Best Case Scenario: Tire Tariffs Cost $900k Per US Tire "Job" Saved

I've been traveling over the last few days, and am thus a little late to this story, but it's just too good to pass up. As readers of this blog know, I've been a vocal critic of President Obama's 2009 decision to impose  - at the request of the United Steelworkers Union - tariffs on Chinese tires pursuant to Section 421 of US trade law.  The last two-plus years have repeatedly revealed just how warranted that criticism is.  Now, a new study by the Peterson Institute's Gary Hufbauer and Sean Lowry puts a very precise price tag on those tariffs and finds that - at best - they cost a small fortune per US job allegedly saved as a result of their imposition:

In his 2012 State of the Union address, President Obama claimed that "over a thousand Americans are working today because we stopped a surge in Chinese tires."  The tire tariff case, decided by the president in September 2009, exemplifies his efforts to get China to "play by the rules" and serves as a plank in his larger platform of insourcing jobs to America. However, our analysis shows that, even on very generous assumptions about the effectiveness of the tariffs, the initiative saved a maximum of 1,200 jobs. Our analysis also shows that American buyers of car and truck tires pay a hefty price for this exercise of trade protection. According to our calculations, explained in this policy brief, the total cost to American consumers from higher prices resulting from safeguard tariffs on Chinese tires was around $1.1 billion in 2011. The cost per job saved (a maximum of 1,200 jobs by our calculations) was at least $900,000 in that year. Only a very small fraction of this bloated figure reached the pockets of tire workers. Instead, most of the money landed in the coffers of tire companies, mainly abroad but also at home.

Ouch.  AEI's Mark Perry uses the study to provide a simple economics lesson that cannot be repeated enough:

The authors point out "While this figure ($900,000 per job saved) seems extravagant, it is consistent with prior research. Studies repeatedly show that the consumer cost of trade protection typically exceeds, by a wide margin, any reasonable estimate of what a normal jobs program might cost." In other words, it would cost the economy much less overall to not impose the tire tariffs and instead direct compensation towards workers in the tire industry in some other way.

In fact, it would have been cheaper to just idle the 1,200 tire workers and pay them their full salary, of let's say $75,000 per year, than to impose tariffs that cost the economy almost $1 million per worker. This is a good example of why economists don't as a group support trade protection and instead favor free trade: the total costs of protectionism always outweigh the total benefits to the protected industry, resulting in a net loss and making the overall economy worse off, not better off.

Indeed.  Of course, as with any protectionism, the problem is that the USW (via jobs, dues and bragging rights) and President Obama (via union votes and campaign donations) benefited directly from these tire tariffs and got to mask those benefits behind some sweet, sweet China-bashing, so it's unlikely that common sense and the opinions of vast majority of economists - both conservative and liberal - are going to change their minds about the tariffs' "benefits" anytime soon... no matter how much they cost.

But I digress.

The whole Peterson study is worth a read and has garnered some good press and commentary, but the thing that a lot of analysts have missed is that the startling $900,000 figure is actually the very best case scenario because it's very, very likely that the tariffs didn't directly cause even a fraction of those 1,200 new US tiremaking jobs. First, the tariffs were imposed in Fall 2009, just as the United States was clawing its way out of the depths of one of the worst economic crises ever.  As the authors note in footnote 10 of their paper: "Of course it seems likely that the general improvement in economic conditions between the fall of 2009 and the fall of 2011 was responsible for a good part of the rise in tire manufacturing employment."  "Likely" is an understatement.  In fact, if you look at Figure 5 of the study, you can see quite clearly that US tiremaking jobs collapsed (and rose and collapsed and rose again) right in parallel with the US economy, and they were already trending back upward before Obama's glorious tire tariffs took effect:

Clearly, the tariffs weren't some magical launchpad for US tiremaking jobs.

Second, the blocked Chinese tires weren't replaced by US tires (thus spurring more US jobs) but were instead replaced almost entirely by imports from other countries - something that even USTR Ron Kirk predicted would happen back when the tariffs were first imposed.  This wholly expected trade diversion is made clear by Figure 1b in the paper:

Thus, it's extremely likely that President Obama's claim that his tariffs saved (or created) 1,200 American jobs is nonsense, and that the actual number of such jobs far lower.  (And, obviously, it's extremely disingenuous for the President and his team to be taking credit for all those jobs.)  If this conclusion is correct (and, let's face it - it is obviously correct), then the tire tariffs imposed in 2009 cost the American economy (disproportionately lower-income US tire consumers) way, way more than $900,000 per job.

In President Obama's 2012 State of the Union address, he said that the Section 421 tariffs on Chinese tires would serve as the model for his new China Trade Enforcement Team.  At the time, I opined that "Obama's vaunted tire tariffs - literally the centerpiece of his 'new' unfair trade enforcement initiative - have nothing to do with unfair trade and have proven to be an abject failure." Now we know that that failure was really, really expensive. So if we can expect President Obama's China Team - and his second term more broadly - to result in more such "successes," we better start saving our pennies right now.

Classic: Poster Child for President's SOTU "Trade Enforcement Team" Is an Abject Failure

I've already spent too much time writing about the stale trade ideas in President Obama's 2012 State of the Union, but one of the President's many comments on trade - reminded to me by Cato's indomitable Sallie James - deserves more pointed criticism (emphasis mine):

I will go anywhere in the world to open new markets for American products. And I will not stand by when our competitors don’t play by the rules. We’ve brought trade cases against China at nearly twice the rate as the last administration –- and it’s made a difference. Over a thousand Americans are working today because we stopped a surge in Chinese tires.

The President's aforementioned job-creation boast relates to his 2009 decision to impose prohibitive tariffs on Chinese tires under "Section 421" of US trade law.  One aspect of that boast is true - Obama's tariffs did cause a dramatic decline in surging Chinese tire imports (as prohibitive tariffs tend to do).  However, another aspect of the President's statement is shamefully misleading: those tire tariffs had absolutely nothing with China's "not playing by the rules" because Section 421 addresses surges of fairly-traded Chinese imports.  I actually corrected this fallacy when the administration first started pushing it after the tariffs were imposed:

Section 421 has nothing to do with "unfair" trade. It's only a determination of whether (i) the subject imports have "surged" and (ii) that surge has injured (i.e., created a "market disruption" for) US producers of like products.  Here's the ITC's own summary of China safeguards under Section 421:

Under section 421 of the Trade Act of 1974, the Commission determines whether imports of a product from China are being imported into the United States in such increased quantities or under such conditions as to cause or threaten to cause market disruption to the domestic producers of like or directly competitive products. If the Commission makes an affirmative determination, it proposes a remedy. The Commission sends its report to the President and the U.S. Trade Representative. The President makes the final remedy decision. (For further information, see section 421, Trade Act of 1974, 19 U.S.C. 2451.)

Please note the conspicuous absence of a word about "unfair trade" or "violations of US law." That's because, unlike antidumping or countervailing duty investigations, China-specific safeguards do not address or remedy unfair trading practices. So technically, China has done nothing "wrong" here other than to sell lots of tires - that Americans obviously want and benefit from - in the United States. Oh, the humanity! (Full text of Section 421 is here if you're interested.)

Despite my repeated clarifications, the President and his team are still relying on this "unfair trade" fallacy when they speak of the tires case (gee, it's as if they don't read my blog or something).  Of course, if they did honestly mention that their vaunted tires case was about simply preventing US consumers from purchasing fairly-traded Chinese tires, then the President's awesome "new" enforcement team might not sound so awesome... especially considering the many real problems with the President's Section 421 decision.

I recently noted some of those problems following the release of a new report by the US-China Business Council which examined the first two years of the Section 421 decision and found that, while Chinese tires did decrease dramatically, they were replaced by other imports rather than increased US production:

The [USCBC] paper goes on to show that, according to US government data, "[t]he biggest beneficiaries of the tariffs are probably tire producers in Korea, Thailand, Indonesia, Mexico and other countries that replaced supply from China."  Of course, anyone who understands trade diversion could have predicted this outcome (and a lot of us did - including US Trade Representative Ron Kirk who hilariously told a Brazilian delegation that they should welcome the President's decision because they'll export more tires to the US).  Unless US manufacturers are the second-most competitive producer of widgets on the planet, tariffs on imports from the #1 widget producer will almost always result in an increase in imports from other countries' widget producers, not from the US producers.  This is not just basic economics, it's also common sense - very well-documented common sense. 

The only thing not mentioned in the new USCBC report is another commonsense outcome of protectionist tariffs - pain for American consumers in the form of higher prices.  In the case of tires, I've cited anecdotal evidence of such price increases, and a previous USCBC report documented significant price increases in the 10-month wake of President Obama's decision.  It'd be good to see more such analysis in the future.  And, of course, there's that sweet Chinese retaliation against US exporters in direct response to the Section 421 announcement.

The Wall Street Journal recently followed-up on my blog post with more distressing facts about the President's tire tariffs.  Most notably, they found (i) further evidence that Obama's decision caused trade diversion abroad and sky-high tire prices at home and (ii) very little evidence that it created a "thousand" jobs like he boldly alleged in Tuesday's State of the Union Address:

The [Section 421] measure was meant to whack imports of passenger and light-truck tires and give a boost to manufacturers and job creation in the U.S.

Yet, for a variety of reasons, it has apparently done little of either—and has surely raised prices for consumers.

"So far as saving American jobs, it just isn't working," says Roy Littlefield of the Tire Industry Association, which has 6,000 members. "And it really hurt a lot of people in the industry—smaller businesses that geared up to bring these tires in from China."...

Mr. Everett, the tire shop owner, says prices jumped not just for China-made tires but for tires made in the U.S., too. Wholesalers, he said, used the cover of the tariff to raise prices across the board. Bob Ulrich, editor of Modern Tire Dealer, a trade publication, says prices are up 29% in the replacement market since 2009. Large increases in shipping and raw-material costs have contributed to the rise, as has recovering consumer demand in the U.S....

Some companies have indeed added production and employees, but whether that is a result of the tariff or the recovery in the U.S. economy isn't entirely clear.

Yes, it isn't "clear" because such results would defy all available evidence and, you know, the laws of basic economics.  As the WSJ article notes (and as I've repeatedly explained), low-end Chinese tires simply don't compete with high-end US tires, and the tariffs simply caused Chinese tires to be replaced by other imports.

So there you have it, folks: Obama's vaunted tire tariffs - literally the centerpiece of his "new" unfair trade enforcement initiative - have nothing to do with unfair trade and have proven to be an abject failure.

So if that's the best he can do...

UPDATE: Heritage's Bryan Riley beat me to the punch on this one and comes to a similar conclusion: "In his State of the Union Address, President Obama followed up his tire tariff story by calling for a brand new federal bureaucracy to investigate unfair foreign trade practices. In fact, the tire tariff is a cautionary tale that should remind policymakers that to the greatest extent possible, the determination of whether a particular transaction is fair or unfair should be made by the people spending the money, not by officials in Washington, D.C." 

Thursday Quick Hits

I know I've been a tad delinquent this week, but it's summer, and, well, the heat makes me lazy:

• America's Bad Trade Parenting Continues.  I've noted several times now about how the United States loves to practice "do as I do, not as I say" trade policy, particularly when it comes to enforcement.  Now, it appears that the US government, fresh off its near-constant (and often justified) criticism of foreign intellectual property protections, is receiving loud complaints from the Japanese government and US/Japanese companies for its failure to policy "manga" piracy.  What is "manga," you ask?  Well, I'm not exactly sure, but I do know that it's a kind of Japanese anime', and that American "fans" are apparently stealing the heck out of it.

• Pascal Hearts China.  WTO Director General Pascal Lamy has told all the haters out there to back off the China-bashing a bit.

• Democrats Don't Heart KORUS.   For American free traders, November 2010 can't come fast enough: "'At a time when our economy is struggling to recover from the worst downturn since the Great Depression, it is unthinkable to consider moving forward with another job-killing FTA,' the 110 members of the U.S. House of Representatives said in a letter to Obama....  'We oppose specific provisions of the agreement in the financial services, investment and labor chapters because they benefit multi-national corporations at the expense of small businesses and workers,' they said."  Oh, yeah, those horrible Korean labor standards, I almost forgot! 

• Three Guesses Why Democrats Don't Heart KORUS.   As relayed to us by one of their own (liberal blogger Mickey Kaus), here's in a nutshell the reason why 110 House Democrats wrote that angry anti-KORUS letter: "I think the Democratic Party has been captured by its interest groups. The unions are the main one."  Kaus was speaking about the California Democratic Party, but the theme certainly applies nationally too.

• Race to the Top, part 789.  More strikes, and more pay raises in China: "Workers at two suppliers for foreign automakers in Southern China returned to work on Thursday after obtaining hefty pay rises, ending strikes that again highlighted the carmakers' vulnerability to their Chinese suppliers."  I don't know what's more tongue-firmly-in-cheek surprising: the strikes themselves or the lack of armed suppression by the evil multinational corporations. 

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!

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.

White House Continues Section 421 Misdirection

The White House defense of President Obama's late-night Section 421 announcement continues to rely on the "enforcement canard" - i.e., the incorrect assertion that the 421 decision was somehow part of the President's basic obligation to enforce US trade laws or global trade rules. For example, here's President Obama today in an interview with Bloomberg:

“We’ve got to establish credibility and enforcement of the rules precisely because I want to further expand trade,” Obama said. “And that is something that I think the Chinese government should understand.”

And Reuters reports that Obama continued his enforcement theme in an interview with CNBC: "If we don't enforce the rules that are contained in our trade agreements, then it's very hard to have credibility."

Orwellian rhetoric aside (exactly how does protectionism expand free trade?), you gotta give the President credit: he is masterfully sticking to the White House's approved "enforcement-credibility" talking points. Unfortunately, as I discussed on Friday night, the talking points are complete nonsense:

[L]et's also be very clear that... this decision also has nothing to do with "enforcing trade agreements" or enforcing US trade law. As I've said before, Section 421 provides the President with complete discretion under the law to disregard the recommendations of the ITC where "such relief is not in the national economic interest of the United States or, in extraordinary cases, that the taking of action pursuant to subsection (a) of this section would cause serious harm to the national security of the United States." See 19 U.S.C. 2457(k). "Not in the national economic interest" is then defined as where "taking of such action would have an adverse impact on the United States economy clearly greater than the benefits of such action." Id. There's plenty of evidence out there that these tariffs will not benefit American tire producers (who, again, didn't support the 421 relief) and would harm many more Americans - consumers, importers, tire merchants and automobile manufacturers - than were allegedly harmed by the surge in Chinese tires. However, even if one were to argue that the economic evidence is mixed on this issue, the express discretion provided under Section 421 means that a Presidential decision to reject the ITC recommendation is as much "enforcing" Section 421 as is a decision to impose the recommended relief. To claim that the President's action tonight denotes "stronger enforcement" of US trade agreements is therefore wholly misleading.

As if Presiden't Obama's version of the enforcement canard weren't bad enough, White House Press Secretary Robert Gibbs takes it to a whole new level in an impromptu press briefing today on Air Force One. When asked whether the tire tariffs might start a trade war with China, Gibbs was utterly dismissive. Indeed, according to Gibbs, the Administration had no choice but to effectively ban tire imports from the US market:

Look, again, I think it's important to back up and understand that if we're going to have a framework for global trade that works for everyone, then agreements are going to have to be enforced and rules are going to have to be followed. Without following those rules and following those agreements it's going to be hard to make trade work for everyone.

I think this administration obviously has invested a lot of time and resources in ensuring that trade happens throughout the world, that developing nations have the access to capital that they need to buy the goods and services that others are producing. But within that framework, again, we have to follow the rules.

Did you get that, folks? Don't blame the White House for the minor trade war. Their hands were tied. It was those pesky rules that made em do it! Well, that sneaky defense might just work if, you know, the text of the law didn't explicity reject such a theory. As my excerpt above demonstrates, Section 421 gives the President complete discretion to impose or reject trade protection. Indeed, President Bush rejected Section 421 relief each of the four times he was in Obama's position, and nobody could do anything about it. Literally. Thus, Gibbs' allegations of White House helplessness are completely and utterly false. (Sometimes I really wonder whether the politicos even check with the wonks before manufacturing this stuff.)

And finally, let's not forget the ultimate indicator of just how little the White House buys its own "enforcement" defenses: the 421 decision's timid Friday night news release. As I said that night:

[I]f... the President's decision to support the USW and effectively ban Chinese tire imports from the US market is a bold and important statement about enforcing trade laws in order to "maintain an open and free trading system," then why not release it first thing Monday morning? Or, better yet, why not do it mid-week as part of a strong statement on US trade policy in anticipation of the upcoming G20 summit? (The decision wasn't due until September 17th afterall.)

By now, I think we all know the answer to these simple questions and, by extension, the veracity of the administration's continuing claims re: "enforcement" of "the rules."

Unfortunately, I doubt they'll change their talking points anytime soon.