Monday, August 29, 2011

Guitars, Catfish and the Rise of Regulatory Protectionism in America

Ever since the advent of the WTO, and the GATT before it, governments' ability to use tariffs, quotas and other straightforward forms of trade protectionism has been limited and, in many cases, subject to retaliation by other WTO Members.  Indeed, such limitations on trade protectionism were the goal of the WTO's "channel and bind" strategy - "channel" all trade barriers into easily quantifiable tariffs, and "bind" them at agreed maximum levels.  However, as I've mentioned here before, these basic WTO disciplines also are subject to broad "exceptions" (under GATT Article XX and XXI) for things like national security, public health, safety and the environment.  Thus, regulatory measures can often (but not always) pass WTO muster, even though they restrict international trade.  These exceptions are widely recognized as necessary to protect WTO Members' sovereignty, and I think that they do serve that important purpose in most cases.  On the other hand, these exceptions also create an extremely ripe opportunity for WTO Members to use health, safety, environmental regulations as a backdoor means of protectionism.

The most high-profile example of the problems created by regulatory protectionism is probably the recent attempts by some US and EU government officials to impose carbon tariffs on imports from countries that haven't adopted sufficient economy-killing climate change mitigation measures.  Carbon tariffs, much like global warming itself, appear to be dormant right now, but that hasn't stopped the United States from pursuing other climate change-related regulatory measures and imposing many other kinds of regulatory protectionism over the last few years.

The most recent and publicized instance of this troubling trend came in last week's anger-inducing news that the federal government raided Gibson Guitars due to alleged violations of the Lacey Act, recent expansions of which prohibit trade in certain protected woods and create an extremely onerous "strict liability" (i.e., you're guilty even if you didn't intend to break the law) compliance standard:
Federal agents swooped in on Gibson Guitar Wednesday, raiding factories and offices in Memphis and Nashville, seizing several pallets of wood, electronic files and guitars. The Feds are keeping mum, but in a statement yesterday Gibson's chairman and CEO, Henry Juszkiewicz, defended his company's manufacturing policies, accusing the Justice Department of bullying the company. "The wood the government seized Wednesday is from a Forest Stewardship Council certified supplier," he said, suggesting the Feds are using the aggressive enforcement of overly broad laws to make the company cry uncle.

It isn't the first time that agents of the Fish and Wildlife Service have come knocking at the storied maker of such iconic instruments as the Les Paul electric guitar, the J-160E acoustic-electric John Lennon played, and essential jazz-boxes such as Charlie Christian's ES-150. In 2009 the Feds seized several guitars and pallets of wood from a Gibson factory, and both sides have been wrangling over the goods in a case with the delightful name "United States of America v. Ebony Wood in Various Forms."

The question in the first raid seemed to be whether Gibson had been buying illegally harvested hardwoods from protected forests, such as the Madagascar ebony that makes for such lovely fretboards. And if Gibson did knowingly import illegally harvested ebony from Madagascar, that wouldn't be a negligible offense. Peter Lowry, ebony and rosewood expert at the Missouri Botanical Garden, calls the Madagascar wood trade the "equivalent of Africa's blood diamonds." But with the new raid, the government seems to be questioning whether some wood sourced from India met every regulatory jot and tittle.

It isn't just Gibson that is sweating. Musicians who play vintage guitars and other instruments made of environmentally protected materials are worried the authorities may be coming for them next....

The tangled intersection of international laws is enforced through a thicket of paperwork. Recent revisions to 1900's Lacey Act require that anyone crossing the U.S. border declare every bit of flora or fauna being brought into the country. One is under "strict liability" to fill out the paperwork—and without any mistakes.
Conservatives and libertarians are rightly incensed by this kind of regulatory adventurism and its effects on US businesses, but what the article above leaves out is that, as noted in a recent Heritage Foundation study, the Lacey Act's legal requirements and strict liability standard are so severe that the law - intentionally or not - has crippled trade in both illegally-harvested and legally-harvested wood products.  And this protectionism has occurred mainly to the detriment of small importers and developing country exporters who simply can't afford to jump through all of these hoops (or risk even trying to do so).

Unfortunately, the Lacey Act is not alone.  For example, the WSJ reported last month that a little-known provision in the Dodd-Frank financial "reform" law, which bans trade in "conflict minerals," is causing harmful unintended consequences for poor African miners engaging in legal commercial behavior:
The world is in the midst of a commodity boom, but in a mineral-rich and desperately poor corner of Africa exports of tin, tantalum and tungsten have fallen by more than 70% since last summer. These are not the effects of war or natural disaster--although the region suffers from all of that and more--but rather of what local small-time miners are calling "Obama's embargo."

The African miners are basically right about the source of their troubles, though if they want to be more specific with the blame they might also call it the McDermott embargo, after the Democratic Congressman from Washington state. Jim McDermott is one of the architects of the Dodd

The goal of Section 1502 is to cut off money to those responsible for the fighting in the Democratic Republic of Congo, and by those lights the sales collapse shows that it's working. A spokesman for Mr. McDermott tells us that if the trend persists, they hope to see a similar drop in the rate of carnage. Over the past dozen years, more than five million people have been killed and more than 200,000 women raped in the fighting between rebel groups and government forces.

Section 1502 requires companies that use these minerals--they have applications in everything from electronic gadgets to medical devices--to disclose whether they, or anyone along their supply chains, source their minerals from Congo or any of the countries at its borders. If so, their SEC reports will have to detail the steps they're taking to not "directly or indirectly finance or benefit armed groups" in the region. If companies cannot demonstrate such steps, they will have to declare on their websites that their products may be funding African atrocities.

Behind the scenes, companies are working to soften the rules. Some industry groups are also putting in place systems that will let them continue to source from central Africa while telling the SEC their supply chains are "conflict free." But the logistics of guaranteeing this on a large-scale are daunting, and many suppliers find it easier to leave central Africa entirely. A case in point is the procurement policy of the H.C. Starck group, which affirms that it rejects all raw materials from the region, "even if we are offered material with allegedly official certifications from other state authorities."

Shifting all sourcing to places such as Canada or Australia may drive up industry and consumer costs somewhat. But as Verizon points out in a letter to the SEC, "For the foreseeable future, it is going to be much easier to demonstrate that the minerals are from somewhere other than the DRC Zone, than to prove that minerals mined in the DRC Zone are responsibly sourced."

The highest price is being paid in central Africa, where millions of people, and 16% of the Congo's population, are dependent on small-time digging. By all accounts most of the money from central African mining goes to these artisanal miners. Soldiers and rebels do pocket some of the proceeds, and that's a depressing reality.

But mineral operations also provide the local population with centers of commerce, with cash to pay for supplies and workers and easily traded goods. As money from the mines becomes increasingly scarce, Congo's warlords have moved on to targeting the banana trade. Perhaps conflict-free bananas will be the next object of activist enthusiasm.

Meanwhile, the butchery continues, with recent reports of government troops raping more than 100 women and children over a three-day spree in the Congo's South Kivu region. If all the money from minerals dries up, these killers will not shy from even more atrocious means to fund their ambitions. As for Western policy makers, Section 1502 is a useful lesson in how well-meaning attempts to "do something" in Africa unintentionally harm the innocent without touching the guilty.
So to recap: a little-know provision of a national financial reform law has caused imports of African minerals to collapse.  Meanwhile, this regulatory protectionism, and the carnage in Congo that it was intended to prevent, continues.

Your tax dollars at work, folks.  Sigh.

But wait, there's more: the Journal reported in February that the USDA is considering reclassifying Vietnamese "catfish" in order to subject it to far more onerous importation and inspection requirements.  And, gee, you'll never guess what would happen if USDA's proposed rule takes effect:
The U.S. Department of Agriculture is seeking public comment on its proposal to classify the pangasius as a "catfish." A lot rides on that name. The 2008 farm bill specifies new safety inspection on imported catfish so onerous it would amount to a ban for at least several years while foreign fishermen struggle to comply. Pangasius is the target because it has a similar taste and texture to American catfish but is cheaper—the main reason American catfish farmers have tried for years to ban the imports.

The problem is that the pangasius is an entirely different species of fish. In an earlier bout of protectionism, Congress even passed a law making it illegal to call pangasius "catfish" for marketing purposes. Since that hasn't deterred American consumers from buying pangasius, Washington is willing to call the Vietnamese fish a catfish again if that makes it easier to ban.

This would be funny if it weren't so costly and probably illegal. On health-and-safety grounds, both the 2008 law and USDA's moves to enforce it make little sense. Vietnamese pangasius, like all fish imports, already is regulated by the Food and Drug Administration. There have been no reported safety problems with the Vietnamese imports. In contrast, USDA has no experience regulating fish despite its history overseeing meat, and catfish will be the only fish species under its regulatory purview....

As for the illegality, stricter regulation is unlikely to pass muster at the World Trade Organization. Trade expert James Bacchus, in an opinion commissioned by fish importers, argues that the U.S. would likely lose if Vietnam sued precisely because FDA regulation already is effective. Trade judges would conclude the only reason to change the regulation was protectionism, and they'd be right. A former Democratic Representative from Florida, Mr. Bacchus was the chief judge of the WTO's appellate panel for eight years.
USDA has yet to announce its intentions with respect to the final rule on catfish pangasius, but it's clear that the proposed rule would amount to an effective ban on a perfectly safe, fairly-traded product that Americans really want.

And so much for Obama administration efforts to encourage healthier American eating habits, eh?

Another law to watch is the Food Safety Modernization Act.  The Act also imposes  new verification and other requirements for US importers and foreign exporters of all types of foods.  The FDA has yet to promulgate the new regulations that will implement the new trade provisions, so the law's overall impact on food imports and domestic food prices remains to be seen.  However, a recent study by Texas A&M University estimates that the programs will be extremely costly:
FDA will likely pursue a strategy of passing as much costs as they can/are allowed to the domestic private sector. Importers will have incentives to pass the costs of compliance verification on to their sources of supply. Foreign governments interested in increasing their country’s exports could end up bearing the costs of developing new export-oriented programs....

The FSML will place substantial costs on the private sector. These costs will have substantial structural impacts. They will also raise food prices. These declaratory conclusions are based on economic logic/theory backed by analyses of the impacts of the implementation of virtually identical food policies and programs by FSIS/USDA, for similar programs implemented by the LGMA, and by research indicating the impacts of food safety import regulations.
So the law will inevitably lead to higher food prices for American families and higher compliance costs for developing country farmers - a classic protectionism exacta.  (Meanwhile, the law's also raising serious concerns about domestic enforcement.)

Now, although I'm clearly not a fan of intensive regulatory adventurism (particularly in this economy), I don't mean to question the trade intentions of these particular regulations - well, not all of them, at least.  But it's undeniable that they are creating real impediments to lawful trade and needlessly harming American businesses and consumers, as well as poor foreign producers and exporters.  And, of course, these onerous regulatory trade barriers appear to have increased rapidly during President Obama's time in office, so one must necessarily ask the obvious question:

Is this all one big coincidence?

I honestly have no idea, and I also don't know whether these new regulatory measures, or any others out there, meet the requirements for one of the aforementioned WTO exceptions and thus are allowed under global trade rules.  But I'm quite sure that, as regulatory protectionism proliferates in the United States, other nations are undoubtedly going to go through the WTO dispute settlement process to find out.

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