Unilateral Import Liberalization Is Helpful, Egalitarian and - Yes - Politically Possible

The Heritage Foundation's Bryan Riley has a great new study out today arguing in favor of the unilateral elimination of all - yes, all - US barriers to imports.  Here's the summary:

Congress routinely makes targeted, short-term tariff cuts through “miscellaneous tariff bills.” While conventional wisdom is that unilateral tariff cuts are politically impossible, these bills show that it is possible to reduce tariffs. Proponents of such tariff cuts argue that the cuts support U.S. jobs; critics argue that the economic value of miscellaneous cuts is modest, and that the process is open to abuse. While it is healthy to discuss ways to maximize the benefits provided by miscellaneous tariff bills, the United States would see the most economic benefit from across-the-board tariff reform. The best possible reform would be for the U.S. Congress to eliminate all remaining import tariffs and quotas.

After noting that the United States rates a dismal 38th place in Heritage's ranking of trade freedom (and would jump to first if if eliminated all barriers), Riley explains that import liberalization is one of the few things on which economists - left, right and center - can actually agree, with over 85% of them repeatedly favoring the policy in recent surveys.  The reasons for this are obvious:

Tariffs make Americans poorer by transferring dollars from the country’s most competitive industries to the industries that have the best political connections. 

Countries with low tariffs, such as New Zealand and Singapore, are more prosperous than countries with high, protective tariffs, such as India and Venezuela. The latest rankings of trade freedom around the world, developed by The Heritage Foundation and The Wall Street Journal in the 2013 Index of Economic Freedom, demonstrate how citizens of countries that embrace free trade have higher average incomes than citizens of countries that do not.

Riley then looks at several examples of countries - including Australia, Chile, China, New Zealand, Canada, and Mexico - unilaterally liberalizing import barriers to great economic success.  And while all of this historical and economic data are great, I think the following passage is my favorite because it really hits home just how obscenely immoral our current tariff/quota system really is, as it disproportionately punishes both poor countries and poor Americans:

Former WTO Director-General Mike Moore observed: “You know, the least-developed countries account for less than 0.5 percent of world trade, yet where they have areas of excellence, they’re not allowed to export to the United States or to Europe.” 

In the United States, the average tariff on products from developing countries is much higher than on products from developed countries. For example, imports from Bangladesh faced an average U.S. tariff of 15 percent in 2012, but imports from Belgium faced an average tariff of just 0.7 percent. The overall U.S. average tariff on products from the U.N.’s Least Developed Countries list in 2012 was 3.9 times higher than the average tariff on products from other countries. 

Imposing tariffs on imports from developing countries makes it more difficult for people in those countries to escape poverty, and keeps them dependent on U.S. aid dollars. In 2011, the U.S. government sent Bangladesh $218 million in economic aid, and collected $746 million in tariffs. If the U.S. government cut the 15 percent effective tariff on imports from Bangladesh, it could keep some aid dollars at home. 

In 2011, U.S. the government collected $28.6 billion in tariff revenue, and spent $31.7 billion on foreign economic aid.... 

Although some people argue that it is politically impossible to cut tariffs unilaterally in the United States, in fact most U.S. tariffs are already close to zero. The United States’ tariff problem stems from the country’s two-tier regime consisting of shoes, clothing, and related items on one tier, and everything else on the other. 

Tier One items including shoes and clothing account for less than 6 percent of total imports, but tariffs on these items account for 47 percent of U.S. tariff revenue.[28] As the liberal blog ThinkProgress observed, tariffs are highly regressive: “The kinds of goods where freer trade would mostly benefit the poor are exactly the kinds of goods where trade is least-free.” A study in the Journal of Diversity Management found that tariffs are higher for clothing purchased by low-income consumers, and also higher for women’s clothing than for men’s clothing....

So not only does our tariff/quota system hurt the US economy, but it also benefits rich, politically-connected US industries (like these guys) at the expense of developing countries and the most vulnerable American citizens.  Now if that isn't a good enough reason to reform the system, then I don't know what is.

Riley concludes by making several great recommendations for reform and by noting that import liberalization isn't nearly as radioactive as some politicians and political hacks claim because the United States government routinely passes import liberalization bills in the form of temporary, small scale programs like the Generalized System of Preferences and the Miscellaneous Tariff Bill.   The same economic and moral principles supporting these bills - eliminating cronyism and helping the economy, US consumers and less-developed countries - obviously would apply to broader liberalization measures (and, of course, to much greater effect).   Indeed, when Congress failed to reauthorize GSP in 2011, one champion of import liberalization got on his high horse and explained what's at stake:

The exclusion of the Generalized System of Preferences from the package means that this important program will lapse on December 31, hurting American consumers and businesses as well as workers and farmers in many of the world's poorer countries....

U.S. businesses and consumers benefit from the GSP program through cost savings on imports. Also, according to a 2005 U.S. Chamber of Commerce study, the program supports over 80,000 American jobs associated with moving GSP imports from the docks to farmers, manufacturers and ultimately to retail shelves. U.S. imports under GSP exceeded $20 billion in 2009 and are on pace to exceed $27 billion in 2010. GSP saved U.S. importers nearly $577 million in duties in 2009. The program was instituted on January 1, 1976, by the Trade Act of 1974. In addition to its benefits to American families, GSP is designed to promote economic growth in the developing world by providing preferential duty-free entry for about 4,800 products from 131 designated beneficiary countries and territories.

This is exactly right, and it echoes many of the findings in Riley's study.  So who, you might ask, is this great, economically-literate champion of free trade?

The typically mercantilist and import-skeptical Obama administration's USTR, that's who.

So with all of the economic benefits and moral arguments for import liberalization so clear, it kinda makes you wonder what's keeping President Obama from supporting a bigger, better, more permanent version of GSP, eh?

Tuesday Quick Hits

Happy belated early St. Patty's Day.  Here are some links to keep your lucky streak going:

• AEI's Phil Levy writes a great column about the likely economic aftershocks of the Japan tragedies caused by, among other things, global supply chains.  The WSJ follows (intentionally or not) Levy's lead with an interesting report on how Japan's problems should affect its exports to China (and thus Chinese exports of goods typically made from the imported Japanese inputs).

• Speaking of Levy, he provides a very good explanation of why China's Indigenous Innovation policy can't achieve China's long-term policy goals but should be a priority for the United States because of the significant near-term pain it'll cause American companies.

• The absurd, needless expiration of the US Generalized System of Preferences cost American manufacturers $54.4 million in January alone.  Awesome.

• Last week's BEA release of the US trade deficit stats elicited a typically awful write-up from the AP.  The forces of good appropriately correct the journalist responsible here, here, here and here. 

• The Heritage Foundation's Walter Lohman and Derek Scissors deftly analyze something that I noticed about a year ago: Australia's China policy is very, very sound.  And, as if on cue, the Aussies provide even more proof of this fact.

• I selfishly hate the relatively new starting date for Daylight Savings Time because it makes getting out of bed to go for a jog excruciatingly difficult, but now I have a more altruistic, economic reason to hate it.  Bonus.

• In reporting on the latest developments in the longstanding US-Canada softwood lumber dispute, the Economist provides another great lesson on the fleeting benefits and long-terms costs of protectionism. 

• The Washington Post confirms what we already knew: the White House, not USTR, drives American trade policy. 

• More excellent destruction of self-avowed protectionist Ian Fletcher's public "arguments" by Cafe Hayek's Don Boudreaux here, here, here and here.  To my knowledge, Fletcher has yet to respond directly to any of Boudreaux's killer critiques.

• And finally, this is absolutely hilarious (h/t Radley Balko).

Enjoy!

In the Corporate Tax Race, America's Pulling Up the Rear

Over the last year, I've frequently lamented the United States' increasingly absurd position on corporate taxes - maintaining one of the highest corporate tax rates in the world and routinely demonizing standard international business tax practices, while other countries (like Canada) are racing to eliminate tax burdens in order to enhance their domestic companies' global competitiveness.  Unfortunately, the last few weeks have produced a depressing cavalcade of similar news.

First, Sen. Carl Levin (D-MI) and Rep. Loyd Doggett (D-TX) introduced legislation to stop "tax haven" abuse by US multinational corporations:

The U.S. government loses $37 billion per year in tax revenues because multinational corporations stash money in overseas tax havens, Democratic Senator Carl Levin and a group of small businesses said in a report on Tuesday.

Levin, who for years has pushed for a tough law to fight tax evasion among corporations, has enlisted some small businesses to back his so-far unsuccessful proposal to close loopholes letting companies legally avoid taxes by keeping income abroad.

"There are too many small businesses now paying more than their fair share," Levin told reporters on a conference call. "It creates a very unfair competitive situation."

Levin wants to attach some of his proposals to help fund a bill that sets up a $30 billion fund for small business. Levin has tried to attach his initiative to other bills in the past without success....

Policy changes sought include a ban on transferring intellectual property abroad to evade taxes, and repeal of a rule letting companies pay no U.S. taxes when 80 percent of their revenue is earned overseas.

A couple days later the House Ways and Means Committee held a hearing on "transfer pricing" - the prices charged by one affiliate to another in an intercompany transaction involving the transfer of goods, services, or intangibles. In his opening statement, Chairman Sander Levin (D-MI) warned that "multi-national companies are potentially gaming the current system to shift assets and funding within foreign-based entities to avoid paying U.S. taxes."  He blamed the misuse of transfer pricing rules for American job losses: "[W]e must be using the U.S. tax code to promote job creation and strengthen economic security for workers and businesses here in America."

At the same hearing, Deputy Assistant Treasury Secretary Stephen Shay told the Committee that "there is evidence of substantial income shifting through transfer pricing."  He was frequently asked about the United States' high corporate tax rate of 35 percent (second highest in the world!) and how that contributes to income shifting.  He agreed that the corporate tax rate in the United States is high in comparison to other OECD nations, but he attempted to assuage the Committee's very real concerns by saying that the effective US tax rate (after deductions, credits, etc.) is closer to the average OECD member nation.

Closer, maybe.  But still higher - by a very significant margin.  And, as I've previously noted, a recent Cato Institute paper shows that the effective US corporate tax rate on new business investments is the highest in the OECD.  The paper's authors also concisely explain how such taxes harm US companies' bottom lines:

[T]he lack of reform in the United States is likely reducing both tax compliance and inward foreign investment. During the 1980s, the United States enjoyed larger direct investment inflows than outflows, but during the 1990s and 2000s, the situation reversed and outflows became larger than inflows.6 Both tax and non-tax factors probably caused this reversal, but it does not help that the United States is near the top of the 80 nations.... The nations with the highest effective tax rates, such as Argentina, Brazil, Chad, India, and Uzbekistan, generally have high statutory rates and taxes on capital or gross revenue that add to the burden on investment.

The excessively high U.S. corporate tax rate reduces economic growth by discouraging both domestic capital formation and inward foreign direct investment. Less investment means slower wage growth and reduced living standards over the long run.

A further problem is that the high U.S. corporate tax rate is applied to worldwide profits, which places the overseas operations of U.S. multinational corporations at a tax disadvantage compared to businesses based in countries that have both a lower corporate tax rate and a tax exemption for repatriated foreign profits.

Finally, the high U.S. corporate tax rate reduces government revenues because it increases tax avoidance. Empirical studies have found that the revenue-maximizing corporate income tax rate is about 25 percent today and has declined over time.  The U.S statutory and effective corporate rates are much higher than the revenue-maximizing rate, thus both the government and the economy would gain from a major rate cut.

Given these facts, the Treasury Department's argument about US corporate tax rates is, in a nutshell, "we still stink, but less than you think."  As catchy as that motto might be, it's hardly a good defense.

But what about all of those evil tax loopholes that corporations are "abusing"?  Well, as mentioned above, onerous American tax rates actually encourage evasion (and often lead to lower tax revenues).  But more importantly, most things that congressmen and senators have described as "abuse" are routine business practices.  And as Cato's Dan Griswold noted last year, contrary to Chairman Levin's claims, these legitimate offshore tax moves actually increase US jobs:

The biggest tax exemption for U.S. companies that invest abroad is the deferral of tax payments for "active" income. U.S. corporations are generally liable for tax on their worldwide income, whether it is earned in the United States or abroad. But the relatively high U.S. corporate tax rate is not applied to income earned abroad that is reinvested abroad in productive operations. U.S. multinationals are taxed on foreign income only when they repatriate the earnings to the United States. Not surprisingly, the deferral of active income gives U.S. companies a powerful incentive to reinvest abroad what they earn abroad, but this is hardly an incentive to "ship jobs overseas."

Such deferral may sound like an unjustified tax break to some, but every major industrial country offers at least as favorable treatment of foreign income to their multinational corporations. Indeed, numerous major countries exempt their companies from paying any tax on their foreign business operations. Foreign governments seem to more readily grasp the fact that when corporations have healthy and expanding foreign operations it is good for the parent company and its workers back home.

If President Obama and other leaders in Washington want to encourage more investment in the United States, they should lower the U.S. corporate tax rate, not seek to extend the high U.S. rate to the overseas activities of U.S. companies. Extending high U.S. tax rates to U.S.-owned affiliates abroad would put U.S. companies at a competitive disadvantage as they try to compete to sell their goods and services abroad. Their French and German competitors in third-country markets would continue to pay the lower corporate tax rates applied by the host country, while U.S. companies would be burdened with paying the higher U.S. rate. The result of repealing tax breaks on foreign earnings would be less investment in foreign markets, lost sales, lower profits, and fewer employment and export opportunities for parent companies back on American soil.

And speaking of global tax competition, it seems that every other country understands these basic facts and has thus jumped on the corporate tax-reduction bandwagon.  I've already blogged about Canada's great tax moves as it attempts to become a top destination for multinational business investment, but in recent weeks we've seen other countries embark on similar paths.  For example, the new government in Japan - site of the highest corporate tax rate in the developed world - announced that it was strongly pushing a significant corporate tax cut:

The [Japanese] government pledged in its medium-term economic plan released last month to bring the corporate tax rate down to a level “commensurate” with other leading nations to spur growth. At around 40 percent, Japan’s corporate tax rate is among the highest in the OECD.

Countries with lower tax rates may enjoy a higher share of revenue because a smaller levy stimulated economic growth or they broadened the tax base, the report said, citing research.

Companies in Tokyo pay a levy, including local taxes, of 40.7 percent. The burden is higher than China’s 25 percent, Seoul’s 24.2 percent and France’s 33.3 percent, Finance Ministry data show. The OECD’s average is around 26 percent.

Not to be outdone, the United Kingdom announced plans to lower its corporate tax rate from 28% to 24% over the next four years.  And Australia's doing the same.

So to recap: In 2010, the United States government uses lame excuses to defend its ridiculously high corporate tax rates, and seeks to end corporate "abuse" of tax rules that actually benefit American businesses and workers - abuse that is often caused by the very same ridiculous tax rates.  Meanwhile, major industrial powers (and US competitors, of course) Japan, Canada, the UK and Australia are furiously racing to lower their corporate tax rates in order to encourage domestic investment and jobs.

No wonder so many of our campaigning politicians routinely demagogue globalization - they obviously don't understand it.

Aussies Getting It Right with China

The Washington Post has a great article today about the Australian approach to China - trade and investment liberalization, with no accompanying diplomatic coziness:

A surging China has become Australia's No. 1 trading partner. It has pumped $40 billion worth of investments into the Australian economy in the past 18 months alone. China's 70,000 students help bankroll Australia's education system, and a half-million Chinese tourists a year keep Aussies employed as lifeguards, blackjack dealers and real estate brokers. Chinese trade and investment have insulated Australia from the global financial crisis more than any other developed nation. Australia is even speaking Chinese: Prime Minister Kevin Rudd is the first Western leader to speak fluent Mandarin....

But all those ties haven't bought China much love Down Under. Opinion polls over the past five years show Australians are increasingly wary of the behemoth to their north. Rudd, while embracing Chinese trade, has moved to balance relations with Beijing by bolstering military and diplomatic ties with Australia's longtime superpower ally, the United States.

I've always wondered why well-intentioned folks who were very (and often rightly) concerned about China's military ambitions, human rights abuses and other global/domestic shenanigans couldn't separate between bilateral trade/economic engagement and becoming diplomatic BFFs.  The Post article makes it clear that this dichotomy is precisely what the Aussies have in mind - sort of a "Trade, but Verify" approach to China.  And the benefits of that trade and investment liberalization for Australia and its citizens are undeniable:

No city better illustrates the China boom than Perth, the capital of Western Australia, a state five times as big as Texas that holds the bulk of Australia's mineral wealth. The state's average income has jumped $10,000 in five years to more than $70,000, thanks to China's purchases of iron ore, natural gas and other resources.  In Perth, the median price for a home just broke $500,000. Its unemployment rate is a measly 2.6 percent; the national rate is just 5.5 percent and predicted to drop this year -- thanks mostly to China.

Beyond the numbers, Perth looks Chinese, with a skyline filled with skyscrapers and cranes. The city is bristling with more than $1 billion in new construction, including a hospital, museum, highways, offices and a vast indoor entertainment and sports complex. More than 110 people move into Western Australia each day, making it the fastest growing state in Australia, and there's still a labor shortage. Truck drivers working in the mines are paid $100,000 a year. A gate attendant at a mine makes $80,000....

A steel company from China's Hunan province sank $580 million into Fortescue Metals Group last year, turning the company's chairman, Andrew "Twiggy" Forrest, into Australia's richest man. Chinese firms also snapped up a uranium mine, gold and coal mines, off-shore natural gas fields, real estate and wineries. This month, an Australian mining company announced a $60 billion deal to ship 30 tons of coal a year from a proposed mine in Queensland.

"The numbers are so big it's deceptive," said Sam Walsh, who runs iron ore operations for Rio Tinto, the Anglo-Australian mining giant in which a Chinese firm, Chinalco, tried unsuccessfully to buy an 18 percent stake last year. "No one has seen this before. It is manna from heaven."

The growth has been so robust that Rio and its old competitor BHP Billiton now want to merge their iron ore operations, allowing them to extract an even higher price from the Chinese. Spot prices for iron ore are already more than $100 a ton and officials from both companies predict that in a few years their total production could hit 1 billion tons a year....

So the Chinese are helping support Australia's economy, and in turn are getting access to natural resources that they don't have themselves.  In other words, voluntary, mutually beneficial exchange actually works - even when it's with "communists"!  Go figure.  Typical skeptic response: well, yes, but I'm sure this means that the evil Chinese are abusing the innocent and naive Australians.  Umm, not so much:

Despite its economic inroads, China has made economic and political blunders that have infuriated, and occasionally amused, many Australians.

Being Australia's primary market for iron ore, the Chinese assumed last year that they would be able to get a good deal on the price. So China rejected as too high a benchmark price that had been accepted by Japanese and South Korean firms. That decision cost China dearly when the spot price of ore rose 90 percent in the past year.

"The Chinese thought they'd be in the driver's seat on this," said Kenneth Lieberthal, a China expert at the Brookings Institution. "Who knew they'd find themselves in the trunk."

The economic relationship's obviously not perfect, and the Chinese have tried, and will undoubtedly continue to try, to bully the Aussies and game the system to their advantage.  But it appears that the Aussies are holding their own just fine so far and are reaping massive benefits, and they're not caving to diplomatic or military pressure in the process. 

Go figure.