PC4D: Dirty Foreign Cheaters and Deja Vu All Over Again

As I noted yesterday, the latest in my new blogseries (fake word!) "Protectionist Campaigning for Dummies" involves Senate legislation (S. 3080) sponsored by Sens. Arlen Specter (RD-PA), Bob Casey (D-PA) and Sherrod Brown (D-OH) that would allow domestic firms involved in US trade remedies investigations of directly competitive foreign imports to go to US courts instead of the US International Trade Commission (ITC) for a determination of whether such imports "injure" the domestic industry at issue.  As I briefly explained, under US law and WTO rules, "injury" must be found before the United States can impose remedial tariffs on imports in order to protect domestic industries.

I hoped to discuss the actual legislation tonight, but the full text of the bill still isn't available (ed. note: the bill was published on 3/12).  Thus, for now I'm just going to rebut the blatant misrepresentations in the Senators' joint press release and Sen. Specter's floor statement introducing the legislation (the "Unfair Foreign Competition Act of 2010").  And I have a special - almost surreal - surprise at the end of this entry, so be sure to read all the way through.  Here's the key text of the press release:

“Job creation and job retention in this country depend, in large part, on our ability to enforce existing trade laws,” Senator Specter said. “This legislation would give an injured industry the opportunity to seek reliable enforcement in federal court so that we can stop anticompetitive, predatory trade practices which steal jobs from our workers, profits from our companies, and growth from our economy.”

“Unfair trade practices have shipped Pennsylvania jobs oversees and increased our trade deficit," said Senator Casey. “One of the best job creations strategies is to make foreign governments play by the rules and create a level playing field for American workers.”

Senator Brown said: “If we’re going to create manufacturing jobs, we need to start enforcing trade law. American manufacturers can compete with anyone – but they need a level playing field. This bill would prevent a flood of unfairly-subsidized imports from shuttering our factories.”...

The legislation comes as China continues to engage in trade and market-distorting practices in violation of WTO rules and U.S. laws. By allowing countries like China to ignore international trade rules, the U.S. has lost countless manufacturing jobs and has a skyrocketing trade deficit. The latest trade numbers indicate that imports from China have exceeded U.S. exports by a staggering $208.6 billion.

Sen. Specter's floor statement echoes some of these assertions and adds a few others.  (Again, please note that I'll deal with the "injury" issues and the legislation's actual "substance" later and for now am only focusing on Specter's other misstatements):

The latest trade numbers demonstrate that the U.S. trade deficit with China in November 2009 was $20.2 billion. Over the years, imports from China have exceeded our imports by a staggering $208.6 billion. This is not evidence that American manufacturers cannot produce goods efficiently or compete with foreign markets; rather, it is evidence of unlawful behavior on the part of China. Such behavior is tantamount to international banditry, and it must not be tolerated....

The enforcement of trade laws should not be a partisan issue. To those who decry our enforcement mechanisms as unabashedly protectionist, let me be clear. I believe in free trade. International trade and open markets are crucial to the economic prosperity of this country. But the essence of free trade is selling goods at a price equal to the cost of production and a reasonable profit. When one country engages in dumping or subsidization at the expense of other countries, it is the antithesis of free trade....

China's succession to the WTO accelerated a "race to the bottom" in wages and environmental quality.

Given these factors, in addition to China's mixed record on providing market access to the United States and its failure to provide protection of U.S. intellectual property rights, I urge that the Congress reexamine our trade agreement the United States signed with China and, if necessary, seek to withdraw permanent normal trade relations status from China. Such a withdrawal would be a serious measure, but we must be willing to demonstrate that we are serious about holding China to its international commitments.

When the United States granted most-favored-nation status to China in 2000, we lost our ability to demand that China play by the rules. We may have to regain this leverage if we are to maintain an equitable trading relationship with China and keep our domestic industry strong.

As President Obama recently noted in his remarks at the Senate Democratic Conference, the United States is home to some of the most innovative, skilled, and efficient workers in the world. But advances in efficiency and innovation by our producers cannot make up for the unfair advantage held by countries that engage in illegal trade practices. Our industries can compete if the playing field is level, but if foreign exporters are not held accountable, and can freely undercut American producers with dumped goods and government subsidies, this country's economic future will be at risk. We must take a stand and we must do it now.

Very scary!   Well, not if you know the facts and recognize that the Senators here are just employing several of the same protectionist myths and rhetorical tricks that I've already gone over.  They're also adding a few new ones that I've covered elsewhere, so I'll quickly dispense of the old ones and devote more time to debunking the new ones.  Now let's get started.

Recycled Myth #1: America's manufacturing sector is disappearing.  Umm, totally untrue, Sen. Brown.  Indeed, US manufacturing was setting all sorts of performance records before the recession, and is leading the economy out of recession now.  Oh, and American industrial output is still about 2.5 times larger than China's output (by value).  So much for those "shuttered factories," huh? 

Recycled Myth #2: Free trade has destroyed US manufacturing jobs.  As we already know, this myth a time-honored classic and is totally and utterly false - manufacturing jobs have decreased in the United States, in most other developed countries (several with trade surpluses) and in China because of productivity gains and changing consumer tastes, not free trade.  And as I noted last week, US manufacturing jobs have been declining in total since 1979 and as a share of GDP since the 1950s - long before trade was little more than a rounding error as a part of the US economy.

New (Sorta) Myth #1: The US trade deficit is a sign of economic weakness.  This myth is partially new because I only discussed it in passing last week.  However, I've certainly dismantled it in previous blog entries.  As I stated last week, "[R]ecent government statistics show that 2009 witnessed a very significant contraction in US imports, total US trade (exports and imports), and the US trade deficit.  And do you know what else characterized 2009?  Cripplingly high unemployment!"  In fact, there's a strong, positive correlation between the trade deficit and the US economy - as the US economy grows, so does the trade deficit, and as I just noted above, as the US economy shrinks (i.e., in recessions), the trade deficit contracts along with it.  Why?  Well, as Cato's Dan Griswold noted in a recent Free Trade Bulletin, rising imports are not a drag on growth but in fact usually signal rising demand in the domestic economy, just as falling imports are a reliable sign of slumping demand.  And if you needed any more data to back up that statement, here's Dan Ikenson's and my 2009 Cato Institute paper:

Between 1983 and 2007, the annual U.S. trade deficit increased from $67.1 billion to around $819.4 billion— or by nearly six-fold in real terms.  During that same period real GDP grew at an average annual rate of 3.2 percent and employers added an average of 1.8 million net new jobs to payrolls every year.  The unemployment rate also declined over the period: the average rate in the 1980s was 7.2 percent; in the 1990s it was 5.7 percent; and, between 2000 and 2007 it averaged 5.0 percent.

I'd say that ends that debate, wouldn't you?  Nevertheless, Ikenson and I also discuss on pp. 20-22 of that same paper how it's even dumber to point to a bilateral trade deficit with China as a harbinger of economic doom (as the Senators do above).  First of all, such accounting is completely nonsensical in this era of global supply chains where Chinese exports contain only 30%-50% value-add.  Just consider the iPod: it's designed, marketed and sold in the US; its parts are made all over the world (including Japan, Taiwan, Korea and some in the US); it's assembled in China; and then it's shipped to the United States (as a $149 product from China).  Looking at the US-China trade deficit alone, you'd think that the US was "losing at iPods" by $149 per unit.  Yet because Apple sells the iPod for $299, its American designers, engineers, marketers, executives and shareholders reap the majority of the iPod's profits, not China.  As such, that "iPod trade deficit" is totally meaningless.  Second, the US-China trade deficit is rendered even more meaningless by the fact that imports from East Asia have remained remarkably steady over the last 15 years or so, and China's increasing share of US imports came at the expense of other Asian countries, not US manufacturers.

So the next time a politician tries to use the trade deficit as a reason to support his legislation, just stop listening.

(Note also that the Senators' discussion of the trade deficit uses the classic "causation-correlation" rhetorical trick - claiming that simply because the US trade deficit increased while US manufacturing jobs declined, the deficit actually caused those job losses.  As I've clearly demonstrated above, that's complete economic fiction.)

New Myth #2: We're losing at trade because our trading partners cheat with impunity and because we're not enforcing our trade laws.  The Senators really try to sell us on the idea that China's a big cheater and we need "tougher laws" to help reverse (a) the "bad" trade deficit; and (b) the "decline" of US manufacturing.  We've already gone over how (a) and (b) are dead wrong, but the underlying issue - cheating and enforcement - is also completely false.  First, this myth clearly implies that there are no "enforcement mechanisms" in place right now, despite the fact that we have domestic "unfair trade" laws (antidumping, countervailing duty, safeguards, etc.), WTO dispute settlement procedures, and even bilateral dispute mechanisms in all of our FTAs.  Second, it implies that we're currently not enforcing the trade rules that are in place, when in reality the United States has been a complainant in almost 100 WTO cases in the trade body's 15 year history, and there are literally hundreds of duties in force against "unfairly traded" foreign imports as a result of our domestic trade laws.  That's a lot of "enforcement."

Furthermore, the idea that our trading partners are all cheaters, and that the only reason we have trade deficits is because China and others are illegally dumping/subsidizing their imports, is just poppycock.  While it's undeniable that some countries are engaging in illegal behavior, the reality is that such chicanery affects a tiny fraction of overall global tradeflows.  For example, in our 2009 paper, Dan Ikenson and I calculated that the combined trade volumes affected by the current US anti-subsidy cases against China represented less than one percent of the entire US-China trade deficit.  For the sake of argument, let's assume that the Senators' new legislation would triple the number of "illegal" Chinese imports subject to US trade laws - that would only mean that less than three percent of the bilateral trade deficit is made up of unfairly traded products, and that the remaining 97% of those imports are fairly traded!  So while "China cheats" makes for a great soundbite, it certainly isn't the driving force behind the US-China trade relationship.  The same holds true for other markets - cheating simply doesn't define or drive global trade.

(It should also be noted that in talking about enforcement on the Senate floor, Senator Specter used the classic rhetorical trick "I'm a free trader, but..."  Sure you are, Senator, surrrrrre you are.)

New Myth #3: free trade leads to a "race to the bottom." The final protectionist myth - glancingly referenced in Specter's floor speech - is the oft-referenced idea that free trade creates a desperate race to the bottom in terms of wages and environmental standards.  Yet as Ikenson and I note:

[I]t is incomplete and misleading to speak of the “advantages” held by foreign-based producers in the realm of international competition without speaking of the advantages held by American-based producers. Sure, lower wages abroad can serve as an incentive to off-shore manufacturing or to outsource services functions, but wages are neither the only—nor the most important—consideration in these production/investment decisions. If wage differentials were determinative, there would be very little manufacturing or services activities in the United States. It would all be gone.

Instead, we see large and increasing foreign direct investment flowing into the U.S. industrial base year after year. Why is ThyssenKrupp building a $3.7 billion green field steel production facility in Alabama? Why do foreign nameplate automakers continue to invest in U.S. manufacturing facilities?  Why do the 5.3 million Americans employed by U.S. subsidiaries of foreign-owned companies earn on average 32 percent higher compensation than workers at U.S.-owned companies?  Because there is no race to the bottom in pursuit of lower wages and lax standards, as some suggest. Rather, there is a race to the top—for skilled workers, for access to production facilities closer to markets, for investment in countries where the rule of law is clear and abided, where there is greater predictability to the business climate, where tax rates are more favorable, where the specter of asset expropriation is negligible, where physical and administrative infrastructure is in good shape, and so on.  Labor costs are but one of a multitude of considerations driving investment decisions. With respect to virtually all of the other factors, the United States fares extremely well relative to most other countries.

Indeed, a recent study by McKinsey & Company found that in 2008 rising oil prices, the declining value of the U.S. dollar, and logistics concerns, among others, could cause many investors to rethink off-shoring strategies and even to consider “re-shoring” manufacturing facilities in the United States.  The study makes clear that sourcing decisions require a complex calculation in which labor costs are one of many factors.

That McKinsey study proved prescient.  For example, according to a recent article in the Detroit News, several Michigan firms have "insourced" jobs that were formerly sent offshore.  So much for that giant sucking sound, huh?   And just in case you need any more evidence about the "race to the bottom myth," just read Jagdish Bhagwati's awesome book In Defense of Globalization.  Dan Griswold summarizes Bhagwati's findings on trade and the environment:

In two meaty chapters, Bhagwati chops the legs out of the argument — heard frequently in the Democratic primary debates — that the U.S. must impose labor and environmental standards on poor countries in any future trade agreements. He points to evidence establishing that U.S. multinationals do not seek out less developed countries with low standards; they locate most of their affiliates in other high-wage, high-standard countries, and when they do invest in poor countries, they invariably pay wages and maintain standards far above those prevailing in the local economy. The result is not a "race to the bottom," but a race to the top. An inescapable implication is that if the Democrats succeed in withholding U.S. trade and investment from poor countries because they are poor, it will mean slower growth in those countries: fewer girls studying in school, and more working in farms, factories, and brothels.

'Nuff said.

Finally tonight, I'd like to discuss a, umm, familiar-sounding comment that I received on last night's blog post about the new Specter/Brown/Casey legislation.  As you'll recall, the primary impetus for my original "Protectionist Campaigning for Dummies" series on Congressman Gene Taylor's anti-NAFTA legislation was an anonymous and provocative comment from someone named "Researcher" that was chock-full of protectionist myths.  When I discovered (via my visitor log) that "Researcher" worked in the US House of Representatives, he revealed himself in a subsequent blog comment to be Rep. Taylor's policy director (Brian Martin), and his "big reveal" utilized a lot of the rhetorical tricks that protectionists often use to debate free traders.  I then proceeded to dismantle those tricks and assumed that that would be the end of my interactions with anonymous congressional staffers.

Boy, was I wrong.

The comment I received this morning on the new Senate "injury" legislation - from a "john" - was similarly substanceless/vitriolic and, to my extreme surprise, came from:

IP Address: 156.33.70.181; Location:  Washington, D.C.; ISP:  United States Senate.

You cannot make this stuff up.  Now, I have no proof that the comment came from a staffer in the office of one of the Senators who sponsored S. 3080, but "john" received a direct link to last night's post from an email (a Google news alert, perhaps?), and both the comment's timing, tone and circumstances sure seem to match those of the esteemed "Researcher" from last week (who, again, turned out to work for the sponsor of the legislation I had criticized).  And just like last week, john's comment is chock-full of rhetorical tricks and protectionist myths, so without further adieu, here it is, typos and all:

Do you have a rebuttal? Have you seen the trade deficit? Have you see the job losses? Do you recognize the importance of manufacturing to national security and middle class creation at all? The idea of county might be a quaint concept to you but it is the only thing that can protect us from the disaster capitalism you preach.

Well, john.  Here's my rebuttal, line-by line.

john: Have you seen the trade deficit? 
Scott:  Yes, I have.  And, as noted above ("New Protectionist Myth #1"), I've also seen the high economic growth and low unemployment accompanying the trade deficit.  You, john, obviously have not.

john: Have you see {sic} the job losses?
Scott: Yes, I have.  And, as noted above ("Recycled Protectionist Myth #2"), I've also seen that US manufacturing jobs have been declining for decades - in the US, in Germany, in China, and elsewhere - and that productivity, technology and consumer preferences are the primary causes of these job losses, not trade.  I also see that you are trying to employ the "correlation-causation" rhetorical trick by trying to claim that the rising trade deficit caused US manufacturing job losses.  Of course, the deficit declined last year, and we lost millions of American jobs, so your trick is actually pretty lame, john.

(As an aside, john's heavy-handed use of such misleading rhetoric definitely qualifies him for designation as an "Unfrozen Caveman Politician":

Awesome.)

john: Do you recognize the importance of manufacturing to national security and middle class creation at all? 
Scott: But, john, as I note above ("Recycled Protectionist Myth #1"), US manufacturing (i) is on the upswing and leading us out of recovery, (ii) was just dominating prior to the current recession, and (iii) remains over two-and-a-half times bigger than its counterpart in China.  And as for trade and "national security," I covered that protectionist myth last week.  In short: it's completely bogus, john.

john: The idea of county {sic, I think} might be a quaint concept to you but it is the only thing that can protect us from the disaster capitalism you preach.
Scott: And what protectionist comment would be complete without the ad hominem attack?  Of course, if john had just taken a moment to read this blog, he would have seen that my "disaster capitalism" isn't based on name-calling or baseless assertions about the "concept of country."  It's based on tons of hard data and historical evidence which clearly demonstrate that the pernicious, political protectionism advocated by john and his Senate boss (or neighbors) would be as economically harmful as it is immoral and misleading.

So thanks, john, for your enlightening, if typo-ridden, comments.  And since I was kind enough to respond to your comment, maybe you could answer one quick question for me:

Given how closely your commenting behavior tracks that of your predecessor in the House (Brian "Researcher" Martin), just how common is is for congressional staffers, on the taxpayer's dime, to comment anonymously on blogs critical of their bosses' legislation?  And is there a protectionist staffer commenting handbook or something?  Because it sure seems like it.

Final note to the general audience: is it just me, or do the House and Senate really need to talk more?  I mean, I thought that the stories about cross-chamber disconnect were just conventional wisdom, but sheesh!