VIDEO: Me on Trade Politics, Messaging & Policy

The Cato Institute has (finally) published the third video that I recorded for them a few weeks ago on U.S. trade policy.  This one actually covers many of the same things that I discussed in yesterday's piece for The Federalist, so be sure to read that too for the total consumer experience.  Enjoy!

TV News Revelation: Imports Are Good (VIDEO)

This CNBC piece is unquestionably great, and they deserve major props for running it.  But my favorite part is, without question, the concluding "wow" from the anchor who works for a business news network yet acts as if the idea that imports are actually good for the US economy - a fundamental tenet of market economics that has decades of empirical support - is some sort of grand revelation.



Wow, indeed.

Of course, given the hackish trade stuff that pervades the mainstream media (*cough*ABC*cough*), perhaps the CNBC anchor here can be forgiven for being surprised by basic trade economics.

Hopefully, more pieces like this will occur and cause people of all stripes to finally understand just how dumb (and immoral) mercantilism and protectionism are.

But I'm not holding my breath.

New Study on Import Benefits

The Heritage Foundation published a great study today further debunking the protectionist myth that imports into the United States harm the US economy and destroy American jobs.  In "Trade Freedom: How Imports Support U.S. Jobs," Heritage scholars Derek Scissors, Charlotte Espinoza and Terry Miller argue:

It is a common misperception that importing goods to America comes at the cost of American jobs. In fact, imports contribute to job creation on a large scale. The increased economic activity associated with every stage of the import process helps support millions of jobs in the U.S. This Heritage Foundation analysis shows that over half a million American jobs are supported by imports of clothes and toys from China alone. These jobs are in fields such as transportation, wholesale, retail, construction, and finance. Understanding the positive role of imports with respect to jobs, in addition to their other benefits, is critical to adopting the correct trade policy and thus to bolstering the economy.

The whole report is worth reading, but I especially like how Heritage dismantles other "studies" out there - relied on by certain, ahem, campaigning politicians - that erroneously connect the US trade deficit with job losses.  On the China version of these studies, the authors state:

Those who attack China often do not examine real economic events: They do not measure actual failed businesses and actual job losses. Instead, they assume the U.S.–China trade deficit means that both production and production jobs are moving from the U.S. to China. If this were true, many jobs would have moved back to the U.S. from China when the bilateral deficit fell by more than $30 billion in 2009. Of course, no jobs actually moved. Instead, millions of jobs were lost, due not to trade flows, but simply because of economic contraction during the financial crisis.

Even absent a crisis, the U.S.–China trade deficit does not have the impact on jobs that many protectionists believe it has. If the bilateral trade deficit were eliminated, jobs would not move to the U.S., because the U.S. does not trade with China alone. Furniture production and similar jobs would move from China, not to the U.S., but rather to other countries where furniture can be made cheaply. The idea that millions of American jobs have been lost to China relies on bad trade numbers, bad economics, and a completely fictional view of the world.

Yep.  Now, if only certain campaigns would stop parroting politically-convenient numbers based on absolute hokum in a shortsighted attempt to scare up a few votes.  Alas.

Be sure to read the whole Heritage study here.

2012 GOP Platform on Trade: the Good, the Bad, and the Really Ugly

The Republican Party has released its 2012 Platform, and it's pretty much what you'd expect given the past few months of campaign and congressional rhetoric: it mostly supports free trade, yet does so in a mercantilist way and contains some pretty harsh - and indeed protectionist - words for today's trade bogeyman, China.  In fact, the platform seems like it was almost entirely lifted from Gov. Mitt Romney's 2011 economic plan, for the better and the worse.  Although there are various trade-related elements throughout the platform, the main "international trade" section can be found on pages 6-7 and I'll focus on it tonight:

International Trade:
More American Jobs, Higher Wages, and A Better Standard of Living

International trade is crucial for our economy. It means more American jobs, higher wages, and a better standard of living. Every $1 billion in additional U.S. exports means another 5,000 jobs here at home. The Free Trade Agreements negotiated with friendly democracies since President Reagan’s trailblazing pact with Israel in 1985 facilitated the creation of nearly ten million jobs supported by our exports. That record makes all the more deplorable the current Administration’s slowness in completing agreements begun by its predecessor and its failure to pursue any new trade agreements with friendly nations.

This worldwide explosion of trade has had a downside, however, as some governments have used a variety of unfair means to limit American access to their markets while stealing our designs, patents, brands, know-how, and technology—the “intellectual property” that drives innovation. The chief offender is China, which has built up its economy in part by piggybacking onto Western technological advances, manipulates its currency to the disadvantage of American exporters, excludes American products from government purchases, subsidizes Chinese companies to give them a commercial advantage, and invents regulations and standards designed to keep out foreign competition. The current Administration’s way of dealing with all these violations of world trade standards has been a virtual surrender.

Republicans understand that you can succeed in a negotiation only if you are willing to walk away from it. Thus, a Republican President will insist on full parity in trade with China and stand ready to impose countervailing duties if China fails to amend its currency policies. Commercial discrimination will be met in kind. Counterfeit goods will be aggressively kept out of the country. Victimized private firms will be encouraged to raise claims in both U.S. courts and at the World Trade Organization. Punitive measures will be imposed on foreign firms that misappropriate American technology and intellectual property. Until China abides by the WTO’s Government Procurement Agreement, the United States government will end procurement of Chinese goods and services.

Because American workers have shown that, on a truly level playing field, they can surpass the competition in international trade, we call for the restoration of presidential Trade Promotion Authority. It will ensure up or down votes in Congress on any new trade agreements, without meddling by special interests. A Republican President will complete negotiations for a Trans-Pacific Partnership to open rapidly developing Asian markets to U.S. products. Beyond that, we envision a worldwide multilateral agreement among nations committed to the principles of open markets, what has been called a “Reagan Economic Zone,” in which free trade will truly be fair trade for all concerned.

I've been over most of these ideas before, so there's no need to get long-winded tonight.  Instead, here's a quick summary of the good, the bad and the ugly in the GOP platform's international trade section:

The Good. The platform expresses unequivocal support for international trade and free trade agreements.  Especially noteworthy is (i) formal party support for the Trans-Pacific Partnership - something we've suspected but not really heard from the GOP's top dogs; and (ii) a loud call for restoration of Trade Promotion Authority - an absolutely critical legal tool for the President's ability to effectively negotiate new trade deals.  Although I'll start complaining in just a second, the GOP's embrace of international trade is definitely a good thing, especially given the economic anxiety out there right now and the strong anti-outsourcing and anti-trade stuff we've been hearing from most Democrats.  Maybe the Dem Platform will surprise us and not contain similar protectionist positions this time around, but until then, the GOP remains the better party when it comes to public support for good trade policy.

The Bad.  The platform continues the failed approach of selling free trade through a single-minded focus on exports and reciprocal trade (i.e., only opening our market if others open theirs).  As I've repeatedly discussed, this strategy is not only economically ignorant, but it also undermines public support for free trade by reinforcing the erroneous notion that imports - and by extension the US trade deficit - are somehow bad for the US economy.  The platform also errs in its support for Romney's "Reagan Economic Zone" - a silly idea from a practical perspective (I've yet to read serious, apolitical trade policy expert express even lukewarm support) and one that implicitly abandons the existing multilateral negotiating framework at the WTO.  That, in my opinion, is a serious mistake - the WTO is and will remain the only real mechanism for broadbased, multilateral trade liberalization, and any alternatives are dangerous non-starters.  The GOP certainly isn't abandoning the WTO altogether - the text above promotes the use of WTO dispute settlement, and the platform on page 49 supports Permanent Normal Trade Relations with Russia in order to reap the benefits of Russia's WTO accession - but the Reagan Zone strongly implies that the GOP no longer sees multilateral negotiations through the WTO as viable.  And that, in my opinion, is a mistake, regardless of the big mess that is the Doha Round.

The Ugly.  I guess it shouldn't be a surprise, but it's really a shame that America's "free market" party has warmly embraced Romney's zealous contempt for all things China trade-related.  This includes support for (i) countervailing duties on Chinese imports due to currency manipulation; (ii) mysterious "punitive measures" on foreign firms found engaging in IPR theft; and (iii) support for a "Buy AmericanAnything-But-Chinese" procurement policy.  Leaving aside for the moment the fact that each of these proposals raises serious legal and practical concerns (see, e.g., here on currency; there's not really a vehicle under US law for the second; and the third could violate WTO rules if it singled out China), there are much bigger problems with such talk: 

• First, the scary chest-thumping overshadows far more legitimate gripes about bad Chinese trade policies (like subsidies and IPR enforcement).  When you're screaming about attacking imports and investment, people tend not to notice your more subtle gripes about real problems in the Chinese market. 

• Second, and more importantly, these proposals expressly condone self-destructive retaliatory protectionism that defies economic sense and free market principles.  As I've repeatedly warned, there is absolutely no reason why such "logic" couldn't be applied to other "offending" countries, and the protectionist slope is very, very slippery.  Saying "we only meant it for China" is likely not going to serve as an adequate defense when the well-funded protectionists come knocking on the White House door.  And, by empowering these anti-trade forces, such proposals also won't help improve tepid American support for free trade.  In short, Pandora's Box has been opened, and it remains to be seen whether Republicans can control the nastiness inside.  The Democrats - who once supported things like NAFTA, China trade and the WTO (see, e.g., Bill Clinton) - sure couldn't.

Granted, each of the GOP's China trade proposals allows for ample wiggle-room, and it's very likely that a President Romney would pursue a much less aggressive approach (indeed, the platform later on page 49 states that the GOP "welcome[s] the increase in trade and education alliances with the U.S. and the opening of Chinese markets to American companies").  Regardless, "Commercial discrimination will be met in kind" is a recipe for heightened protectionism and possibly a trade war, not a responsible, economically and legally sound policy from the supposed "adult in the room" on US international trade policy and politics.  And the sign that such rhetoric - in GOP's defining policy document, no less - sends to the rest of the world is nothing short of embarrassing.  The only bright side for Republicans, I guess, is that the Democrats' platform promises to be even worse.

Hooray, lesser of two evils!

More to come, I'm sure.

Another Year, Another Bogus China Study

So the union-friendly folks over at the Economic Policy Institute have released their annual report "calculating" the number US jobs lost because of trade with China.  This year's EPI report is pretty much identical to past editions: same (erroneous) methodology, same (erroneous) doom-and-gloom protectionist conclusions.  I really shouldn't give the "study" an iota of bandwith, but because it will undoubtedly be mentioned by ignorant journalists or opportunistic politicians looking to respectively score a few cheap pageviews or scare a few unwitting voters, here's all you need to read:

• My 2010 blog post dismantling of EPI and its study (including boatloads of links from myriad scholars decrying EPI's asinine "trade deficit = job losses" methodology); and

• Today's quick dismissal of the EPI report by the US-China Business Council.

Finally, one quick observation: I just love this chart in EPI's new study entitled "Cumulative U.S. jobs displaced by growing trade deficits with China since 2001":

If you look closely, you'll see that EPI's report shows "cumulative US job losses" supposedly caused by US-China trade plummeting in 2009 - thus indicating a major "gain" of about 300,000 China trade-related jobs in America between 2008 and 2009.  This big "victory," of course, is due to the fact that the China-US trade deficit plummeted in 2009 because of the Great Recession, and, as noted above, EPI's "jobs" calculation is wholly dependent on the trade deficit.

But you know what else plummeted in 2009?  Oh, right, total US employment:

Unemployment shot up in 2009 from 7.7 percent in January to 10.1 percent in October before settling at 10 percent in December. Behind those percentages were more than 4.1 million people who lost their jobs during the year. According to data from the Bureau of Labor Statistics, that's the most job losses in a year since 1940.

Funny, I can't seem to find a 2010 version of EPI's annual paper that highlights the impressive 2009  "improvement" in their US jobs picture. How weird.  (You can check the BLS numbers - non-farm payrolls and unemployment rate - here, if you really want.  Heck, it'd be a lot more informative than reading the EPI study.)

So can someone at EPI - or in the office of, say, Senator Schumer - please call or email me to reconcile the Institute's amazing "improvement" in US-China trade-related jobs in 2009 with the depressing collapse in total non-farm jobs (and the soaring US unemployment rate) shown in the official US employment data?  I hereby promise that I will post any explanation in full on my little ol' blog.

Yeah, I'm not holding my breath waiting for the phone to ring on that one.

Anyway, over the next few months, we will undoubtedly be deluged with protectionist rhetoric - from both political parties, unfortunately - about the pernicious effects of the US-China trading relationship on the American job market, and, if history is any guide, EPI's study promises to play a supporting role in such demagoguery.  But the next time you hear some campaigning politician breathlessly claim that Chinese imports are destroying millions of American jobs, be sure to remember the chart above, and that said politician is either stunningly ignorant or willfully trying to scare and deceive you.

More on the Idiocy of Our Current Political Discourse re Trade

Last night, I promised that I wouldn't get into the weeds explaining the blatant economic ignorance currently displayed by our political leaders on the issues of trade and outsourcing.  I'm glad I avoided that aspect because today's Wall Street Journal contains a fantastic recap of many of these economic facts.  Not much of this information will be new to readers of this blog, but it is, in my view, the best and most concise summary of many of the economic reasons why free trade, and imports in particular, is undeniably good for the US economy.  After setting the stage with a quick summary of the political firestorm surrounding those made-in-China US Olympic uniform, the WSJ lays out why politicians' anti-import/trade posturing defies all economic sense:

[I]mports of all kinds drive American jobs and export competitiveness. Most goods imported by the U.S. are used to make other goods. The Washington-based Trade Partnership, which studies such things, says that 62% of the $2.2 trillion of imports in 2011 were inputs for producers.

These include oil, precious metals, minerals, green coffee and lumber. But the list also includes motor vehicle parts, semiconductors, aircraft engines and parts, steel products, fertilizers, plastics and machinery and other equipment. American companies buy these products, make other things with them or add value and then sell their output at home and abroad. If they can't buy these imports at good prices, U.S. producers can't compete globally.

Protectionists portray imports as coming from Third World sweat shops that undercut American labor. But half of U.S. imports come from such developed countries as Canada, Japan and Germany. In 2011 imports from low-income countries amounted to less than 1% of the U.S. total.

Even finished goods imported by the U.S. often have a U.S. export component. Today's manufacturers, no matter where they are located, use an international supply chain that employs Americans. U.S. research, development and design—high-paying jobs—are behind much of what is made overseas.

And what about those Ralph Lauren-designed berets? Well, the American Apparel and Footwear Association says that while their industries are now dominated by imports, these two markets in the U.S. employ more than four million people in everything from design to marketing, merchandising and retail. The International Trade Commission says more than half of the value of imported apparel sold in the U.S. is American. The Commerce Department says that more than 50% of direct importing operations in the U.S. are small businesses.

Imports also raise U.S. living standards. According to Cato Institute trade analyst Dan Ikenson, prices of many tradeable goods like electronics, toys, furniture and apparel in the U.S. have been dropping over the last decade even as the price of nontradeables like health care and education have increased sharply.

President Obama says he wants to double U.S. exports from 2009 to 2014, which makes sense even if the government will have little to do with it. As the U.S. Chamber of Commerce points out, 80% of the world's purchasing power is outside the U.S. along with 95% of consumers.

But this export boom won't happen if the U.S. doesn't keep its own markets open. Protectionism will impoverish our best customers. And there is a risk that trading partners will retaliate with their own new trade barriers. Both would be devastating for U.S. producers: Fast-growing middle-income countries like Mexico and China are also the fastest growing export markets for the U.S.

Understanding these facts, as well as the undeniable moral depravity of politicians' anti-trade and anti-outsourcing demagoguery (something known since the time of Adam Smith), I again ask:

Why on earth is the Republican party indulging such garbage (see, e.g., this most recent, depressing example) instead of attacking it?

Seriously.

Huge New Report Further Crushes Protectionist Myths about Trade, Jobs & Outsourcing

The OECD recently concluded a giant new report on the effects of open markets on employment, and the consensus conclusion couldn't be any clearer: free trade is awesome.  In the process of coming to that (admittedly broad and obvious) conclusion, the authors of the myriad studies included in the final OECD Report also debunk a whole host of protectionist myths still floating around out there about imports, jobs and outsourcing (President Obama, please take note).  Here's the press release announcing the new Report (emphasis mine):

Governments that foster open markets and resist protectionism have the best chance of stimulating inclusive economic growth and creating high-value jobs, according to a new study from 10 international organisations presented in Paris.

Policy Priorities for International Trade and Jobs, launched by OECD Secretary General Angel Gurria during the annual OECD Forum, shows that protectionist and discriminatory trade measures do not protect or preserve jobs. On the contrary, closing markets is actually more likely to stifle growth and put additional pressure on labour markets.

The report, a product of the International Collaborative Initiative on Trade and Employment (ICITE)*, analyses the complex interactions between globalisation, trade and labour markets. Drawing on numerous studies covering different parts of the globe and countries at very different levels of development, the report highlights the powerful role trade can play in driving growth and improving employment.

Of the 14 main studies undertaken since 2000 reviewed in the report, all 14 have concluded that trade plays an independent and positive role in raising incomes.
Through its impact on productivity, trade also raises average wages. Over the 1970-2000 period, manufacturing workers in open economies benefitted from pay rates that were between 3 and 9 times greater than those in closed economies, depending on the region. In Chile, workers in the most open sectors earned on average 25% more in 2008 than those in low-openness sectors.

Fears of the impact of offshoring may be exaggerated. Studies for the United Kingdom, United States, Germany and Italy demonstrate that off-shoring of intermediate goods has either no impact or, if any, a positive effect on both employment and wages.

The report also shows, however, that openness to trade is not enough. Complementary policies – such as sound macroeconomic policies, a positive investment climate, flexible labour markets and adequate social safety nets – are needed to realise the full benefits of trade....

The ICITE report debunks the principal argument against freeing up trade – the supposed impact of imports on jobs. The report says that there is no systematic link between imports and unemployment. Instead, evidence shows that in country after country, both exports and imports push productivity growth upward while helping create better skilled and higher paying jobs.

Offshoring and outsourcing by developed countries – two commonly-cited negative aspects of globalisation – often complement, rather than replace domestic jobs, while creating new, higher-wage opportunities in developing countries, according to the report.

There is enough in this report to keep even the nerdiest of trade nerds busy for a long while.  I especially like the part about the necessity of "complementary policies" to realize the full benefits of free trade.  That's something I've been arguing here for a while now - open markets are awesome, but their benefits are seriously undermined unless they're accompanied by sound fiscal policies (especially tax policies), a streamlined, predictable regulatory environment and a dynamic labor market.  Without these things, all the trade in the world won't fix what ails the US and other struggling economies.

But all the trade stuff's important too, particularly during yet-another-election-season featuring scores of US politicians spewing populist nonsense about the allegedly horrible effects of imports and outsourcing on American jobs.  At the risk of sounding like a broken record, isn't it about time we stopped listening to these people?

"Imports Work"

That's the title of a new website sponsored by several US trade associations who rely on imports to remain globally competitive (and provide tons of well-paying US jobs).  The site and its blog hit on a lot of the import-loving themes that I've been pushing here for the last few years, and the groups are even sponsoring a "imports week" next week (May 7-11) that will dedicate a day to each of the following issues:

- May 7 – Imports work for U.S. jobs

- May 8 – Imports work for American families

- May 9 – Imports work for U.S. manufacturing

- May 10 – Imports work for economic development

- May 11 – Imports Work for America: A Policy Agenda

Looks like a worthwhile endeavor, and I must say that an industry-sponsored website touting the immense benefits of import liberalization (rather than the tired mercantilist stuff that many business groups usually spew) is a really welcome - and long overdue! - development.  Indeed, given the blatant realities of today's modern, globalized economy, the lack of any such public face was a real missed opportunity (as argued in this recent briefing paper).

So be sure to check the website out, and let's all hope that it sticks around for a long time. 

And, of course, I'd be remiss not to mention that you can find a lot more information and analysis on the myriad benefits of imports and harms of protectionism right here and here (and elsewhere on this blog).

Bipartisan Push to End the (Regressive, Immoral) Shoe Tax

The Heritage Foundation's Bryan Riley and the GlobalWorks Foundation's Ed Gresser have a new briefer rightly supporting the long-overdue passage of the Affordable Footwear Act (H.R. 2697 and S. 108).  They argue:

Liberals and conservatives have plenty to disagree about. But faced with continuing high levels of unemployment and slow economic growth, they should agree on a few things—and one is that Congress should find ways to help Americans at the bottom rung of the economic ladder. The Affordable Footwear Act (AFA) is one such effort. Introduced by Joe Crowley (D–NY) and Lynn Jenkins (R–KS) in the House of Representatives and Roy Blunt (R–MO) and Maria Cantwell (D–WA) in the Senate, it would repeal many of the disproportionately high tariffs on shoe imports and save American families as much as $3 billion a year.

The AFA was first introduced in 2009, but three years later, Americans continue to pay more than they should for footwear. Now is the time for Congress to reduce tariffs on shoes and help all Americans save a few dollars on their next pair of work boots, pumps, or sneakers.

The whole thing is worth reading, but my, umm, "favorite" part is their explanation of the very real and significant cost of our existing tariff system, particularly for lower income American families:

Americans bought about 2.3 billion pairs of shoes in 2010—many designed here, but virtually all stitched and glued overseas.[3] The value of these shoes at the border was $22.6 billion, and the U.S. government collected footwear duties amounting to $2.3 billion—and a closer look finds that the government is charging poor families the most. Tariffs are 8.5 percent for leather dress shoes, rising to 20 percent for running shoes and peaking at more than 60 percent for some grades of cheap sneakers—the highest tariffs imposed on any manufactured good. For a pair of canvas sneakers with rubber soles that costs $10 to import, the government charges an additional $2.90 in import taxes....

Tariffs inflate the cost of the cheapest shoes by about one-third. As the sneakers travel through the supply chain on the way to the retailer’s shelf, the tariffs may be magnified by retail markups and state sales taxes. The $10 pair at the border is a $30 pair in the store, with the tariff now accounting for as much as $8.70, even though the original tariff provided the federal government just $2.90 in tariff revenue. In larger terms, these markups mean the tariff that raises $2.3 billion may cost shoppers billions of dollars more.

Footwear tariffs are a hidden, regressive tax on a household necessity. They reduce the amount of income families have to spend on other goods and services. This expense is most onerous for low-income families with children, who spend the largest share of their income on shoes and other necessities of life.

In short, this a tax rate that is highest on those who can least afford it.  It would be difficult, I think, to find a more unquestionably absurd and immoral US government policy (although I'm sure several come close).  Heck, even protectionists would be hard-pressed to justify the current tariff system on shoes or oppose the AFA, given the mind-blowing fact that, as Gresser and Riley note, there are virtually no footwear producers (or production jobs) in the United States anymore.
 
When I first reported on the Affordable Footwear Act back in 2010, I opined:

Free traders in Congress (all two of them!) have reintroduced the "Affordable Footwear Act" (H.R. 4316 ) which would mandate the unilateral elimination of abnormally high US tariffs on imports of low-cost shoes that aren't even made in America anymore. The bill highlights a great example of the idiocy and immorality of US tariffs and is a good first step to remedying such nonsense. Of course, the fact that legislation scrapping a pointless tax on a basic necessity that disproportionately harms poor Americans can't pass with overwhelming bipartisan support is a sad commentary on the state of US trade policy, wouldn't you say?

Considering that two more years have passed and Congress still hasn't repealed these tariffs, I'd say that "commentary" is markedly sadder at this point, wouldn't you?

Happy (Additional) Tax Day

As most everyone knows, today is Tax Day in the United States - the annual deadline for paying state and federal income taxes.  I've long been a critic of the irrationality and complexity of US tax code, and the good fiscal cons at the Republican Study Committee have two new charts to really hit these points home.  First, we see just how insanely complex the US tax code really is:

After reviewing my inscrutable tax returns (for the fourth time) yesterday, I'm honestly surprised that the Tax Code's only 3,827,105 words. (It felt like my return alone topped out at a million.)  And it's really no wonder that the World Bank has ranked the United States at an embarrassing 69th out of 183 countries in terms of overall tax burden, including ease of doing taxes.  Pathetic.

Next, the RSC shows us just how much work it takes for the average American to pay his tax bill:

So it'll take the average American over a hundred days to pay off his annual tab to Uncle Sam, and our total tax bill is well more than we'll pay on food, clothing and shelter combined.  Painful.

And speaking of clothing, the American Apparel and Footwear Association helpfully reminds us today that today's income tax bills are really just one of the many taxes that Americans fork over to the federal government:

In case you missed it, today is Tax Day. People all around the country (and even some on staff here at AAFA) are busy crunching numbers to fill in their 1040 form ahead of tonight’s deadline.

If you stop by the mall on your way to or from the post office or jump on your favorite store’s Web site after e-filing, and purchase a shirt, a pair of shorts, or new sandals for the summer with your anticipated return, today is Double Tax Day for you.

You see, 98 percent of the clothing and 99 percent of the shoes sold in the United States are imported. And often, those imports are charged a duty, or a tax paid to the government to allow that product to enter into the United States. For every American who wears clothes and shoes, you are paying extra taxes to the government and you may not even realize it. In fact, while apparel and footwear imports account for only less than five percent of total U.S. imports, clothes and shoes account for more than 40 percent of total duties collected by the U.S. government. And these duties amount to a $30 billion tax at the cash register every year for hardworking American families.

As I've repeatedly noted here, these apparel and footwear tariffs are just a few of the many existing US import taxes that make everyday necessities (and industrial inputs) more expensive in America than they are elsewhere in the world.

So while we all might have a glorious 364 more days before we again worry about today's extra special (and onerous) tax burden, just remember that pretty much every day is "Tax Day" for American businesses and consumers thanks to the US tariff code.

The Potential Downside of Chinese "Re-balancing": US Inflation

With China recording an unexpectedly huge trade deficit in February 2012, the punditocracy has rushed to opine on the potential effects of Chinese "re-balancing" - i.e., a shift away from economic growth driven by exports and foreign investment (due mainly to relatively cheap labor and currency) to growth driven more by domestic consumption.  Most of the commentary has looked at a "re-balanced" China's potential problems for Chinese exporters and potential gains for US exporters, but I'd like to look at another possible effect of Chinese re-balancing: the loss of two significant, longstanding brakes on harmful inflation in the United States.

Before I get to that, let's dig into China's surprising trade data, courtesy of the WSJ:

A trade deficit of $31.5 billion in February is the largest on record for the world's second-largest economy....

With the lunar holiday for Chinese New Year playing havoc with the data, it makes sense to look at January and February's trade numbers together. On this basis the trade deficit is a less-alarming $4.1 billion-because of a substantial surplus in January-but remains the largest for the first two months of the year since 2004.

Exports grew just 6.8% compared with the first two months of 2011, down from 14.2% growth in the final quarter of 2011. No prizes for guessing the main reason for the fall: exports to Europe contracted 1.1%....

Qu Hongbin, Asia economist for HSBC, notes that growth in processing trade imports fell to 2.4% compared with a year earlier, down from 8.6% in the fourth quarter of 2011. Those imports are the inputs to make China's own exports. Such a low growth rate suggests factories are anticipating weak demand for their products down the line, and going slow on accumulating stock.

Another WSJ article gives us the money graphic:

The article added that "[l]ooking at January and February together, exports rose 6.9%, while imports gained 7.7%, far slower than the double-digit gains China usually chalks up."

So what's causing the sudden shift in China's trade balance?  Well, some of the change is clearly due to falling demand abroad, particularly in crisis-torn Europe (as the WSJ notes), but a broader look at China's exports (courtesy of Michael McDonough) indicates that there may be something bigger and more systemic going on here:

The chart above makes clear that Chinese exports have steadily declined over the last 2 years across the globe, not just in Europe.  I have no idea if this means that China actually has begun to "re-balance," but if China's growth model really is moving towards domestic consumption and away from export-dependence, domestic factors like rising living standards and a stronger currency are likely at play.  If so, that's good news for Chinese consumers and certain US manufacturers that compete directly with China and other low-cost Asian manufacturers.  Unfortunately, there's a downside to these re-balancing factors: they should make it increasingly difficult for the United States to keep inflation at bay.

First, rising labor and other costs in China have made Chinese exports more expensive. This well-documented trend will affect not only China's trade balance, but also US inflation:

Since the 1990s, Chinese imports have helped cool inflation in the U.S. That allowed the Federal Reserve to keep interest rates a bit lower, allowing the economy to grow at a quicker pace.

But with wages rising, the cost of China-made goods has begun to go up. That is bound to continue, and as it does the U.S. economy will look a little more inflation-prone. The Fed's job is going to get more complicated.

The U.S. imported $399 billion in Chinese goods last year, according to the Commerce Department. That was quadruple the $100 billion imported in 2000, the year prior to China joining the World Trade Organization, and ten times the $39 billion imported in 1994.

The jump in Chinese imports has coincided with a period in which inflation has been remarkably quiescent. Over the past 15 years, the core consumer-price index, which excludes food and energy, has risen at an average annual rate of 2.1%, according to the Labor Department, compared with 4% in the 15 years previous.

Much of that downshift owes to a cooling in prices for goods—that is, prices for stuff like t-shirts, which can easily be imported, rather than services like haircuts, which can't. Core consumer-goods prices have increased at an average annual rate of 0.2% over the past 15 years, compared with 2.9% in the 15 years before that.

The Chinese import prices have lately been increasing, however, rising 3.9% last month from a year earlier, according to the Labor Department. Some of that owes to higher commodity costs, but rising Chinese wages and an appreciating yuan also seem to be playing a role. One indication of that: Prices for footwear imports—labor-intensive goods that use a minimal amount of raw material and are mainly made in China—have risen 5.5% over the past year.

While a cooling Chinese economy could offer some temporary respite, China has reached a point in its development where it will be difficult to keep labor costs in check. Some manufacturers are shifting operations to other low-wage Asian countries, but the scope for doing that is limited—there are only 90 million people living in Vietnam compared with China's 1.3 billion.

This isn't to say that rising prices in China will be pushing prices higher in the U.S. Rather, they won't be pulling them down. So the U.S. economy will look a little more inflationary, and a little less productive—a little more like it looked before China entered the scene.

A brand new report from the WSJ indicates that rising Chinese labor costs are having a "ripple effect" on labor costs in other developing Asian economies like Malaysia, Thailand, Indonesia and Vietnam. Thus, the prices of these countries' exports are also on the rise:

More Asian governments are pressing businesses to hike wages as a way to prevent outbreaks of labor unrest, raising the specter of higher manufacturing costs for global companies—and the products they sell world-wide....

Global companies already have been facing higher labor prices in China over the past year, despite a weak global economy, as workers demand a greater share of the country's economic boom. In recent months, the pressure also has intensified in countries across Southeast Asia that have marketed themselves as alternatives for companies seeking to escape China's rising costs, leaving those companies now with fewer places to move....

Asian governments, in some cases, are embracing the call for higher salaries, in part to head off the spread of the kind of unrest that has toppled Middle Eastern regimes recently—and to calm rising labor actions in their countries.

They also are hoping the higher wages will help consumers boost spending, providing a new engine of growth at a time when slack demand for exports in the West and higher oil prices are worrying policy makers across the region.....

The spread of higher wages is likely to present challenges for the companies that have long relied on Asian manufacturing operations to keep their costs low, potentially including multinationals, such as Nike Inc., Adidas AG, Dell Inc. or their suppliers....

Boosting minimum wages risks setting off more inflation at a time when central bankers are worried about increased oil prices. Such a scenario could put the price of ordinary goods out of reach of the people the higher wages are intended to help.

Garment, footwear and electronics manufacturers operating in Indonesia from South Korea, Taiwan and Japan say they are now thinking of taking their factories elsewhere. Some said they fear more wage increases as local politicians try to win votes in elections scheduled over the next two years....

But with wages now rising in so many places at once, unhappy companies may have few places to escape.

If rising Chinese import prices are removing a brake on US inflation, then rising prices of other Asian imports   should have a similar and supplemental effect.

Second, in real terms, the Yuan has appreciated significantly against the US dollar over the last several years.  This appreciation will undoubtedly decrease some Chinese exports and increase domestic import consumption, but it might also have a significant effect on US inflation because of how China manages the value of the Yuan.  As I've repeatedly noted, much of the Yuan's relative appreciation is due to significant Chinese inflation (caused by, among other things, economic growth, rising labor costs and Chinese monetary policy), but some of it is due to a noticeable shift in China's monetary policy, in particular its "managed peg" of the Yuan against the US dollar.  Until last week's trade surprising trade deficit, this change allowed (or forced) the Yuan to appreciate against the Dollar in nominal terms over the last year or so (chart again courtesy of Mr. McDonough):

So why did the Yuan's nominal value appreciate so much last year?  Well, one possible reason is that China stopped buying US government debt.  China helps control the nominal value of the Yuan by purchasing that debt, but the government's purchases slowed dramatically last year:

China's holdings of U.S. Treasuries accounted for 54% of its foreign-exchange reserves as of June 30, according to a U.S. Treasury survey released this week. That's down from 65% in 2010 and a record 74% in 2006....

Beijing continues to buy loads of U.S. debt. As of June 30 it held $1.73 trillion in U.S. securities, up 7% from June 30, 2010.

Still, other federal data show it was a net seller of U.S. treasuries in the second half of 2011.

Bank of America predicts that China will continue to diversify its debt holdings away from US Treasuries in 2012, even though most people expect the Yuan's nominal appreciation to slow this year.  Because global turmoil has made the United States the "debt of last resort," most experts note that China's diversification shouldn't have a huge affect on interest rates (and thus inflation) in the United States right now.  However, China's reduced foreign purchases of US Treasury Bills could eventually bite, as this new report from the Federal Reserve makes clear:

Foreign offi cial holdings of U.S. Treasuries increased from $400 billion in January 1994 to about $3 trillion in June 2010. Most of this growth is accounted for by a handful of emerging market economies that have been running large current account surpluses. These countries are channeling their savings through the offi cial sector, which is then acquiring foreign exchange reserves. Any shift in policy to reduce their current account surpluses or dampen the rate of reserves accumulation would likely slow the pace of foreign offi cial purchases of U.S. Treasuries. Would such a slowing of foreign o cial purchases of Treasury notes and bonds a ect long-term Treasury yields? Most likely yes, and the eff ects appear to be large.

The aforementioned Bank of America report echoes these concerns.  So, in short, should the Chinese government stop buying US debt in order to allow (or force) the Yuan to appreciate, an unfortunate - but totally expected - byproduct could be higher interest rates and increased inflation in the United States.

There are growing concerns from several reputable, non-partisan sources that inflation could become a real problem in the United States over the next year or so.  (Sky-high energy costs and ridiculously easy money can do that to a country.)  At the same time, President Obama and his administration are relentlessly pushing China to re-balance its export-dependent economy.  As noted above, part of that re-balancing process will undoubtedly involve more expensive Chinese (and other Asian) imports into the United States and also could involve fewer Chinese government purchases of US debt.  But given the potential adverse effects of such events on the inflation-prone US economy, advocates of Chinese re-balancing in the administration and elsewhere may want to recall an old bit of wisdom:

Be careful what you wish for.

NEWSFLASH: Administration Still Clueless About Global Competitiveness

Last week, I detailed why the Obama Administration's fiscal policies were utterly clueless when it came to improving US businesses' global competitiveness.  Those criticisms remain valid, and perhaps even more so, now that the White House has released its big corporate tax "reform" plan (to see why, go here, here, here, here and here - for starters).  Thus, I'm going to ignore the President's campaign talking points tax "plan" and focus on another critical aspect of US companies' international competitiveness that the President and his advisers completely ignore: import liberalization and global supply chains.

Now, this isn't the first time that I've exposed the administration's blind spot when it comes to the clear connection between duty-free access to imports and US companies' ability to compete and "win" in the global economy.  (And I'm certainly not the only one.)  But a new piece by trade gadfly Greg Rushford really hits this point home by repeatedly documenting the abject silliness (and economic ignorance) that is the President's mercantilist obsession with exports (and concomitant disregard for imports).  In the piece, Rushford follows President Obama's recent "Made In America" road trip - in which he trumpets various companies' export successes - and then explains the dirty little secret behind that success: imports and even - gasp! - outsourcing.

First, President Obama on February 15th traveled to a Master Lock factory in Milwaukee to proclaim that "[w]e need an economy that is built to last, that is built on American manufacturing, and American know-how, and American-made energy, and skills for American workers, and the renewal of American values of hard work and fair play and shared responsibility."  What he failed to mention, however, is how Master Lock actually does business:

In Milwaukee, Master Lock now employs more than 400 workers, some 100 of them having been brought back from its Chinese facilities. The company also has about 700 more workers in Nogales, Mexico. Together, the Milwaukee and Nogales plants account for perhaps 55 percent of the company's lock production, with the remainder still in China, according to press reports....

And while praising Master Lock's manufacturing exports, President Obama failed to mention how the company's product is, you know, actually manufactured:

While at first glance, a padlock seems like a pretty simple thing to make, Master Lock's unionized Milwaukee work force has reason to know otherwise. Master Lock's vice president for global supply chains, Bob Rice, wrote a memo to the company's Asian suppliers last year, listing as examples 20 different products the company needed to import from China, each with its own SKU number.

Locks have parts that come from just about anywhere: keys, cylinders assemblies, ball bearings, plated shackle stop pins, anti-saw pins, screws, cylinder external assemblies, cases and cylinder retainer blocks. In 1995, the last year for which publicly available documentation is available for U.S. Customs' records, Master Lock made nine of 11 such components in Milwaukee. But the lock case and cylinder retainer block were needed from Taiwan --- and those two parts represented an estimated 25- 35% of the total cost of the finished padlock.

More recently, in 2010 Master Lock made U.S. Customs officials work a bit to determine where one padlock model was really made. The padlock was made of ten different components from various countries, with the principal components being a lock body made in Milwaukee and a shackle from China. All the components were then assembled in Mexico. Customs determined that the finished padlock should be marketed as a product of Mexico --- but that "Mexican" padlock also employed workers from Milwaukee to the Middle Kingdom.

Sometimes, Master Lock imports parts from Mexico, like unfinished padlock lock bodies and shackle assemblies that are then finished in Milwaukee, where the cylinder locks are attached. Those padlocks are labeled Made in USA --- but again, there's more to the American success story. Workers of the World: you have really become united....

Odd that Obama left these important facts out, huh?  It's almost as if he doesn't care about using the loudest microphone in the world to spread economic ignorance.  But I digress...

Rushford then follows President Obama to a Boeing plant in Everett, Washington to show that the company's production of the new 787 Dreamliner "is a great example of how we can bring jobs and manufacturing back to America."  Obama added that his administration wanted "to make it easier for companies like Boeing to sell their products all over the world, because more exports mean more jobs."  However:

The president didn't admit what every economist would immediately recognize: to export those Dreamliners, Boeing's workers need access to raw materials and components from all over the world.

Dreamliners may be Made in America, but with essential imports sourced from so many other places that it's difficult to know where to begin. There's the Integrated Surveillance System Processor and an Integrated Navigation Radio, from Canada. There's also a Valve Control Unit from Germany --- passengers can thank that for keeping their cabin air pressure within tolerable limits. And there's a turbine engine exhaust nozzle, brought in from Mexico from titanium sheets made in China. Those are just the first three telling examples that show up from a glance through US Customs records --- with each import necessary to the American workers in places like Everton.

That doesn't even get to the big-ticket items: the Rolls-Royce Trent 1000 engine, the testing in wind tunnels in the UK and France; the Mitsubishi Heavy Industries' wing; Italian horizontal stabilizers, doors from France, and other critical components from Sweden, India, South Korea --- it's a very long list. The Dreamliner is as cosmopolitan as the American people. Boeing's American workers should love imports, because their jobs depend upon them.

Finally, Rushford explains that it's not just US manufacturing companies that benefit from import liberalization and global supply chains.  Services firms, like those who helped build Miller Park in Milwaukee, also reap major dividends:

Miller Park was built by American (union) workers, with tons and tons of domestic materials. But that's not the whole story. The subcontractor for the stadium's renowned retractable steel roof was Mitsubishi Heavy Industries, Ltd. Mitsubishi bought high-strength steel from Luxembourg, which was shipped to Mitsubishi fabrication yards in China and Japan. The finished steel components were then shipped to the Port of Los Angeles, where they were unloaded by American longshoremen and then driven by Teamsters to Milwaukee.
Other steel that went into Miller Park came up the Mississippi River from the Port of New Orleans, according to sources at that port. And Haven Steel Products, Inc., headquartered in Kansas City, made the steel for the stadium's bowl that supports the roof. Other key work was done by Wisconsin Electrical Power Co.,not to mention the intrepid workers who put in the all-important beer-supply pipes.

Arup, the United Kingdom's experienced design firm, was responsible for most of the engineering design for Miller Park, working also with design teams from Dallas, Los Angeles, and Milwaukee. Arup, headquartered in London, has sent its consultants and engineers just about everywhere in recent decades: including New York's Tappan Zee Bridge, the 2nd Ave. Subway; Japan's Kansai International Airport, and the Sydney Opera House. Miller Park, like the others, was truly Made in the World....

Back when President Obama announced his National Export Initiative in 2010, I first highlighted the administration's odd habit of trumpeting US exporters who just so happen to rely on imports.  Rushford's piece makes clear that the White House hasn't kicked that habit and remains as economically uninformed as ever (well, at least publicly).

And just in case you think that Rushford and I are cherry-picking, think again.  The 2012 Economic Report of the President - quietly released last week - shows that the Obama administration's complete disregard for import liberalization is very much intentional.  That report's section on International Trade and Finance goes to great lengths to (i) praise goods and services exports (particularly the increase in US exports since their post-crash nadir in 2009); (ii) denigrate goods and services imports (for, example by lamenting the trade deficit and lauding opportunities to decrease exports of services imports); and (iii) not mention - even once! - the demonstrably positive effects of import liberalization on US firms' global competitiveness (despite spending several pages on ways to improve such competitiveness).  This complete disregard for import liberalization is, in my estimation, a new low (previously set by the President's 2010 Trade Policy Agenda) and a serious step backwards from the administration's much-improved 2011 Agenda.

If the President and his economic team can't even mention such an obvious and critical aspect of American businesses' ability to compete in today's global economy, then why on earth should we trust them on related issues like tax reform?


Oh, right, we shouldn't.

Danger: Senate Highway Bill Gets Funding from Auto Tariffs

The US Senate is poised to consider its version of the Surface Transportation Reauthorization Bill (S. 1813) this week, and last night the Senate Finance Committee signed off on the funding mechanism, drafted by Finance Chair Max Baucus (D-MT), for this multi-billion dollar piece of legislation.  According to published reports, Sen. Baucus’ legislation, The Highway Investment, Job Creation and Economic Growth Act of 2012, still won't cover the full cost of the Highway Bill because several Committee Members balked at certain controversial provisions.  Unfortunately, another funding mechanism in the Baucus Bill should warrant similar concerns yet for some reason seems to be cruising under everyone's radar: the earmarking of revenue from automobile import tariffs for the Highway Trust Fund.

That is an absolutely horrible - and extremely dangerous - idea.

The full text of the final, approved Baucus bill isn't available online yet, but the aformentioned published reports, as well as the official Final Results of last night's Committee session, indicate that the auto tariff provision will be included in S. 1813.  A summary of that provision was tucked into the original "Chairman's Mark" and reads as follows:

The proposal would appropriate from the General Fund and deposit into the Highway Trust Fund amounts equivalent to amounts received in the General Fund, for fiscal year 2012 through fiscal year 2014, on articles classified under subheadings 8703.22.00 and 8703.24.00 of Chapter 87.

Tariff revenue is supposed to be deposited directly into the General Treasury ("General Fund").  The summary above makes clear that the Baucus Bill, if it became law, will mandate that all revenue collected from the current 2.5% tariffs on imports of small (1000cc to 1500cc - 8703.22) and large (over 3000cc - 8703.24) automobiles be diverted from the General Treasury fo the Highway Trust Fund.  The revised Chairman's Mark extends this measure through FY2016 instead of FY2014.  The revenue estimates accompanying both documents provide no actual estimates of the amount of revenue that the import tariff diversion would deliver to the Trust Fund, and instead punt that calculation to the CBO.

Now, I'm no budget guru, so for now I'll ignore the budgetary gimmicks that appear to be involved here. (How does merely diverting existing revenue from one account to another account actually pay for an entirely new project?  Isn't that like me using the portion of my monthly paycheck that's allocated for my mortgage on a spontaneous trip to Vegas and then calling the Vegas trip "paid for"?  And how does Finance have any clue as to the revenue effects if it's punting to CBO?  Oh, never mind.) 

Instead, I want to focus on Sen. Baucus' novel idea to tap into existing tariff revenue - rather than cutting spending or (shudder to think) raising new revenues - to fund a specific government spending projects (road construction via the Highway Trust Fund), and to mandate, via US law, that the tariff revenue stream be used only for those purposes.  Do he and his fellow Senators not see the immense problems with that little plan?

Apparently not.  So here's a quick list:

First, there's the awful precedent.  Earmarking tariff revenue for specific spending projects isn't completely novel, but the past cases that I'm aware of - the Cotton and Wool Trust Funds - were specifically intended to fund certain industries allegedly injured by the tariffs at issue.  I'm certainly not condoning these kinds of slush funds, but they're obviously a lot different from the Baucus Bill.  In the latter case, a cash-strapped Senator who can't bring himself to actually cut spending or raise taxes (you know, actually do his job) in order to fund a big new highway construction project is simply scouring the US tariff code for "new" sources of revenue.  So, if the Baucus Bill becomes law, just imagine the feeding frenzy among congressional protectionists and spend-a-holics that could be set off by the precedent.  The spend-a-holics can fund new pet projects without making any difficult choices, and can team with protectionists who would just love to have their favorite tariffs used for those purposes (more on that below).  And the protectionists, of course, also have a new excuse to raise US tariffs (in many cases, there is room between existing, "applied" tariff rates and "bound rates" which the US can't exceed under WTO rules).

In short: "HEY LOOK, GUYS, WE CAN JUST RAISE APPLIED TARIFF RATES ON STEEL/TEXTILES/WHATEVER TO MAGICALLY FUND OUR FAVORITE BRIDGE TO NOWEHERE!"  [Yes, I really do think that Senators think/speak/type in all caps.]

So am I the only one who thinks that this is precisely the wrong kind of precedent we want to be setting right now?

Second, the Baucus Bill discourages tariff reductions for the earmarked tariff lines.  For example, if the Highway Trust Fund is, by law, partially funded by automobile tariffs, it will provide yet another political excuse for not eliminating those tariffs.  So free traders will have to respond to not only the typical protectionist excuse that the auto tariffs' elimination will harm US automakers, but also the brand new excuse that the tariff cut will defund the Highway Trust Fund (and kill jobs or drivers or puppies or something)!  Convincing Congress and the Administration to lower tariffs is difficult enough already (despite the overwhelming moral and economic support), thanks.

This is also another incentive for protectionists to lard up spending bills with tariff earmarks.  It literally protects their protectionism.  Ugh.

Third, and somewhat related to the previous point, what would this new policy do to USTR's ability to negotiate tariff reductions in bilateral or multilateral trade negotiations?  Given congressional PayGo rules, all new spending hikes or revenue cuts have to be offset with spending cuts or revenue hikes.  Meanwhile, the Bacus Bill hardwires the tariff earmark into US law as a funding source for the Highway Trust Fund.  So if the United States wants to exchange the elimination of that 2.5% auto tariff for new market access in, say, Japan, will USTR have to get Congress to promise (stop laughing) to pass a new law (shifting the Highway Trust Fund's revenue source back to the General Treasury or something)?  Yeah, our trading partners are going to just line right up to be part of that awesome process.
 
Thus, the tariff earmark provides yet another impediment - again, as if there weren't enough already - to liberalizing trade, this time via reciprocal trade negotiations.
 
What a debacle.
 
I have other questions and concerns, but that'll have to do for tonight.  Until then, I welcome your insights in the comments. 
 
And fortunately, there's still some time before this awful measure becomes law.  So who knows?  Maybe cooler heads will prevail.

Documenting the Real - and Personal - Harms Imposed by the Obama Administration's Trade Remedies Policies

Over the last few days, I've tried to document the myriad problems surrounding current Obama administration policies related to trade remedies (i.e., anti-dumping, countervailing duty and safeguards) actions against Chinese imports.  I first explained (in admittedly excruciating detail) how the administration's steadfast support, in the face of numerous adverse legal rulings, for imposing CVDs on imports from "non-market economies" (NMEs) like China and Vietnam was undermining US-China trade relations, injecting uncertainty into the US economy, and creating tons of needless litigation in US courts and at the WTO.  I then criticized President Obama's rather, ahem, audacious claims in the 2012 State of the Union Address that his administration's "Section 421" safeguards tariffs on Chinese passenger vehicle and light-truck tires created lots of American jobs and will therefore serve as the poster child for the President's new trade "enforcement" team.

These blog posts follow years of documenting the problems with US trade laws and the immense-yet-mostly-unseen costs that US trade remedies actions - including the Section 421 tariffs and unrelated countervailing duties on Chinese off-road tires - impose on American businesses (e.g., importers, retailers and downstream manufacturers) that consume, import, market or sell Chinese and other imported goods subject to all of those US duties.  Most of these discussions, however, were been based on public statistics and published news reports, rather than firsthand accounts (mainly because most US business owners are unwilling or unable to comment on the record about such things).

Then last night I received an unsolicited email from Mr. Robert Sherkin, currently President and CEO of Dynamic Tire Corp. and a founder of the now-bankrupt GPX International Tire Corp (the named Plaintiff in the big US court case on the CVD/NME issue).  [Note: I don't represent Mr. Sherkin in any capacity.]  He kindly praised my analysis of the troublesome US trade remedies cases against Chinese tires, and then in a subsequent email explained just how these particular trade actions - which have been repeatedly ruled illegal by US courts and the WTO, yet continue to be championed by the Obama administration - destroyed his company (via the aforementioned bankruptcy), eliminated hundreds of US jobs, and personally cost him millions of dollars.  I asked Mr. Sherkin if I could post his email here, and he agreed.  It is copied below, verbatim (with my clarifications in brackets):

From: Robert Sherkin
Date: Thu, 2 Feb 2012
To: Scott Lincicome
Subject: RE: your post 

[Regarding the AD/CVD investigation of off-the-road (OTR) tires and subsequent CVD/NME litigation in US courts...]

We spent millions fighting this battle for 4 years only to lose the company. The process was Orwellian. You go in thinking that truth would prevail and vindication would be the end result. Boy were we wrong... even now with a US Court telling the government 3 times that they are wrong … they still refuse to accept it.

You can’t possibly calculate both AD and CVD in a non-market economy.  The “surrogate cost” inclusion deals with the CVD aspect!  It is DOUBLE COUNTING.

Has the USA really become that weak that they need to have 6 outs per inning where the other side has 3?  Doesn’t anyone want to do the math or are even the “smart guys” on the Hill only capable of focusing on 20 second sound bites from the talking heads.

We spent over $30 Million on a facility in China, employed over 200 people in North America.

Titan Tire launched an AD claim which was subsequently commandeered by Bridgestone, who by the way was brilliant!  Using their aging 40 year old factory in Bloomington Illinois that they haven’t invested much in over the years, they have effectively blocked China from access to their OTR market in USA ($300+ Million per year) which they fill mostly from their factories in Japan... how smart is that!

Titan on the other hand claimed they couldn’t compete in USA but purchased more USA assets with the goal of attaining 50% of their revenue on an export basis... how can they compete with China outside of USA if they need AD/CVD protection inside USA?  Ridiculous argument but the DOC and ITC lap it up.

[Regarding the Section 421 safeguards duties on fairly-traded Chinese consumer tires...] 

The latest one we are currently suffering with is the 421 ruling on consumer tires... what I call Obama’s $6 Billion Tax on the US consumer... not one new job was created as a result despite the state of the union lie!  This 421 ruling will have had the effect of increasing the cost of automotive tires to the US consumer by not less than $6 Billion over the 3 years [that it will be imposed]… and imports during the last 2 ½ years have not reduced, they only shifted from China to Taiwan, Malaysia, Thailand, Korea and others.  The USW (not one industry participant) claimed that the 421 “relief” was needed to address market disruption caused by the surge of tires imported from China.

So the US consumer pays the price for the USW to the thump their chest, to the tune of $6 Billion.  Priceless!  Something tells me that there are a lot of better ways to spend this amount of funds!

Sorry for my rant….. I feel a little better now! --- getting kicked in the teeth by the US Government for over $20MM personally gets one a little agitated sometimes!

I don't know about you, but there seem to be plenty of reasons for Mr. Sherkin to get "a little agitated" about (and no reason for him to apologize for) how he, his company and its employees were treated by the Obama administration and its strong commitment to maintaining the problematic status quo on US trade regulations.

The loss of a small business, 200 jobs and $20 million can certainly cause a guy to get a little ranty.

In a great new video, Senator Jim DeMint (R-SC) explains how US regulations are destroying American entrepreneurs' ability to compete and succeed in the global economy.  As I (and others) have frequently noted, US trade remedies laws - and the litigation arising therefrom - are precisely the types regulations that can, if poorly crafted or administered, strangle American businesses - particularly those that consume or otherwise rely on imports.  Unfortunately, many politicians - even supposed champions of the free market - seem to forget that US "unfair trade" regulations can impose very real costs on many American businesses (US tariffs are paid by Americans, afterall) and often on very "unfair" terms.  Maybe Mr. Sherkin's story will help them remember (or discover) that fact.

And if more of this is the future of the Obama administration's China trade policy, then heaven help us.

Congratulations Chinese Sleeping Bag Exporters!

While most of us were enjoying the holidays, the Obama administration quietly announced its intention to raise import taxes on sleeping bags from Bangladesh that used to qualify for duty-free treatment under the US Generalized System of Preferences (GSP).  According to the USTR announcement (emphasis mine):

United States Trade Representative Ron Kirk announced today the outcome of the Obama Administration’s 2010 Annual Review under the Generalized System of Preferences (GSP) program. Congress created the GSP program in the Trade Act of 1974 to help developing countries expand their economies by allowing certain goods to be imported to the United States duty-free.

Ambassador Kirk said, “GSP is an important element both of this Administration’s trade agenda and of its efforts to help developing countries grow their economies through increased trade. The annual review of GSP helps us to ensure that the program is working as it should and that developments affecting country and product eligibility are taken into account, consistent with the GSP statute. A well-functioning GSP program also helps U.S. businesses, workers, and consumers by lowering the costs of imported goods, including those used as inputs for U.S. manufacturing.”

Based on the Administration’s review of product petitions accepted for the 2010 GSP Annual Review, President Obama determined that one product – certain non-down sleeping bags – should be removed from eligibility for duty-free treatment under GSP because it is import-sensitive in the context of GSP.

As you may recall, the Bangladeshi sleeping bags were the subject of a big controversy last year as Sen. Jeff Sessions caused GSP to expire in an attempt to force USTR to stop granting those imports duty-free treatment and thus protect - allegedly - Alabama sleeping bag manufacturer Exxel Outdoors.  Well, it looks like the Senator was finally successful, as Congressional Quarterly[$] makes clear (emphasis mine):

The Obama administration is removing certain Bangladeshi-made sleeping bags from a special duty-free list, a victory for an American sporting equipment company and its congressional allies, including Republican Sen. Jeff Sessions of Alabama.

The U.S. trade representative’s (USTR) office announced Thursday that it is agreeing to a petition from Exxel Outdoors Inc., which has its main factory in Haleyville, Ala., to stop granting duty-free status to certain “non-down” sleeping bags under the Generalized System of Preferences, which reduces tariffs on certain imports from developing countries.

Exxel has been fighting to get the sleeping bags — which compete with its own sleeping bags — off the list for years. Many lawmakers went to bat for the firm, including Rep. Robert B. Aderholt, R-Ala., but Sessions, the state’s junior senator, became their highest-profile champion after he forced a temporary expiration of the GSP program in 2010 over the issue.

He fought repeatedly in 2011, during the debate over the stalled Bush-era trade bills with South Korea, Colombia and Panama, to force USTR to take the provision off the list.

Without GSP duty-free status, there is a 9 percent tariff on the sleeping bags, which are mainly made in Bangladesh. Sessions argued that exempting those products from tariffs violated the spirit of the GSP program, which is not supposed to help foreign companies at the expense of American firms....

Harry Kazazian, Exxel’s CEO, said Thursday that the administration had made the right choice. Kazazian argued that his company does business internationally and is not anti-trade....

“The way the trade laws were written in GSP, regarding sleeping bags, wasn’t fair,” he said from the company’s Los Angeles corporate headquarters, adding that the tariff waiver could have forced him to move the Alabama factory offshore. The company also has a plant in Shanghai.

Exxel has spent $90,000 on lobbying expenses related to GSP issues in the last three years, according to the Center for Responsive Politics.

So to recap:

• Raising tariffs on sleeping bags and thereby preventing dirt-poor workers in Bangladesh (per capita income of $641/year!)  from enjoying the export and development benefits intended by GSP?  CHECK! 

• Tens of thousands of dollars spent on shady corporate lobbying - and lots of hard work by the congressional beneficiaries - to raise those tariffs?  CHECK!

• "Alabama" company with its corporate headquarters - and high-paid professional services jobs - in Los Angeles (not Alabama)?  CHECK!

• "Alabama" company with production facilities in China?  CHECK!

Behold, protectionism in all its crony-tastic, poverty-inducing glory!  

And speaking of China (which doesn't qualify for GSP treatment), guess which foreign country has been gobbling up domestic market share for years and easily stands to benefit most from raising tariffs on Bangladeshi sleeping bags?  Oh, right:

Country	2009	2010	2010 YTD	2011 YTD	Percent Change YTD2010 - YTD2011
	In 1,000 Dollars
China	64,426	76,910	67,242	70,962	5.5%
Bangladesh	612	5,324	4,238	5,367	26.6%
United Kingdom	451	298	182	268	47.1%
India	17	0	0	135	51,531.4%
Pakistan	2	6	3	75	2,863.9%
New Zealand	0	0	0	37	N/A
Canada	13	36	28	15	-44.5%
Czech Republic	6	2	2	11	641.1%
Australia	0	35	35	9	-75.2%
Hong Kong	26	100	100	8	-92.0%
Turkey	0	0	0	8	2,728.9%
Mexico	37	5	0	4	N/A
Taiwan	94	11	11	4	-63.1%
Estonia	0	7	7	4	-49.4%
Germany	11	13	13	3	-77.1%
Subtotal :	65,695	82,747	71,861	76,909	7.0%
All Other:	16	165	52	22	-58.5%
Total	65,711	82,912	71,913	76,931	7.0%

So Exxel's Chinese manufacturing facility will all-of-a-sudden become 9 percent more competitive now?  Sweet!  But, hey, at least Exxel's employees in LA will be okay if/when those Chinese sleeping bag imports keep growing, right?

Thanks, Senator Sessions.

UPDATE: Heritage's Bryan Riley makes a great point on this decision that I totally missed: "President Obamas decision to hike tariffs on sleeping bags from developing countries came just one month after Hu Jintao, president of the Peoples Republic of China and General Secretary of the Communist Party of China, announced the elimination of tariffs on 97 percent of items imported from least-developed countries that have diplomatic relations with China."  Ouch.  He then rightly concludes: "Instead of sending billions of dollars in aid to developing countries every year, Congress should remove trade barriers that prevent Americans from doing business with people in those countries....  Congress should take these decisions out of the White House by permanently removing the tariff on imported sleeping bags along with tariffs on all other imports from the worlds developing countries."