar, tuna, apparel and shoes than their foreign counterparts. And American companies do the same for industrial inputs like ball bearings, steel and cement.
Protectionism is akin to earmarks, but it comes out of the hides of American families and businesses instead of the general treasury. And under the current trade negotiations system, our government is essentially choosing certain U.S. businesses and workers – those seeking protection and those seeking new export markets – over everyone else in America. As a result of these taxpayer-funded efforts, U.S. families pay higher prices for everyday essentials, and import-consuming companies struggle to remain globally competitive. (See, for example, U.S. candy makers who have moved their operations, and thousands of jobs, overseas due to sky-high sugar prices here.) Why on earth should our government pursue such an obviously immoral approach to international economic policy? Obvious answer: it shouldn’t.

A Better Path Forward

Fortunately, there is a much better, simpler way forward for U.S. trade policy. Most obviously, the United States should (i) immediately and unconditionally eliminate tariffs on basic human necessities like food, clothing, shoes, as well as industrial inputs that U.S. manufacturers rely upon to remain globally competitive; and (ii) phase out all other tariffs over a relatively short transition period. This change, coupled with matching rhetorical shift about the domestic benefits of trade liberalization, would instantly put the United States back at the forefront of global economic policy and in line with longstanding economic doctrine, fundamental fairness and modern business practices.
And, contrary to popular belief, such moves are politically possible: not only have countries like Australia, Chile, China, New Zealand, Canada, Mexico and Colombia pursued unilateral import liberalization in recent years in order to boost their economies, but the U.S. government also has done so via more limited initiatives like the Generalized System of Preferences and the Miscellaneous Tariff Bill (and sold such policies by – rightly – emphasizing their benefits to U.S. businesses and consumers). These policies would resonate with policymakers on the right and left, particularly in this era of increasing bipartisan disdain for corporate welfare. They would be consistent both with conservatives’ principled opposition to higher taxes and big government interventionism, and with liberals’ opposition to regressive taxation.
Furthermore, the unilateral elimination of tariffs would not lead to a flood of “unfair” imports that destroy U.S. industry because we already have trade remedy laws designed to address such situations and, due to years of domestic industry lobbying, are extremely biased towards protection. (Not to mention the fact that the vast majority of imports are already “fairly traded.”)
Speaking of which, the United States also should pursue fundamental reforms of its trade remedy laws to ensure that they actually address unfair and injurious imports (rather than domestic lobbying) and take into account the broader public interest – including U.S. consumer concerns. Our government should be ever vigilant of the fact that American consumers, not foreign exporters or governments, pay U.S. “unfair” trade duties, and these measures should therefore be a last resort.
Other regulatory reforms also are necessary, such as the elimination of most U.S. subsidy programs and various forms of “regulatory protectionism,” such as the Lacey Act and Dodd-Frank rules on “conflict minerals,” all of which thwart competition, raise prices and distort domestic and global markets.
Finally, the United States should complement these important changes by coupling them with “American competitiveness agenda” in order to give U.S. workers and companies what they really need to compete in today’s global economy: lower individual and corporate taxes in order to reflect new global norms, limits on lawfare and professional/occupational licensing, energy deregulation, etc. Such changes would boost economic growth, eliminate most domestic demands for protection from low-cost foreign competition, and, combined with the aforementioned tariff liberalization, boost U.S. exports without the need for slow and messy reciprocal trade negotiations. (Remaining trade barriers could be addressed via more aggressive litigation of existing rights and obligations under WTO rules and a “name and shame” approach to the most egregious transgressors.)

The global economy is advancing at a breakneck pace, but U.S. trade policy is stuck in neutral. Our elected leaders ignore basic facts and economics and pursue negotiations that not only benefit a well-connected cabal of businesses and lobbyists at the expense of U.S. consumers, but also undermine long-term public support for free trade. This archaic, immoral approach has produced diminishing returns in recent years and has called into question almost 70 years of U.S. leadership in the global economy. Meanwhile, other countries press ahead with agendas that better serve their citizens and reflect the realities of modern global supply chains, multinational investment and other key aspects of the 21st century economy.

It’s time America did the same.