New Article: "America’s Horrible, No Good, Messed-Up Trade Policy (and How to Fix It)"

[Ed. note: This article was first published in The Federalist, which you really should be reading by now.]

Americans currently pay high taxes on food, clothing, automobiles, industrial inputs and other goods and services, and their own United States Trade Representative is vigorously fighting other countries to keep it that way. Even worse, the government’s efforts all but ensure that removing such taxes – and easing the artificial burdens they place on American families and businesses – will remain unnecessarily, and irrationally, difficult for years to come.
 

This is the awful state of American trade policy, and serious reform is long overdue.
 

Americans tend to think of the United States as some sort of free trade bastion in which unfettered globalization is – for better or worse – simply a way of life. However, while many U.S. tariffs were lowered decades ago, several tariff “peaks” remain in certain politically-connected areas like food, clothing, footwear and automobiles. Moreover, “non-tariff barriers” to trade – subsidies, regulations, etc. – have proliferated in recent years, and many “trade remedies” duties – based on allegations of “unfair” trade – also remain in place, particularly for industrial inputs like steel and chemicals.

The pros and (mostly) cons of these government measures vary, but one thing remains constant: their staunch and unflinching defense by the U.S. government in global free trade agreement negotiations. In these venues, gains are viewed as coming only from new access for U.S. exports and investment, while imports are the unfortunate price that America must pay for such “victories.” For example, as negotiations in both the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP) gained momentum earlier this year, blubbering American journalists were quick to proclaim President Obama’s supposed “free trade renaissance” and strong support for expanding U.S. exports, but uniformly failed to report on the fact that his firm resistance to negotiating partners’ calls for lower U.S. trade barriers was a major reason for the agreements’ continuing difficulties. Nor did any such reports delve into the fact that those barriers, while certainly good for certain well-connected companies in the United States, injured the vast majority of American individuals and firms. And when TPP negotiators inevitably miss their much-ballyhooed and over-promised 2013 deadline for completing the agreement, you can bet that these facts will not receive top billing (or maybe even passing mention). Instead, only trading partners’ refusal to heed U.S. export demands will be blamed.

Trade and Reciprocity

The Obama administration, of course, is not the first to engage in such negotiating tactics and instead is simply the latest White House to do so. In fact, since the 1930s, American trade policy has utilized a “reciprocity” model of trade negotiations in which the United States treated any trade liberalization (e.g., the reduction of tariffs), no matter how smart or moral, as a “concession” that is only to be traded for another nations’ own acceptance of new U.S. exports or investment. Moreover, the diplomatic origins of the reciprocity model have ensured that trade liberalization is treated as a foreign, rather than domestic, policy area in which trade negotiations take on a zero-sum, war-like mentality where benefits are “won” or “lost”, instead of mutually achieved. Put most simply, exports are an unquestioned good to be pursued, while imports are an unmitigated bad to be resisted. Full stop.

Even though U.S. foreign and domestic policy – as well as economics, politics and society more broadly – has changed dramatically in the intervening decades, U.S. trade policy remains mired in this 20^th century, cold-war framework, as the current TPP and TTIP negotiations make abundantly clear. Unfortunately, some things to not get better with age, and U.S. trade policy is certainly one of those things. In fact, there are at least five fundamental problems with the United States’ mercantilist, reciprocity-based approach to international trade.
 

First and most basically, it is economically ignorant. Since Adam Smith first penned The Wealth of Nations, there has been a near-universal economic consensus in support of the elimination of trade barriers regardless of whether other nations do likewise. For this reason, there is quite literally no policy issue on which more economists – left, right and center – agree more, and the supposed death of the “free trade consensus” in academia has been wildly exaggerated.
 

This support, however, goes far beyond mere economic theory: there is also an endless array of empirical and historical evidence demonstrating the value of free trade and free markets. In fact, just last week the Heritage Foundation rounded up a lot of the latest data in order to (once again) resoundingly conclude that trade and investment liberalization is awesome, and that Congress should unilaterally eliminate tariffs on a wide range of products in order to boost the U.S. economy (including U.S. manufacturers). Heritage is certainly not alone: policy shops across the political spectrum, including Brookings, AEI and my colleagues at the Cato Institute, have produced similar studies in the past. And, as Dan Ikenson and I explained in a 2009 paper for Cato, the facts not only support free trade, but also destroy the various myths used by protectionists to undermine public support for such policies, including the greatly-exaggerated “death” of American manufacturing; the alleged link between imports, the trade deficit and U.S. jobs; and the idea that foreign companies and governments routinely cheat in order to gain an “unfair” advantage over their American counterparts.

Second, the reciprocity model has proven increasingly ineffective in producing tangible trade liberalization gains for U.S. businesses and consumers. The biggest example of this failure is WTO’s Doha Round of multilateral trade negotiations, which remains comatose after 12 years of missed deadlines, unkept promises and angry finger-pointing among stubborn nations that refuse to make further “concessions” to finalize the multi-trillion-dollar deal. Even the WTO’s “mini package” of supposedly-low-hanging fruit – intended to jump-start Doha during this December’s ministerial meetings in Bali, Indonesia – appears in doubt.
 

Smaller, regional/bilateral deals aren’t faring much better. Indeed, according to a recent report from the Asian Development Bank, the entire TPP is at risk of collapsing due to nations’ demands for various protectionist exceptions (or “carve-outs”) from the deal’s general free trade and non-discrimination rules:

The need to provide exemptions, or “carve outs,” to avoid a collapse in negotiations also raises concerns over the final form the TPP will take. The secrecy surrounding the negotiations makes it difficult to assess progress, but—from what is known—there is the risk of degenerating into a series of loosely tied bilateral deals. Indications are that the two largest TPP members—the U.S. and Japan—are proceeding along bilateral lines, threatening the demanding single-undertaking approach the TPP is supposed to adopt. 

Although the number of countries involved in these negotiations is much lower than at the WTO, for instance, it does not translate to a commensurate reduction in diversity in terms of disparate interests. These interests often conflict, especially in a context where the agenda is far more ambitious than any other proposed thus far. The recent round of negotiations that took place in Brunei Darussalam in August 2013 was reported to have made very little progress, highlighting the difficulties being faced as the TPP moves toward finding common ground on the more difficult issues.

Bloomberg has more on the ADB report and the TPP’s current problems here. Among the carve-outs demanded by TPP participants are Japan’s agricultural protectionism and Malaysia’s imposition of discriminatory regulatory barriers to tobacco, but many such demands originate in Washington, including three of the negotiations’ most contentious issues:

• Sugar protectionism. The United States has not only resisted calls to liberalize archaic tariffs and quotas on sugar imports, but also refused to reopen the current U.S.-Australia FTA, which completely excludes sugar from the Agreement.
• Textiles, apparel and footwear. The Obama administration has repeatedly refused requests from Vietnam and other large exporters to lower U.S. tariffs on textiles, clothing and shoes, and has demanded complicated “rules of origin” that will dramatically narrow the goods that could qualify for preferential access to the U.S. market.
• Automobiles. The United States also has vigorously fought Japan over U.S. tariffs on automobiles (2.5% for cars and a whopping 25% for light trucks) – a nearly-identical request that delayed the implementation of the U.S.-Korea FTA for several years after it was originally signed by the Bush Administration.

Each of these issues not only hurts U.S. consumers (more on that below), but threatens the completion of the TPP itself – an absolutely dumbfounding prospect, given these sectors’ relative insignificance for both the agreement and the U.S. economy.

The third flaw in the current system is that it’s needlessly messy and archaic. Every U.S. FTA, from NAFTA to KORUS, contains a different “schedule” which dictates the level and timing new market access for individual FTA partners’ goods and services. Rules of origin and other commitments also vary widely across agreements, thus creating an impenetrable web of rules and regulations and making the U.S. tariff code look like the Rosetta Stone. As a result, the exact same product will be subject to different taxes and rules based solely on its origin and the year in which it enters the country, and U.S. businesses often make sourcing decisions based on FTA rules rather than a product’s actual value. (And, of course, they must spend millions of dollars annually to determine those rules!)

Not only is this process costly and inefficient, but it is wholly out of step with the 21^st century world of seamless and ever-changing global supply chains. Today, product components are often sourced from multiple countries and assembled in another, and sourcing patterns routinely change based on market developments. (See, e.g., the evergreen “origins” of the iPhone and its competitors.) Arcane trade rules prevent such dynamism and thus hurt U.S. companies and consumers. Put another way, goods today are “made on earth,” but our trade agreements reflect a bygone era of vertical manufacturers, simplistic designs and old-fashioned notions of bilateral trade among individual nations. It makes no sense. None.

Fourth, the United States’ “free trade” policy has proven to be a horrible tool for actually achieving and sustaining public support for trade liberalization and free markets. For one thing, focusing on exports, FTAs and arcane market access issues (e.g., pharmaceutical patent protections) gives many Americans the not-totally-unwarranted impression that our trade policy is little more than a tool of large multinational exporters and investors at the expense of American workers. That is hardly a way to achieve grassroots support for important economic policy!

More importantly, the constant focus on exports and resistance to any type of import liberalization actually breeds public misunderstanding and distrust of trade liberalization. As Dan Ikenson and I explained in 2011:

The pervasive view that exports are good and imports are bad is a central misconception upon which rests the belief that trade negotiations and “reciprocity” are essential to trade liberalization. Under this formulation, an optimal trade agreement, from the perspective of U.S. negotiators, is one that maximizes U.S. access to foreign markets and minimizes foreign access to U.S. markets. An agreement requiring large cuts to U.S. tariffs, which would thus deliver significant benefits to consumers, would not pass political muster unless it could be demonstrated that even larger export benefits were to be had. This misguided premise that imports are the cost of exports and should be minimized lies at the root of public skepticism about trade. Ironically, it is also a prominent feature of the favored pro-trade argument.

There is nothing, of course, wrong with exports or pursuing new market access for U.S. businesses. The political appeal of that message is obvious, and exports do contribute to economic growth and, thus, job creation. However, the U.S. government’s relentless obsession with exports and reciprocity not only confuses the public and reinforces bad economics, but also creates a large and unnecessary opening for misleading protectionists:

[The mecantilist] message invites the following retort: if exports help grow the economy and create jobs, then imports must shrink the economy and cost jobs. In failing to explain why that conclusion about imports is wrong, trade proponents have yielded the floor to trade skeptics, who have been more than happy to manufacture talking points about the “deleterious” impact of imports on the U.S. economy. Most of those talking points are misleading or plain wrong, but there has been inadequate effort to correct the record. As a result, too many Americans accept the mercantilist fallacy that exports are good, imports are bad, and the trade account is a scoreboard.

Birdcages across the country are lined with op-eds from protectionist union leaders, businessmen and “consumer protection” groups that turn FTA proponents’ mercantilist message against them. Indeed, just this month I was treated to a piece in my hometown paper from the NC AFL-CIO, arguing that the U.S.-Korea FTA – and U.S. free trade policy more broadly – was a clear disaster for North Carolina because imports from Korea increased in the agreement’s first year, while U.S. exports declined. (Nevermind the fact that Korea’s economy was struggling mightily in 2012 and thus represented a low-demand export market, or that free trade resoundingly benefits the Tarheel state.) Sadly, using the Obama administration’s own misguided metric for gauging an FTA’s success (i.e., exports and the trade balance), the union had a point and thus capably hoisted the administration on its own mercantilist petard. And until the U.S. government changes this shortsighted, incorrect approach to trade policy and messaging, this rhetorical weapon will be readily available to protectionists, and public opinion will remain subject to the whims of meaningless statistics instead of economic consensus and actual historical fact.

Trade and Morality

Finally, the current approach to U.S. trade policy is manifestly immoral. Government intervention in voluntary economic exchange on behalf of some citizens necessarily comes at the expense of others and is inherently unfair, inefficient, and subverts the rule of law. At their core, trade barriers like those for sugar, clothing, footwear and automobiles are the triumph of coercion and politics over free choice and economics. The protectionist policies that USTR fights to maintain are the result of productive resources being diverted to achieve political ends and, in the process, taxing unsuspecting consumers to line the pockets of the special interests that succeeded in enlisting the weight of the government on their side.
 

This immorality has a clear and tangible cost. In 2011, Americans paid over ten billion dollars in tariffs on clothing alone, and another two billion each for shoes and automobiles – $29 billion total that year and $40 billion total in 2012. These taxes also raise the prices of goods made here at home and, as a result, American families pay much more for everyday staples like butter, milk, ice cream, sugar, tuna, apparel and shoes than their foreign counterparts. And American companies do the same for industrial inputs like ball bearings, steel and cement.
 

Protectionism is akin to earmarks, but it comes out of the hides of American families and businesses instead of the general treasury. And under the current trade negotiations system, our government is essentially choosing certain U.S. businesses and workers – those seeking protection and those seeking new export markets – over everyone else in America. As a result of these taxpayer-funded efforts, U.S. families pay higher prices for everyday essentials, and import-consuming companies struggle to remain globally competitive. (See, for example, U.S. candy makers who have moved their operations, and thousands of jobs, overseas due to sky-high sugar prices here.) Why on earth should our government pursue such an obviously immoral approach to international economic policy? Obvious answer: it shouldn’t.

A Better Path Forward

Fortunately, there is a much better, simpler way forward for U.S. trade policy. Most obviously, the United States should (i) immediately and unconditionally eliminate tariffs on basic human necessities like food, clothing, shoes, as well as industrial inputs that U.S. manufacturers rely upon to remain globally competitive; and (ii) phase out all other tariffs over a relatively short transition period. This change, coupled with matching rhetorical shift about the domestic benefits of trade liberalization, would instantly put the United States back at the forefront of global economic policy and in line with longstanding economic doctrine, fundamental fairness and modern business practices.
 

And, contrary to popular belief, such moves are politically possible: not only have countries like Australia, Chile, China, New Zealand, Canada, Mexico and Colombia pursued unilateral import liberalization in recent years in order to boost their economies, but the U.S. government also has done so via more limited initiatives like the Generalized System of Preferences and the Miscellaneous Tariff Bill (and sold such policies by – rightly – emphasizing their benefits to U.S. businesses and consumers). These policies would resonate with policymakers on the right and left, particularly in this era of increasing bipartisan disdain for corporate welfare. They would be consistent both with conservatives’ principled opposition to higher taxes and big government interventionism, and with liberals’ opposition to regressive taxation.
 

Furthermore, the unilateral elimination of tariffs would not lead to a flood of “unfair” imports that destroy U.S. industry because we already have trade remedy laws designed to address such situations and, due to years of domestic industry lobbying, are extremely biased towards protection. (Not to mention the fact that the vast majority of imports are already “fairly traded.”)
 

Speaking of which, the United States also should pursue fundamental reforms of its trade remedy laws to ensure that they actually address unfair and injurious imports (rather than domestic lobbying) and take into account the broader public interest – including U.S. consumer concerns. Our government should be ever vigilant of the fact that American consumers, not foreign exporters or governments, pay U.S. “unfair” trade duties, and these measures should therefore be a last resort.

Other regulatory reforms also are necessary, such as the elimination of most U.S. subsidy programs and various forms of “regulatory protectionism,” such as the Lacey Act and Dodd-Frank rules on “conflict minerals,” all of which thwart competition, raise prices and distort domestic and global markets.
 

Finally, the United States should complement these important changes by coupling them with “American competitiveness agenda” in order to give U.S. workers and companies what they really need to compete in today’s global economy: lower individual and corporate taxes in order to reflect new global norms, limits on lawfare and professional/occupational licensing, energy deregulation, etc. Such changes would boost economic growth, eliminate most domestic demands for protection from low-cost foreign competition, and, combined with the aforementioned tariff liberalization, boost U.S. exports without the need for slow and messy reciprocal trade negotiations. (Remaining trade barriers could be addressed via more aggressive litigation of existing rights and obligations under WTO rules and a “name and shame” approach to the most egregious transgressors.)

The global economy is advancing at a breakneck pace, but U.S. trade policy is stuck in neutral. Our elected leaders ignore basic facts and economics and pursue negotiations that not only benefit a well-connected cabal of businesses and lobbyists at the expense of U.S. consumers, but also undermine long-term public support for free trade. This archaic, immoral approach has produced diminishing returns in recent years and has called into question almost 70 years of U.S. leadership in the global economy. Meanwhile, other countries press ahead with agendas that better serve their citizens and reflect the realities of modern global supply chains, multinational investment and other key aspects of the 21^st century economy.

It’s time America did the same.

Giving Obama's Free Trade Legacy Some Much Needed Perspective

Over the last several weeks, Americans have been treated to a pretty constant stream of news stories applauding President Obama's new found affection for free trade.  The impetus for this fawning coverage is obvious: since the end of 2012, the Obama administration has repeatedly thrust trade - in particular the inclusion of Japan in the ongoing Trans-Pacific Partnership talks and the launch of FTA negotiations with the EU - into the spotlight.  The administration does deserve some credit for finally, after four years of depressing inaction, putting the United States back in the free trade game (a game we not only used to dominate, but also kinda, you know, invented), but the media reaction to these announcements - i.e., assuming the FTAs' timely completion and all-but-anointing President Obama to be the greatest free trade president in the history of anything ever - has been utterly ridiculous.  Fortunately, Cato's Dan Ikenson has finally had enough and today does his best Winston Wolfe impression by throwing some much-needed cold water on the media's coronation party.  First, he quickly recites the administration's actual record on trade so far:

[B]efore anyone awards the president the Nobel Trade Prize for a job yet done, consider this: in four-plus years, this administration has concluded zero trade agreements, while launching 13 WTO cases against various trade partners. For 50 months, enforcement and domestic protectionism—not liberalization—have dominated the trade agenda....

Yep.  Next, Ikenson mentions another, ahem, minor hurdle to completing ambitious trade agreements in a rapid fashion - our totally unnecessary lack of a lead trade negotiator:

For starters, wouldn’t the president have delegated someone capable and experienced to take ownership of the trade agenda if he were really committed to leaving a trade policy legacy? U.S. trade representative Ron Kirk announced more than one year ago that he would be leaving his post early in a second Obama administration. Yet there is nobody vetted and ready to take the reins of trade policy. Kirk’s official resignation came at the end of last month—though he has been hanging around to help out on account of … “sequestration.”

The most prominent name floated for U.S. Trade Representative has been the OMB’s Jeff Zients, the person most closely associated with President Obama’s proposal to subsume the USTR under the enforcement-centric Commerce Department—again, not exactly the substance of trade legacy-building. Members from both parties in Congress have demanded a better candidate if the president expects his trade agenda to be taken seriously.

I'd be remiss not to note that the Obama administration also had a really tough time finding Kirk back in 2008-09 because at least one candidate (rightly, in retrospect) saw that trade policy would be a low priority in the Obama White House and thus turned the job down.  But I digress...

Back to the current situation.  Ikenson then points out the myriad landmines in the TPP and EU deals themselves:

Accomplishments, not rhetorical intentions, should serve as the basis for our judgments. Anyone can announce initiatives. President Obama is quite proficient at reciting litanies of initiatives. But it remains to be seen how he handles the situation when the deals require his confronting allied interests and dismantling their protectionist perches. In fairness, the administration’s trade negotiators have been working hard toward a Trans-Pacific Partnership agreement with 10 Pacific-rim nations. But let’s see where this goes before we start writing history. There’s still a lot of ham left on that bone.

The administration has verbally committed to completing the TPP negotiations by the end of this year and the just-announced Transatlantic Trade and Investment Partnership negotiations with Europe by the end of next year—both virtual impossibilities given where things stand in those negotiations and between the White House and Congress. So we already have a credibility problem.

Both sets of agreements are likely to include provisions that penetrate deeper than usual into the domestic regulatory space of all countries involved. Understandably, this is generating resistance—particularly to U.S. demands for extra investor and intellectual property protections. Some of the groups that were instrumental in defeating SOPA and PIPA legislation last Congress are beginning to mobilize in response to concerns that the TTIF could be a backdoor to IP-based restrictions that affect internet use and data sharing, among other issues. U.S. negotiators are making serious demands on matters they claim to be central to 21st century trade, yet they appear unwilling to give ground on the 18th century protectionism still afforded U.S. textile and footwear producers.

I bring attention to these details not to pick a fight about Obama’s trade record, but to emphasize that facts matter. So do characterizations. Readers should know about growing resistance to U.S. demands that threaten to prolong or derail the TPP and TTIP negotiations. Readers should know that if the talks break down or produce less ambitious outcomes, that there is probably more to the story than the official U.S. account, which will pin the blame on foreign intransigence. Readers should know that the U.S. government engages in all sorts of protectionist policies and then relies on media to characterize trade as a zero-sum contest between U.S. producers and foreign producers. Under this rubric, U.S. protectionism is presented as a necessary response and it becomes patriotic to support our own trade barriers—the very protectionism that hurts us the most....

Furthermore, the administration has barely begun to do anything substantive with respect to securing Fast Track negotiating authority from the Congress, which it will need to get any trade agreements approved by the legislature. Congress is largely in the dark about what the administration has been negotiating in the TPP. The administration’s cavalier attitude toward this potentially arduous process betrays either a lack of understanding or concern that Congress, if it grants that authority, will attach all sorts of conditions that may render moot the past couple years of negotiations on the TPP....

AEI's Claude Barfield also deftly details the many serious hurdles facing the TPP and the TTIP - definitely worth a read. (Conclusion: "The administration is misguided in bowing to the EU’s frantic plea for a crash, two-year timetable for FTA negotiations. Such a course will fail — and of much greater significance, it may well imperil a successful conclusion of the strategically and economically vital TPP negotiations."  Ouch.)

Finally, Ikenson explains what's really driving President Obama's new embrace of trade, and it's hardly flattering:

Alas, President Obama has not found religion on trade after all. He’s merely run out of options. The TPP was motivated from the outset as a means to regain some of the influence—on policy and institution-building in the Asia-Pacific—presumed to have been lost to China, as America toiled in Iraq and Afghanistan. Persistently high unemployment, despite four years of stimulus, subsidies, and bloated federal spending, had finally led the administration to its last resort: trade liberalization.

So there you have it. A president who has settled on trade agreements as a last resort to spur investment and create jobs shouldn’t inspire too much confidence that he’s in it for the long haul and that he’ll be willing to make the tough political decisions ahead, particularly if the economy starts to improve and his affection for trade agreements proves fleeting.

Oof.  I'd say that Ikenson's bitter assessment is pretty much a pitch-perfect review of President Obama's real free trade legacy (so far, at least), and it's either telling or sad that the media can't seem to grasp these easily Google-able facts.  Indeed, foreign media reports of the administration's pre-negotiations with Japan regarding its entry into the TPP hardly inspire confidence in the President's resurgent free trade bona fides:

Japan plans to agree to let the United States maintain its automobile tariffs for a certain period during preparatory talks for joining the Trans-Pacific Partnership free-trade negotiations, sources said Tuesday.

As the United States fears a possible surge in Japanese auto exports to the U.S. market under the TPP, Japan is set to agree that the United States will be allowed time to eliminate the tariffs in an attempt to extract a U.S. concession over Japan’s agricultural tariffs once it enters the TPP negotiations, the sources said.

Japan’s participation in the TPP negotiations has been opposed by the U.S. auto industry, as well as by Japanese farming groups fearful of cheaper agricultural imports. Japan currently imposes high tariffs on farm products such as rice and wheat to protect domestic farmers.

The United States currently imposes tariffs of 25 percent on trucks and 2.5 percent on cars.

To summarize: the United States is demanding the maintenance of high tariffs on imported trucks (and lower ones on cars) as the "price" of Japan's entry into free trade negotiations, and in return, Japan will get to keep high tariffs on farm products like rice and wheat.  Such a deal is sadly illiberal but it really shouldn't shock anyone: it's quite similar to the one that the administration worked out for the US-Korea FTA re-negotiation back in late 2010.  But, still, since when does vigorously protecting protectionism permit fawning reports of a president's commitment to free trade?

Seriously, man. What the...?

Thus, all the breathless media coverage of the president's free trade renaissance places the responsible journalists into one of three categories: (i) ignorant dupes fooled by savvy USTR and White House press shops; (ii) hopeless, overly-optimistic Obamaphiles blinded by their love for The One; or (iii) complicit hacks acting as the administration's unofficial PR wing.  None of these is very flattering, but - after comparing the media's Pollyannaish reports with the realities presented by Ikenson, Barfield and other trade experts - there really isn't any other option.

Fortunately, there's always foreign media.

FTA Round-up

With both the House and Senate poised to vote on, and approve, pending US FTAs with Colombia, Korea and Panama tomorrow, it seemed like a good time to provide some recent must-read items to get you caught up to speed:

• The Competitive Enterprise Institute just issued a great new study documenting the Obama administration's failed - and economically harmful - strategy of delaying ratification of our pending FTAs in order to appease US labor unions (through, for example, revised FTA obligations, side agreements and reauthorization of expanded TAA).  CEI provides good support for something that I've been saying here for years: placating anti-traders, especially unions, is a fool's errand.

• Speaking of economically harmful delay of these FTAs, the Korea Herald reports that the recently-ratified EU-Korea FTA (started years after the still-pending US-Korea FTA) is reaping major benefits for European carmakers.  Good for them.

• However, as the FT's Alan Beattie explains in this new op-ed, the economic value of these FTAs shouldn't be oversold, and their final ratification has come at a pretty big price.  He concludes: "The US, along with all countries that trade – poor and middle-income as well as rich – is presented with a complex array of interlocking issues by the operation of globalisation: technological change, migration, exchange rates, capital movements and geopolitical power politics, as well as flows of goods and services.  Reducing the globalisation debate to passing three bilateral trade deals – at the cost of adding momentum to a potentially dangerous currency bill – is a very long way from being a proportionate response. In net terms, this was a bad week in Washington for free trade and real free-traders should recognise it."

• Jagdish Bhagwati takes a different, but kinda similar, angle, lamenting that "Congress and the president apparently have plenty of time to discuss bilateral FTAs with South Korea, Colombia, and Panama, as well as the regional Trans-Pacific Partnership (TPP), but none for negotiating the non-discriminatory Doha Round, which is languishing in its tenth year of talks." 

• Not to be outdone, Australian Marc-William Palen actually goes a bit further than Beattie and Bhagwati and argues that the FTAs' price tag - TAA - shows that the President is, deep-down, a protectionist.

• Speaking of the FTAs' price tag, the CBO released its cost estimates for the Korea, Colombia and Panama implementing legislation.  The Korea report is by far the most interesting, as it shows that the FTA's implementing legislation includes almost $8.5 billion in new customs users fees - $4.1 billion in extensions and, more importantly, $4.3 billion in increased merchandise processing fees because the FTA implementing legislation raises the fee from 0.21% to 0.3464% of a shipment's value.  I've already gone over why raising taxes on American import consumers to fund a free trade agreement is really misguided, but I do think it's very interesting that the revised KORUS legislation includes an exemption from these new fees for imports from Korea.  Colombia and Panama legislation provides for a similar exemption.  So, really, Korean, Colombian and Panamanian imports into the US will get a double benefit from the respective FTAs - lower tariffs and cheaper customs fees.  Unfortunately, US consumers of non-Korean/Panamanian/Colombian imports will be left holding the tab, and the FTAs' overall trade liberalization benefits will be muted.  Sigh.

• Finally, AEI's Phil Levy explains that, although the FTAs should definitely help the US economy, their tortuous path to final implementation is indicative of the sad state of US trade leadership.  Yep.

That's all for now, folks.  

Tuesday Quick Hits

I'm travelling this week, so blogging will remain light, but here are a few things to keep you going:

• Senate Minority Leader Mitch McConnell (R-KY) takes to the op-ed pages today to explain what many of us have been saying for a month now: President Obama's "blame Congress" strategy for the continuing stagnation of US FTAs with Colombia, Panama and Korea is extremely disingenuous.

• Mitt Romney released his economic plan today, including a detailed section on trade policy (starting at p. 41).  I'll have a lot more on this later, but for now let's just say that, on US-China trade, Governor Romney regrettably appears to have taken a page right out of Donald Trump's China playbook.  (Jon Huntsman's recently-released plan was far less antagonistic.)

• The WSJ today explains how Korea is facing a serious inflation problem because its trying to competitively devalue its currency as in the face of continued easy money policy in the United States.  If this all sounds familiar, it should: China's having the same problem for much the same reason.  Crazy how basic economics works, eh?

• Speaking of China, the WSJ reports that its "low wage export engine" is starting to "sputter" due to labor cost inflation and competition from other low-cost countries like Vietnam.  Shocking, I know.

• The WSJ rightly explains that Asia's impressive increase in high net-worth individuals is a good sign for those economies (and the global economy more broadly), but it's troubling that some of that increase is due to cronyism and government patronage rather than merit.

That's it for tonight, folks.

Congratulations, Canadian Exporters!

Last month, we congratulated EU and Korean exporters and consumers on the entry into force of the Korea-EU FTA.  And, much to the dismay of the US exporters and consumers who have been patiently waiting on the Obama administration and congressional Democrats to finally move the Korea-US FTA, the KOREU has already produced some eye-popping benefits.

Now, it's time for us to congratulate the lucky consumers and exporters in Canada and Colombia, as their bilateral trade agreement entered into force today.  Meanwhile, the US-Colombia FTA collects dust in the same Oval Office drawer as the KORUS:

“I’ve got a flag on my lapel, not a maple leaf,” U.S. Trade Representative Ron Kirk exclaimed at a Senate Finance Committee hearing in March. Today, as Canada’s free-trade agreement (FTA) with Colombia enters into force, it is the maple leaf that represents competitive pressures on U.S. market share and the political influence that goes with it.

Canada and Colombia are two of our closest friends in the Western Hemisphere, and their strengthened commercial ties clearly benefit their mutual interests as well as Washington’s broader goal of promoting open markets and economic development. Yet U.S. businesses and their congressional advocates are keenly aware that Canada has beat us to the punch, leaving U.S. exporters to an important emerging market at a competitive disadvantage.

The implications of delayed ratification of the U.S.-Colombia FTA are not lost on either Colombia or Canada. As Colombian President Juan Manuel Santos bluntly put it in a recent interview with Americas Quarterly, “American products are being replaced in the Colombian market because other countries have free-trade agreements. If the FTA is not approved shortly, the U.S. will continue losing market share.” Those losses will be particularly acute in the agricultural sector, where duty-free Canadian wheat will likely replace U.S. imports.

Similarly, on a visit to Bogotá last week, Canadian Prime Minister Stephen Harper lauded the leveling of the playing field for Canadian business vis-à-vis competitors who have or are seeking preferential access to the burgeoning Colombian economy. For Canadian wheat exporters, for example, this will mean the opportunity to catch up with Argentina, which has surpassed the United States as Colombia’s number one agricultural supplier. Tellingly, the president of the Canadian Wheat Board noted that the U.S. has yet to ratify its own agreement as he welcomed the competitive edge gained by Canadian grain exporters.

For both Ottawa and Bogotá, a strengthened trade relationship is also geopolitically attractive. As Harper stated on his official visit to Colombia, “diversifying trade and economic activity like this is the focal point of Canada’s renewed outreach to its hemispheric neighbors.” As in the United States, securing parliamentary approval of the FTA with Colombia was not an easy lift, given domestic opposition from labor unions and human rights groups. Nevertheless, the trade agreement was viewed an important tool in a comprehensive strategy to engage with Latin America.

House Ways & Means Chair Dave Camp (R- and Trade Subcommittee Chair Kevin Brady (R-TX) issued an unequivocal press release calling for the Congress to act "immediately by passing all three of our trade agreements before we lose any more jobs" and "stand[ing] ready to do so as soon as the President submits them to Congress."  Meanwhile, Senate Finance Chair Max Baucus (D-MT) issued an, ahem, interesting statement of his own (emphasis mine):

Canada’s trade agreement with Colombia gives our competitors a leg up and shows the importance of coming together quickly to pass America’s pending trade agreements and Trade Adjustment Assistance.  Every day our trade deal with Colombia languishes is a day U.S. ranchers and farmers can fall behind in this lucrative market, which is why we've been fighting so hard to pass the Colombia Free Trade Agreement. Approving our trade agreements with Colombia, Panama and Korea in tandem with Trade Adjustment Assistance will increase exports by $13 billion for ranchers, farmers and businesses in Montana and across the country and create jobs here at home – and that’s why we cannot afford further delay. As we open new markets for American goods with these free trade agreements, this package ensures we are fulfilling our duty to help provide U.S. workers the resources they need to succeed. Working together to enact this package into law needs to be a top priority when we return in September to help create the jobs and economic opportunities American ranchers, farmers and workers need to prosper in this global economy.

That's right, folks.  The US-Colombia FTA is such a "top priority" for the White House, Sen. Baucus and his fellow congressional Dems that they refuse to move the deal (and the Korea and Panama FTAs) unless it's done "in tandem" with TAA expansion.  And we "cannot afford further delay" - except to wait for a vote on expanded TAA, of course.  And how exactly does TAA expansion "increase exports by $13 billion for ranchers, farmers and businesses in Montana and across the country and create jobs here at home"?  Oh, that's right, it doesn't.  TAA expansion is just the $1B ransom we apparently have to pay in order to get the FTAs' economic benefits.

But other than that, Sen. Baucus has been "fighting hard" to pass the agreements, and he's ready to roll in September, baby!

(Unless congressional Republicans refuse to pass the TAA expansion, of course.)

Quick Reminder: FTA Delay Is Far From Painless

It's been pretty common knowledge for a while now that congressional consideration of pending US FTAs with South Korea, Colombia and Panama wouldn't happen before Congress' summer break (woo hoo!) August recess due to the unnecessary impasse between the White House and congressional Republicans about Trade Adjustment Assistance.  Insiders note that several different (Rube-Goldbergian) plans are circulating to secure passage of the trade agreements after the August recess, and most of the big "planners" are confident that the FTAs will be speedily passed in September.

Those of us who have been watching this comedy tragedy of errors unfold since mid-2007, of course, are taking a more cautious approach (read: we'll believe it when we see it).  But for a moment, let's just swallow the Kool-Aid and assume that the FTAs will finally get done in the Fall.  Everything will be cool then, right?  No harm, no foul, right?

Wrong.  Wrong wrong wrong wrong wrong.

As I noted when the EU-Korea FTA entered into force on July 1, the delay of pending US trade agreements is imposing serious, and unnecessary, pain for US exporters and consumers who are facing higher tariffs (and thus higher prices/costs) at home and abroad that they would be if the KORUS (and other FTAs) had been implemented at some point over the last four(!) years.  When I first mentioned this problem, however, I was speaking in hypothetical terms, as the KOREU deal had just entered into force.  Now, after a few weeks of operation, South Korea's JoongAng Daily provides us with real proof of those formerly-hypothetical gains for European and Korean consumers and businesses (and, thus, of the real losses for American consumers and businesses):

Since the free trade agreement between Korea and the European Union took effect on July 1, cheap commodities from Europe are already helping ease consumer price strains here.

Frozen pork belly, known as samgyeopsal in Korean, from the Netherlands now sells at almost half the price of local pork belly, which stands at 2,280 won ($2.17) per 100 grams. Thanks to the imports, the sky-high price of Koreans’ favorite meat dish - which spiked from the mass culling of pigs after the recent foot-and-mouth disease epidemic - has come down considerably. Pork belly products from Belgium and France have also hit the shelves at more accommodating prices of 1,000 won per 100 grams.

The downward price movement does not only apply to produce: luxury European products also have modified their price tags. As a result, Koreans can now buy a BMW 3 Series for as much as 8.5 million won less than pre-FTA prices of 45.3 million won to 51.6 million won.

And the Korea-EU FTA has not only shaved prices of European products. Japanese and American carmakers are also reducing prices to compete with European imports. They are even cutting dealership margins in order to bring down prices.

In Europe, Korean companies are making big strides thanks to the tariff benefits of the FTA. Hyundai Motor, for example, sold 336,000 vehicles in 25 European countries in the first half of the year and is expected to outpace Japanese automaker Toyota by raising its market share in the euro zone by more than 5 percent in the second half. Japanese media have begun worrying that Japan will lose its share in the European market to its Korean counterparts due to a strong yen and the Korea-EU FTA.

It is undisputable that benefits from free trade agreements are immense. During the seven years of the Korea-Chile free trade agreement, bilateral trade has surged by 287 percent. In Chile, Korean motor vehicles and electronics now outperform their Japanese competitors.

Very cool.  For Europeans and Koreans, I mean.  It's totally un-cool for American consumers and exporters who needlessly face (and in some cases have needlessly faced for over four years now) higher prices at home and tougher competition abroad due to their government's embarrassing inability to implement the pending US FTAs.  And some of the Korean (and soon, Colombian) market moves happening right now because of the "rival" FTAs will not be easily reversed if/when American companies gain equal footing with their European (or Canadian or...) competitors.

So, hey, if the US trade deals do finally get finalized in September, it'll certainly be better than if they don't move at all.  But let's please never forget that (i) American families and businesses are paying a steep price for their government's incompetence, and (ii) all of this pain easily could have been avoided if President Obama really cared enough to make that happen.

But he doesn't.  So here we are.

See you in September, I guess.


[P.S.  I've often said that FTAs are the least-good option when it comes to free trade policies (third to unilateral and multilateral liberalization), but the article above really hits the point home that FTAs, while far from perfect, are still a significant improvement over the status quo.]

Right Now

There's an old joke that the definition of "chutzpah" is when a man kills his parents and then pleads for mercy on the grounds that he's an orphan. (Ba-dum-cha!)  Well, after President Obama's speech this morning on the dismal June jobs numbers, I think we have a new definition: when a President and his political party do everything in their power to stall four-year old US trade agreements and then publicly grouse about the deals' still-pending status.

In trying to deflect blame for the United States' continued inability to escape the doldrums of the 2009 recession (the worst "recovery" ever, by the way), the President stated today:

There are a few things that we can and should do, right now, to redouble our efforts on behalf of the American people.... Let me give you some examples.... Today, Congress can advance trade agreements that will help businesses sell more American-made goods and services to Asia and South America, supporting thousands of jobs here at home. That could be done right now.

Actually, Mr. President, that could have been done in 2008, had then-Speaker Pelosi (D-CA) not rewritten the longstanding congressional-executive agreement on Trade Promotion Authority (and "fast track" before that) when President Bush tried to implement the US-Colombia FTA.

And that could have been done in 2009, had you not shelved the FTAs in order to placate your party's protectionist wing.

And that could have been done in 2010, had you not demanded that each one be renegotiated in order to further stall the agreements and to pay off powerful domestic constituencies.

And that could have been done earlier this year, had you simply submitted the renegotiated FTAs' implementing legislation to a Republican-controlled House of Representatives that was literally begging for you to do so.

And that even could have been done last week, had you not attached a "poison pill" to the US-Korea FTA in the form of an expensive and highly controversial Trade Adjustment Assistance (TAA) expansion that congressional Republicans had already voted down in February and had repeatedly warned would be deal-killer.

And, despite all of this, Mr. President, you and Congress could still implement these FTAs right now if you would just submit clean FTA implementing legislation to the House and Senate pursuant to TPA.

So, what do you say, Mr. President?  How about we get on this?

Right now.

The TAA-FTA "Deal": The Law, Ctd.

On Tuesday, I blogged about whether the Obama administration's brilliant plan to jam through Congress joint legislation containing Trade Adjustment Assistance and the US-Korea FTA would, based on a reasonable reading of the law, qualify for the procedural protections afforded FTA implementing bills under Trade Promotion Authority.  My conclusions were that the White House's legislation shouldn't qualify for TPA, but that the Senate could - and probably would - just ignore the law.

Phil Levy picks up where I left off and opines on the broader implications of a decision by the White House and Senate Majority Leader Harry Reid (D-NV) to ignore the law and go through with their plans to move the TAA-FTA bill using TPA.  His conclusions are as depressing as they are correct (emphasis mine):

This [fast track] process worked until April of 2008, when then-Speaker Nancy Pelosi demonstrated, to widespread surprise, that Congress had not really committed itself at all: When President Bush tried to submit the Colombia FTA under Trade Promotion Authority, she just changed House rules and blocked it. This dealt the first serious blow to the underpinnings of U.S. trade policy.

Last week, the administration dealt the second such blow. By stuffing TAA into the Korea FTA implementing bill - i.e., by protecting it with Trade Promotion Authority that was supposed to be reserved exclusively for these trade agreements -- it may have sounded the death knell for this critical trade procedure.

The maneuver may well work.... But there is a significant future trade agenda now at serious risk. The administration has ambitious negotiations underway for a Trans-Pacific Partnership that could set the rules for trade with Asia. Global leaders have repeatedly called for a conclusion to beleaguered talks under the auspices of the World Trade Organization. For any of these, the White House will need new trade promotion authority. Such authority was hard to come by even in the best of circumstances. What chance would it have now, if it is interpreted as giving any White House the right to attach controversial and unrelated spending measures in a protected way?

The passage of the pending FTAs is long overdue. The compromise on TAA is acceptable, if it paves the way for a necessary reworking of the program. But, as with mishandled fireworks, the administration's narrow and divisive approach to solving the present impasse may prove crippling for U.S. trade policy in years to come.

In short, the Obama administration's attempt to use the KORUS FTA and a dangerously expansive interpretation of TPA as a sketchy vehicle for achieving a narrow political victory on TAA might win the legislative battles over the Korea, Colombia and Panama FTAs, but the plan seriously risks losing the bigger war over the future of American trade policy and potential trade agreements worth far more than the three currently being debated.  So free traders really need to ask themselves the following question:

If the President refuses to yield and a joint TAA-FTA package passed under fast track really ends up being the only way forward, is it worth it?

I think we all know which direction I'm leaning these days.  And that's pretty sad.

Finally, let's also not forget that, considering that all of the troubling TPA chicanery noted above has come from Democratic politicians doing the bidding of anti-trade American labor unions, the big winner from the passage of these FTAs might just be the very folks most opposed to them - the unions.  (No, seriously.)  In the process of "losing" the current FTA battles, their elected minions might just ensure the demise of future trade deals and America's long history of leading global trade liberalization initiatives.  Such a result would be one helluva "win" for them.

And one helluva loss for the American people.

[UPDATE: I somehow forgot to mention that the Obama administration's erosion of TPA's value actually began last December with its steadfast assertions that the Agreement's renegotiated automobile provisions would somehow not remove the deal from TPA's procedural protections.  So, really, the joint TAA-FTA package is the third blow to the longstanding congressional-executive agreement on TPA (and fast track before it).  The third, however, definitely remains the most egregious and problematic for the reasons Phil states.]

The TAA-FTA "Deal": Spending, Ctd.

[UPDATE: The revised merchandise processing fees for the TAA and KORUS legislation are laid out here.]

Since I blogged on Monday about the dubious spending provisions in the White House's proposed joint TAA-FTA legislation, there have been a few noteworthy developments:

First, on the question as to whether the legislation's increase in Customs Users Fees is consistent with WTO rules (first raised by your humble correspondent, btw), it appears that the White House and its supporters are utilizing the vaunted "because I said so" defense that my parents successfully employed throughout the 1970s and 80s.  Reports Inside US Trade [$]:

Supporters of renewing the lapsed Trade Adjustment Assistance (TAA) program are defending the increase of customs user fees to offset its costs as complying with World Trade Organization rules, which stipulate that customs user fees cannot be higher than the cost of the services rendered at the border.

The TAA deal as unveiled this week would increase the merchandise processing fee from 0.21 percent ad valorem to 0.329 ad valorem as one of a variety of funding offsets. 

Congress has not altered merchandise processing fees since 1995. Several sources noted that the cost of processing goods has gone up since that time, and one source said there is currently a "shortfall" between the costs of border services provided and the money collected through customs user fees.

One source also noted that since the terrorist attacks in 2001, the United States has placed a greater emphasis on security, and suggested that this could be one factor why processing costs have gone up.

In its draft Statement of Administrative Action (SAA) accompanying the draft implementing bill for the U.S.-Korea free trade agreement, the White House provides little explanation for how the fee increase would comply with WTO rules. The TAA compromise is included in the Korea FTA implementing bill.

"The change in rate addresses the increased costs Customs and Border Protection has incurred as a result of the increased volume of trade and additional operational initiatives since the last legislative change to the merchandise processing fee in 1995," the SAA states. 

The current merchandise processing fee of 0.21 percent ad valorem is generally assessed on "formal" entries, or those imports that have a commercial value of $2,000 or more. U.S. importers are required to pay this fee to Customs and Border Protection at the time of presenting the entry summary.

According to Article VIII of the General Agreement on Tariffs and Trade (GATT), all fees and charges imposed by WTO members on or in connection with importation "shall be limited in amount to the approximate cost of services rendered and shall not represent an indirect protection to domestic products or a taxation of imports or exports for fiscal purposes."

That means Congress can determine the level of the merchandise processing fees so long as they are commensurate with the costs of the services rendered.

So to summarize the White House's argument: Legislation that expressly raises revenues by increasing Customs users fees in order to fund TAA expansion doesn't actually raise revenues (and thus violate WTO rules), but instead simply pays for a longstanding "shortfall" in current fee collections (and thus is, like, totally WTO-consistent).   And this "shortfall" has persisted for more than a decade without anyone in the White House or Congress ever proposing to end it in standalone legislation because the US government is apparently so flush with cash that it was simply willing to keep subsidizing US importers to the tune of billions of dollars.  And it was just a coincidence that the big shortfall will be terminated in the joint TAA/KORUS legislation.  Oh, and something about 9/11 and terrorists.

Even shorter: The customs users fees provisions are WTO-consistent because the SAA says they are.  Now what WTO panel could argue with that?  (Rrrriiiiiight.)

Second, and speaking of those billions of dollars, the CBO has released its preliminary estimates of the revenue impact of the joint TAA/KORUS legislation.  You can check out the full score here, but the highlights are as follows:

• Projected amount of import tariffs eliminated (thus saving American consumers) between 2011 and 2016: $2.085 billion.

• Projected cost of TAA expansion over the same period: $1.17 billion.

• Projected increases in customs users fees over the same period (thus costing American consumers): $2.167 billion.

So according to CBO's (admittedly preliminary) projections, in this deal's first five years, American consumers will pay more in new Customs fees than they'll save in reduced or eliminated tariffs on Korean imports, and we'll pay another billion dollars for TAA expansion.

What a bargain!

But, hey, maybe TAA is some super-awesome program that's totally worth this fiscal and political expense.  Wouldn't it be great if some federal government agency released a long-overdue report on that very issue that would settle the TAA debate once and for all?  Umm, well:

As a divided Congress moves closer to a decision on three big international trade pacts, the Labor Department is four years late in delivering a study that is supposed to measure the efficacy of a program to provide extra benefits to workers who lose their jobs through globalization.

The deals with Colombia, South Korea and Panama, which could add billions in exports, are on a knife-edge over disagreements between Republicans and Democrats over Trade Adjustment Assistance, taxpayer funds paid to workers who lose their jobs as a direct result of trade.

The lack of up-to-date government data on how effective the $1 billion-a-year program is at helping the unemployed find well-paying work has hobbled efforts to identify and make improvements....

Labor Department officials say their research on TAA, originally due in 2007, won't be ready until the end of the year. That's likely to be after the fate of the proposed U.S. trade deals has been decided, at least until after the 2012 election. Thus far, the TAA study has cost $8.9 million, the Labor Department estimated.

"The data used for the study is long-term data on individual participants, which was collected over several years; therefore completion of the study is a long process," said Department of Labor spokeswoman Gloria Della.

Howard Rosen, resident visiting fellow at the Peterson Institute for International Economics, helped write 2002 reforms to TAA while he was a congressional aide that also called for a comprehensive evaluation of the program, and he has complained about the Labor Department's failure to deliver it.

"We need to make reforms based on what will work, not what will fly" politically, Mr. Rosen said.

Reports from Labor and the Government Accountability Office have led to changes, for example, in improving worker access to the program. Last year, 235,000 workers—or less than 2% of the nation's 14 million unemployed—were receiving benefits under the TAA program at a cost of $975 million.

In 2009, the program was expanded to include service, not just manufacturing workers, who now make up less than one-fifth of TAA recipients....

According to a Labor-sponsored study of TAA applicants in 2008-09, about one-third of eligible workers belong to a trade union; about half of those in the program are union members.

Gee, I wonder what possibly could be delaying the Labor Department study?  What a shame that it won't be ready in time for the current congressional debate.  Fortunately, IBD today points us to other studies on the TAA program, and let's just say that American taxpayers are definitely not getting their money's worth:

For starters, TAA is wasteful. Sen. Tom Coburn, R-Okla., released a report earlier this year showing that the $18 billion the government already spends on job training programs are full of waste, fraud and abuse.

A 2008 American University study by Kara Reynolds and John Palatucci concluded the same, declaring TAA "of dubious value in terms of helping displaced workers find new, well-paying employment opportunities."

Meanwhile, a 2003 study from the Office of Management and Budget called TAA downright "ineffective."

Also, it duplicates other programs. Trade-blogger David Almasi cites a GAO report earlier this year that shows, as of 2009, there were already 47 different federal jobs programs administered by nine different federal agencies. And 44 of those duplicated other efforts.

Finally, it cheats workers. The GAO study found that workers in the TAA program made less money in their new jobs than workers who hadn't benefited from the 156-week program.

A Heritage Foundation study of academic papers also found that TAA training tends not to boost wages.

On Monday I said of the White House's TAA-FTA proposal, "it's the spending, stupid."  Yet after reading all of these updates, I think I need to issue a slight correction:

It's the stupid spending.

The TAA-FTA "Deal," Part 1: It's the Spending, Stupid

[Ed note: This is the first of a three-part series in which I'll review the joint FTA-TAA legislation proposed by the Obama administration and Senate Democrats last week.  Familiarity with the White House's brilliant plan and recent events is presumed.]

One of the reasons that things went haywire last week was the simple fact that the White House's joint FTA/TAA legislation didn't actually represent a "compromise" on the scope of the Trade Adjustment Assistance expansion that was attached to the US-Korea FTA.  As AEI's Claude Barfield notes:

The attempt to slip TAA through in the FTA process took both the House majority leadership and Senate Republicans, who apparently not been privy to any of the negotiations, by surprise. And it infuriated Finance Committee Republicans, who felt particularly dissed by the substance and the process. The usually mild-mannered [Orrin] Hatch gave a blistering critique of the administration and the president personally in his speech here at AEI. In addition, House Speaker John Boehner immediately disassociated the House Republican leadership from the president’s decision to combine the FTA and TAA legislation in one bill.

Under all of this, there is another complication—the belief by some Republicans Representative Camp had conceded too much on TAA to the administration, allowing too many provisions of the expanded 2009 TAA bill to remain in place. At the panel session we held here at AEI after Hatch’s speech on Thursday, the two speakers, Howard Rosen (long-time advocate for TAA) and Sallie James (a leading critic), who agreed on little else, both agreed that the “compromise” did not split the difference but went far in the direction of the administration’s position.

According to Inside US Trade [$], administration officials have actually been bragging to their supporters about the broad scope of the TAA program attached to the US-Korea FTA implementing legislation:

Administration officials described the TAA deal they negotiated with Republicans and Senate Democrats as a “strong and strengthened program” that retains the most important features of a 2009 expansion. For example, officials noted that the deal retains the eligibility of service workers and workers who lose their jobs due to offshoring and trade with countries with which the U.S. does not have FTAs.

In short, the joint TAA/KORUS legislation saves almost all of the features of the "mega-TAA" program that was created as part of the 2009 Stimulus* bill.  So, given the serious budget constraints facing the federal government these days, this fact of course raises a very simple question:

How much does this darn thing cost?

Well, if the White House is to be believed, they have absolutely no idea:

It now costs about $1 billion annually and administration officials said they did not have a final estimate of what the revised program would cost.

So much for the President's "adult-in-the-room" fiscal responsibility streak, eh?  Of course, such claims of ignorance do run straight into the fact that the "offsets" section of each piece of proposed legislation - required under congressional PAYGO rules - are extremely precise.  For example, Section 601 of the the KORUS legislation raises certain Customs merchandise processing fees on imports from 0.21% to 0.329%.  Meanwhile, Section 602 extends the duration of one Customs users fee program from January 7, 2020 to December 31, 2020 and another Customs users fees program from January 14, 2020 to November 10, 2020.

Those are pretty odd and exact numbers for a program of allegedly indefinite cost, eh?  And don't the White House and Congress have, like, their own personal budget analysts on call?  Hmmmmmm.

The disconnect between the precision of such offsets and the administration's claims of ignorance raises only two possibilities, neither of which are flattering for the White House.  Either they truly have no clue as to how much the TAA program costs and are just spitballing the offsets (insipring total confidence in the process, no doubt); OR they know exactly how much the expanded TAA program costs, but don't want to say in order to avoid putting a very-public pricetag on the cost of their little pet program.  Either way, it's very sketchy.

Furthermore, what kind of fiscally responsible "offset" is the extension of Customs users fees programs from January 2020 to November/December 2020 anyway?  (Such goofy extensions are also included in the legislation for the Panama and Colombia FTAs too.)  There are good arguments against the strict use of PAYGO rules, particularly for legislation that lowers tariffs and taxes, but they're the rules that are now in place.  So please someone explain to me how "paying" for TAA and the FTAs by extending a revenue program that doesn't expire for 9 years passes the "fiscal responsibility" laugh test.

Quick answer: it doesn't.  (So much for the "First Adult.")

The aforementioned KORUS/TAA offsets in Section 601 of the legislation also raise other serious questions.  As I noted before (also discussed by Cato's Sallie James):

• Raising customs fees on imports by about 50% is a rather ridiculous way to "offset" the revenue impact of legislation that eliminates tariffs on those very same imports (and others); and

• Using customs fees to expressly supplement federal budget revenues instead of paying for the cost of services actually rendered could very well violate the United States' international trade obligations under GATT Article VIII.

Moreover, Section 601 of the KORUS legislation also raises questions under the very US law that it amends.    In particular, 19 USC Sec. 58c(a)(9)(B)(i) expressly indicates that such Customs fees should reflect the costs of Customs services rendered not be used to pay for things like TAA (strikethrough represents the KORUS amendment):

The Secretary of the Treasury may adjust the ad valorem rate specified in subparagraph (A) to an ad valorem rate (but not to a rate of more than 0.210.329 percent nor less than 0.15 percent) and the amounts specified in subsection (b)(8)(A)(i) (but not to more than $485 nor less than $21) to rates and amounts which would, if charged, offset the salaries and expenses that will likely be incurred by the Customs Service in the processing of such entries and releases during the fiscal year in which such costs are incurred.

In short, the KORUS legislation is partially paid for by increases in Customs users fees that, according to very same law being amended, are only supposed to "offset the salaries and expenses that will likely be incurred by the Customs Service in the processing of such entries and releases during the fiscal year in which such costs are incurred."  Nice.

So to recap: the Obama administration's TAA legislation (i) is of unknown (but significant) cost; (ii) raises revenue by, in part, extending customs programs that don't actually expire for almost 9 years; and (iii) contains offsets that raise taxes on imports and potentially violate WTO rules and US law.

Behold, the new era of American fiscal responsibility!  Bring on the debt ceiling!

Ugh.

Tomorrow (hopefully), I'll examine whether the KORUS/TAA legislation can proceed in the Senate under Trade Promotion Authority (aka "fast track"), as some Senate Democrats claim.

(And Happy 4th, everyone.)

Congratulations, EU Exporters!

Great news for European and South Korean exporters and consumers: as expected, the EU-Korea FTA entered into force today:

A landmark free trade agreement between South Korea and the European Union took effect Friday amid expectations of a boost to already booming commerce between the two sides.

The agreement brings together the 27-member EU, the world's largest economic bloc, and increasingly affluent South Korea, Asia's fourth-largest economy.

It is the first such accord for the EU with an Asian country. South Korean and EU lawmakers ratified the agreement earlier this year with the implementation date set for July 1....

It immediately slashes 70 percent of tariffs, with that set to expand to 98.7 percent within five years, Kozlowski told reporters Thursday. Among items for which import duties have disappeared are South Korean auto parts and mobile phones and European auto parts, industrial machinery and wine, he said.

Of course, not everyone's cheering today's big announcement.  EU exporters' biggest competitors must be, ahem, less-than-enthused about the news:

The pact marks a come-from-behind victory of sorts for the EU over the United States. The bloc began negotiations for the deal with South Korea in May of 2007, a month after Washington and Seoul first concluded their own free trade agreement....

The agreement, originally negotiated by previous governments in the two nations, was long hung up on demands by the Obama Administration for more U.S. access to South Korea's auto market. South Korea reopened the deal under pressure from Washington and negotiators reached a compromise late last year.

Now, however, it has become caught up in a debate in the U.S. Senate along with two other stalled free trade deals with Colombia and Panama over proposed financial and job-retraining help to workers hurt by foreign competition.

"The earlier entry into force of the Korea-EU FTA is really significant," Choi Seok-young, Seoul's top free trade negotiator, told The Associated Press, citing the lowering of tariffs. "U.S. competitors in the Korean market and EU market would face comparatively disadvantaged positions from today onward."

The EU ranked as South Korea's fourth-largest trading partner last year behind China, the Association of Southeast Asian Nations and Japan, according to South Korean statistics....

The U.S. is South Korea's fifth-biggest trading partner.

Of course, what this article unhelpfully omits is that the "debate" over the proposed "financial and job-retraining" subsidy - you know, the one that has further delayed implementation of the completed-and-signed-in-2007 US-Korea FTA and cemented its second-place finish behind the EU-Korea FTA - is also a demand of the Obama administration.  But what the article does make depressingly clear is that, as of today, every day that passes is a day in which American exporters and consumers pay real and unnecessary costs due to the continued stagnation of the US-Korea FTA.  (And in some cases, the costs are huge.)

Gee, you'd think with the clock ticking and Americans needlessly suffering, the White House - which has repeatedly praised the KORUS - would just get on with it and submit the FTA to Congress, right?  You'd think that nothing, especially a billion-dollar unemployment subsidy that's not connected to the agreement, would get in President Obama's way, right?

Right?

Sunday Quick Hits

Here's a whole lot of links to get your week started off right:

• The Economist asks whether we're seeing the end of China's dominance as the world's low-cost manufacturer of first resort.

• J.E. Dyer absolutely dismantles labor lawyer Thomas Goeghegan's lame defense of NLRB's indefensible attempt to stop Boeing from opening a new manufacturing facility in South Carolina.

• GMU's Russ Roberts beautifully explains why President Obama's silly comments about ATMs taking American jobs are so darn silly.  (And Cato's Andrew Coulson piles on.)

• The AFL-CIO's use of a 13-year old photo in its latest anti-Colombia FTA smear campaign is the perfect metaphor for its trade policy more broadly - stuck in the past.  Meanwhile, Colombia hits yet another labor benchmark that was supposed to ensure passage of its FTA with the United States.  Key words: supposed to.

• AEI's Phil Levy provides a great roadmap showing how we got into the current mess re: Trade Adjustment Assistance and how we can get out of it.

• And while TAA gums up passage of pending US FTAs, our potential FTA partners in South Korea and Colombia are lining up another, rather conspicuous suitor - China.  Awesome.

• And the TAA/FTA impasse also has infected [$] ongoing US trade negotiations under the Trans-Pacific Partnership.  Double-awesome.

• AEI's Mark Perry highlights the amazing gains in US worker productivity in our allegedly struggling manufacturing sector.

• Cato's Dan Griswold shows how IBM's remarkable evolution is a perfect metaphor for the US economy.

• Is America's stupid ethanol policy on the way out the door?  If this recent Senate vote is any indication (and it might not be), yes.

• Cafe Hayek's Don Boudreuax provides some great commentary on the House's vote to cut off those embarrassing US bribes to Brazilian cotton farmers.  John Stossel has more.  (And Brazil unsurprisingly grumbles about it all.)

• Can we please, PLEASE stop labeling free traders who support practical limits on US foreign policy adventurism "isolationists"?

• Mark Perry and Dan Griswold team up to explain how people's blinkered obsession with the US trade deficit misses the other, inevitable side of the coin, our massive foreign investment surplus:

If these don't leave you sufficiently depressed about US trade policy, then nothing will. 

Behold, the Insane (and Possibly Illegal) Bi-partisan FTA Deal!

As you may have heard, the White House and congressional Republicans are currently battling behind closed doors over a way forward for the pending US free trade agreements with Colombia, Panama and South Korea.  National Journal [$] reports on the latest developments (emphasis mine):

House Republicans retreated from their plan to begin preliminary markup on the pending trade agreements with Colombia, Panama, and South Korea, but the public stalling may signal that negotiators are making better progress behind closed doors.

Several people involved in the talks said on Monday that weekend negotiations over Trade Adjustment Assistance moved the parties closer to a deal. The White House has made clear that it wants Congress to reach a deal on TAA before beginning the markup process on the bills.

A House Republican aide said that preliminary hearings, expected to get under way this week, have not been scheduled. The move could pave the way for a deal to be announced before markups begin.

An aide to Rep. Kevin Brady, R-Texas, said in an e-mail: “While no date has been set for the mock-markups, we remain optimistic that a bipartisan solution will soon be reached.”

Some stakeholders said that the biggest sticking point has been finding enough revenue to offset the cost of the program extension. The White House originally pushed for extending a version of the worker retraining funds that was expanded in 2009 to include service employees and health care. But it appears that the deal will be significantly scaled back....

Lawmakers from both chambers have floated a wide range of frameworks in recent weeks. The chief concern has been raising enough revenue to counteract the cost of TAA and tariffs that will expire when the deals come into force.

Several of the parties involved said that a large portion of the pay-fors could come from additional customs fees, although that money would be insufficient to cover the full cost of the package. But the revenue gap may not be insurmountable....

The negotiated agreement on the trade deals may be sufficient to gain the bipartisan support needed to advance a comprehensive package before August, but it may not be enough to win the backing of skeptical Democrats in the House. Once the deals are introduced, they will need only a simple majority to pass in both chambers.

For a moment, let's ignore the fact that these agreements have been completed and signed for about four years, and that the President alone has the power to submit the FTAs for congressional consideration and approval (a simple majority vote in both chambers without amendment and pursuant to strict timelines), and that the three agreements would undoubtedly pass the House and Senate all by themselves.

And let's ignore the fact that the TAA program, in whatever form, has proven itself to be costly, ineffectual (politically and practically) and economically unjustifiable, and that, because he also really wants these FTAs to be implemented, the President is in effect holding a hostage that he's not willing to shoot.

And let's ignore the fact that, even with an eventual deal on the TAA bribe subsidy, most House Democrats (and many Senate Dems too) will never, ever, EVER support these FTAs (as the article makes clear and the Senators themselves have admitted).

Instead, for a moment, let's just focus on the big bi-partisan agreement outlined above.  Why on earth is this "breakthrough deal" even being considered?

First, it's absolutely irrational.  As noted, the parties have reportedly agreed to impose new (or higher) "Customs fees" in order to offset the cost of the TAA subsidy and the lost tariff revenue resulting from the FTAs implementation.  But "customs fees" are simply hidden taxes on import consumers.  A quick review of the US Customs website on "customs users fees" makes this clear.  They're paid (mainly) by commercial transporters bringing goods (imports) into the United States, thus raising the costs of importation.  And those higher costs, of course, are eventually passed on to American consumers through higher import prices.

Thus, pursuant to the bi-partisan deal outlined above, the FTAs' great import liberalization benefits will be immediately and tangibly undermined by new taxes on those very same imports (and others)!  Amazing.  Heaven forbid that Congress fill the tariff gap created by the FTAs and pay for TAA by actually eliminating federal spending on, oh I don't know, one of its absolutely-critical research programs into cow farts or cocaine-using monkeys.  Nope, the Obama administration's (and some congressional Republicans') big plan is to offset the elimination of taxes on import consumers by... wait for it... raising taxes on import consumers.  (It's truly a mercantilist's dream come true!)  Even worse, those new taxes will be necessarily be much larger than the amount of the FTA tax cut because they also have to fund a politically and economically dubious subsidy program that isn't even guaranteed to buy the approval of the FTAs' current congressional opposition!

Only in Washington, folks.  Only in Washington.

Unfortunately, it gets even worse: the big plan might also be illegal under global trade rules.  Granted, the description above is way too ambiguous to make any definitive conclusions about the deal's legality, but assuming that the agreement would raise US customs users fees (or implement new ones) in order to generate revenue for the federal government, it would probably violate GATT Article VIII, which governs WTO Members' imposition of "Fees and Formalities connected with Importation and Exportation" (in other words, customs fees).  The key provision of Article VIII reads:

1.(a) All fees and charges of whatever character (other than import and export duties and other than taxes within the purview of Article III) imposed by contracting parties on or in connection with importation or exportation shall be limited in amount to the approximate cost of services rendered and shall not represent an indirect protection to domestic products or a taxation of imports or exports for fiscal purposes.

WTO panels have interpreted this provision narrowly, and an old GATT panel has actually looked into the US system of customs users fees.  In these cases, the panels have ruled that Article VIII's requirement that a customs fee be "limited in amount to the approximate cost of services rendered" is actually a "dual requirement," because the charge in question must first involve a "service" rendered, and then the level of the charge must not exceed the approximate cost of that "service."  They've also found that the term "services rendered" means "services rendered to the individual importer in question," and that the fees cannot be imposed to raise revenue (i.e., for "fiscal purposes").

Interestingly, a relatively recent Customs Department notice about an increase in the amount of applicable customs users fees makes clear that the US government's customs fees are intended to approximate the costs of customs services (e.g., inspection) actually rendered (emphasis mine):

On October 22, 2004 the President signed the American Jobs Creation Act of 2004 (Pub. L. 108-357). Section 892 of the Act amended Title 19 United States Code 58c to renew the fees provided under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), which would have otherwise expired March 1, 2005, and to allow the Secretary of the Treasury to increase such fees by an amount not to exceed 10 percent in the period beginning fiscal year 2006 through the period for which the fees are authorized by law....

CBP is increasing the fees by the amounts authorized so that they more accurately reflect the actual costs of providing the services for which they are charged. On April 24, 2006, CBP published a Notice of Proposed Rulemaking in the Federal Register (71 FR 20922) proposing to amend the regulations in accordance with the current statutory provisions by increasing the fees for: (1) customs services provided in connection with the arrival of certain commercial vessels, commercial trucks, railroad cars, private aircraft and private vessels, passengers aboard commercial aircraft and commercial vessels, and barges or other bulk carrier arrivals, (2) each item of dutiable mail for which a customs officer prepares documentation, and (3) annual customs brokers permits.

But now, the US government specifically and expressly intends to raise these fees (and/or others) in order to fund TAA and offset lost tariff revenue on imports from Korea, Colombia and Panama - absolutely nothing to do with the "actual costs of providing the services for which they are charged" or, in WTO parlance, the "the approximate cost of services rendered."  So, even assuming that this plan doesn't run afoul of more general WTO non-discrimination provisions by singling out certain countries, how is the deal even remotely WTO-consistent under the most conservative reading of GATT Article VIII?

I honestly have no idea.

But, hey, even assuming the plan isn't illegal, that doesn't change the fact that it's clearly insane.  So it's got that going for it, which is nice.

Could someone again please remind me how we got into this mess?