Tuesday, February 2, 2010

Increasing Exports: Right Way, Wrong Way

As I've already discussed, the President's new push to dramatically increase American exports has two main prongs: (i) export promotion efforts; and (ii) trade enforcement.

On the latter, it appears that the White House's 2011 budget allocates new funds for trade compliance and overseas enforcement efforts.  Unfortunately, I've already listed several problems with the idea that "enforcement efforts" can significantly increase exports, and Cato's Dan Ikenson really lays the smack down today in a new blog entry:
According to what metric are we failing to enforce trade agreements? The number of WTO complaints lodged? Well, the United States has been complainant in 93 out of the 403 official disputes registered with the WTO over its 15-year history, making it the biggest user of the dispute settlement system. (The European Communities comes in second with 81 cases as complainant.) On top of that, the United States was a third party to a complaint on 73 occasions, which means that 42 percent of all WTO dispute settlement activity has been directed toward enforcement concerns of the United States, which is just one out of 153 members.

Maybe the enforcement metric should be the number of trade remedies measures imposed? Well, over the years the United States has been the single largest user of the antidumping and countervailing duty laws. More than any other country, the United States has restricted imports that were determined (according to a processes that can hardly be described as objective) to be “dumped” by foreign companies or subsidized by foreign governments. As of 2009, there are 325 active antidumping and countervailing duty measures in place in the United States, which trails only India’s 386 active measures.

Throughout 2009, a new antidumping or countervailing duty petition was filed in the United States on average once every 10 days. That means that throughout 2010, as the authorities issue final determinations in those cases every few weeks, the world will be reminded of America’s fetish for imposing trade barriers, as the president (pursuing his “National Export Initiative”) goes on imploring other countries to open their markets to our goods....

Sure, the USTR can bring even more cases to try to force greater compliance through the WTO or through our bilateral agreements. But rest assured that the slam dunk cases have already been filed or simply resolved informally through diplomatic channels. Any other potential cases need study from the lawyers at USTR because the presumed violations that our politicians frequently and carelessly imply are not necessarily violations when considered in the context of the actual rules. Of course, there’s also the embarrassing hypocrisy of continuing to bring cases before the WTO dispute settlement system when the United States refuses to comply with the findings of that body on several different matters now. And let’s not forget the history of U.S. intransigence toward the NAFTA dispute settlement system with Canada over lumber and Mexico over trucks. Enforcement, like trade, is a two-way street.

And sure, more antidumping and countervailing duty petitions can be filed and cases initiated, but that is really the prerogative of industry, not the administration or Congress. Industry brings cases when the evidence can support findings of ”unfair trade” and domestic injury. The process is on statutory auto-pilot and requires nothing further from the Congress or president. Thus, assertions by industry and members of Congress about a lack of enforcement in the trade remedies area are simply attempts to drum up support for making the laws even more restrictive. It has nothing to do with a lack of enforcement of the current rules. They simply want to change the rules.
Well, I think we can finally put the enforcement debate to bed, wouldn't you say?  That said, Ikenson's and my analyses leave untouched the second prong of the President's export plan - export promotion efforts.  On this issue, the White House's 2011 budget provides a 20% increase in the budget of the Department of Commerce's International Trade Administration for export promotion efforts (through the Foreign Commercial Service), as well as millions of dollars for similar efforts through the Foreign Agricultural Service and the Ex-Im Bank.  The White House claims that the ITA funding increase alone will expand US exports by $4.4 billion in 2011, but is a simple policy of throwing more money at ITA and other export promotion agencies really a realistic plan to significantly increase American exports?

Well, the stats sure appear to say "no."   As the table below indicates (my calculations), there's no correlation between US exports and funding for the ITA (in $1000).

Moreover, a detailed review by the Government Accounting Office of US export promotion efforts found serious problems with the current system, yet lack of funding was not one of them:
Specifically, GAO has identified elements of U.S. export promotion activities that warrant attention: (1) coordination; (2) targeted services for small and medium enterprises and other priorities; (3) performance monitoring; and (4) partnerships and methodologies for setting user fees. The expert studies GAO reviewed echo the importance of each of these elements with regard to the activities of foreign export promotion agencies and may be informative for policy discussions about U.S. export promotion activities.
Another GAO Report found other big flaws in the ability of the ITA's Commercial Service to do basic things such as collecting market data and communicating with US businesses.  In short, there's nothing on record which supports the idea that increased funding of US export promotion programs will actually increase exports.

So what does drive US exports?  Well, according to Ikenson, imports and economic growth:
[I]mport growth is much more closely correlated with export growth than is heightened enforcement.  The nearby chart confirms the extremely tight, positive relationship between export and imports, both of which track similarly closely to economic growth.
U.S. producers (who happen also to be our exporters) account for more than half of all U.S. import value.  Without imports of raw materials, components, and other intermediate goods, the cost of production in the United States would be much higher, and export prices less competitive.  If the president wants to promote exports, he must welcome, and not hinder, imports.
Indeed.  Of course, there are other things well-grounded in economic reality that the United States government could do to encourage exports, and none of them involve throwing good money after bad, pursuing irrational "enforcement efforts," or illegally subsidizing US exports.  I've already discussed pending US FTAs with Colombia, Panama and South Korea, and the WTO's Doha Round, but domestic fiscal policy could also play a big role.  For example, the bold alternative budget of Congressman Paul Ryan (R-WI), ranking Member of the House Budget Committee, seeks to increase exports and enhance America's overall global competitiveness by dramatically reforming the United States' absurd corportate tax policies.  Specifically, Ryan's plan would replace America's insane 39% corporate income tax (second highest in the world) with a flat 8.5% "business consumption tax" (BCT) that would encourage investment in US businesses, benefit US exports and spur economic growth:
To level the playing field and eliminate the competitive disadvantage on American businesses and American-made products, the BCT is not imposed on U.S. exports when they leave the U.S. It is instead imposed on foreign imports when they enter the U.S. Thus, the BCT is “border adjustable.” Currently, the U.S. corporate income tax is not border adjustable (i.e., the tax cannot be removed from exports or imposed on imports). In contrast, foreign competitors in Europe have the advantage of removing their own taxes on their exports. The World Trade Organization [WTO] established the requirements for a border adjustable tax system. Direct taxes, such as the corporate income tax, are not border adjustable, but indirect taxes, such as the BCT, are border adjustable....

An uncompetitive business tax climate has forced many U.S. companies to relocate and send jobs abroad, often through mergers and acquisitions with foreign companies. This tax plan reverses the trend.

With an enhanced investment climate, international businesses, particularly capital-intensive industries such as manufacturing, will have a greater incentive to invest in the U.S. and expand production here, which creates jobs.

The United States’ relatively high statutory corporate income tax has led to multinational corporations shifting their profits to lower-tax countries, essentially shifting the tax base overseas. Many U.S. businesses also delay the repatriation of earnings from their foreign affiliates. This plan brings these earnings and profits back to the U.S.

Greater investment in the U.S. will also help to speed the pace of technological innovation in the U.S. economy, a key factor in raising productivity.

There is a clear link between investment and capital formation on the one hand, and productivity and rising living standards on the other. Between 1973 and 1995, for instance, productivity grew at just under 1.5 percent, implying that living standards in the U.S. would double every 50 years. Since 1995, productivity, spurred by technological innovation and investment, has increased at a 3.0-percent rate. This rate implies it will take only 25 years for living standards to double, half as long as under a slower rate of productivity. A business climate that fosters investment, therefore, is one of the keys to future U.S. prosperity.

The way the U.S. taxes international business operations is important because roughly two-thirds of U.S. export trade (a growing share of the U.S. economy) is facilitated by U.S. multinational companies and their foreign affiliates.
Ryan's BCT is essentially a business VAT - applied equally on all domestic consumption (imports and domestic production alike) - and has definite advantages for investment and exports (as long as it's not applied on top of a corporate income tax, of course!).  It's certainly not perfect, but it's at least a novel plan that has some foundation in economic reality.

As opposed to the President's tired and incoherent plan of increased trade enforcement and export promotion funding.

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