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.

KORUS Afterthoughts

With a KORUS deal in the bag and both Presidents signaling strong support, here are a few more things - some big, some little - to consider since last Friday's original post on the new agreement.

• It turns out that the agreement included more new protectionism than I originally noted.  In particular, Korea now gets to maintain its tariffs on US pork until 2016, instead of 2014 as originally agreed in 2007.  (The Korea Times has a nice rundown here.)  Market access for American pork was one of the big achievements of the original 2007 agreement, so this is a little more serious than it sounds.  That said, this bad change, like those on autos, won't override the agreement's overwhelming economic benefits, but it still stinks that our administration is bragging about "improving" a free trade agreement by increasing trade barriers, not lowering them. 

• Thinking more broadly about last week's deal, it becomes pretty clear to me that the Koreans really caved.  Not only does the laundry-list of achievements/concessions appear to favor US negotiators (Nice work, team! Way to keep the US market closed! Grumble grumble), but the re-opening of the agreement necessary to complete last week's deal is also a dramatic shift from Korea's consistently firm stance on the FTA that, for economic, strategic and political reasons, they would not agree to substantive, textual changes.  So why the complete reversal, especially when, armed with the Korea-EU FTA and similar trade agreements with other US competitors, the Koreans had the upper hand?  I can only think of one thing, and it actually has very little to do with the FTA: North Korea.  It seems to me that the only thing that changed between last month's embarrassing meeting and non-agreement between Presidents Obama and Lee and last Friday's deal was the unprovoked attack on South Korea (and murder of several of its citizens) by a certain psychopathic dictator and his babyfaced dictator-in-training to the North.  After those Nork missiles were fired, I think completion of these distracting trade negotiations got a lot more urgent, and the South Koreans decided that the long-term bilateral relationship was a lot more important than a few million dollars in automobiles nonsense (and the UAW had no counterbalancing concerns, of course).  So in the end, it could be that the most effective KORUS negotiator wasn't an American or a South Korean but instead a stumpy, murderous jerk who likes to look at things.

• Not everything about the KORUS deal surprised me.  For example, we got to watch our Mercantilist-in-Chief go through some typical contortions to avoid mentioning the economic benefits that Korean imports would provide American consumers (including many businesses).  In his remarks heralding last week's agreement, Obama stated that KORUS will benefit American exporters ("For our farmers and ranchers, it will increase exports of American agricultural products. From aerospace to electronics, it will increase our manufacturing exports to Korea, which already support some 200,000 American jobs and many small businesses."); he stated that it will benefit Korean exporters and consumers ("They will gain greater access to our markets and make American products more affordable for Korean households and businesses -- resulting in more choices for Korean consumers and more jobs for Americans."); but he didn't say anything about American consumers and the (very significant) benefits they'd derive from the FTA.  I guess American imports into Korea benefit Korean households and businesses, but Korean imports to the US?  Not so much.  And once again, when faced with a very public opportunity to educate the public on all of trade's benefits, President Obama whiffed.  Shocking, I know. 

• Finally, and on a serious note, has anyone given any thought to how this new deal will affect congressional consideration and approval of FTA?  Sure, people are already vote counting, but that's not actually my concern (I think the agreement will pass pretty easily).  Instead, I'm very curious as to whether this "new" agreement will be covered by the now-expired Trade Promotion Authority (aka "fast track"), which subjects trade agreements completed and signed before July 1, 2007 to strict procedural requirements and thus prevents congressional meddling.  A few observers are assuming that TPA will apply because the original agreement was signed on June 30, 2007, but the law on TPA (19 U.S.C. 2191-2194 and 3803-3805) states, inter alia, that it will cover trade agreements "entered into" by the President before July 1, 2007.  Thus, it appears that whether TPA applies to the KORUS will rest entirely on whether the 2010 changes on autos, beef, etc. mean that the agreement wasn't "entered into" until now.  The changes announced to the FTA - especially those affecting the countries' previously-agreed tariff schedules - almost certainly constitute substantive changes to the agreement, so I'm having a very hard time figuring out how someone can seriously argue that TPA will apply - i.e., that the agreement wasn't substantively modified such that it must be re-signed and "entered into" again.  [Note: USTR is calling this a "supplemental agreement," so maybe they're going to spin this as outside the original agreement, but that seems like a pretty hard sell considering that specific tariff lines, present in the original agreement, have been changed by the 2010 pact.] 

• And trust me, this is no small matter - if TPA doesn't apply, then all of its important procedural limitations - short timelines, limited committee consideration, no amendments, etc. - don't apply.  And, as I discussed a few weeks ago, TPA effectively prevents a few powerful congressmen or senators from singlehandedly derailing the deal (through procedural maneuvers, "poison pill" amendments and other nasty things).  Senate Finance Committee chair Max Baucus is apparently spitting mad that last week's deal didn't address Korean restrictions on US beef exports, and while he's powerful enough to scuttle the deal, I doubt he'll do it (although he might use his new power to get Korea to move on beef outside the confines of the FTA).  On the other hand, folks like anti-trade stalwart Sen. Sherrod Brown (D-OH) would probably have no such reservations, particularly if Brown's favorite constituents - the United Steelworkers Union - decide to oppose the deal (as of now, they're still decidingdetermining what goodies they can squeeze out of the White House).  So am I missing something here, or is TPA a bigger issue than most people are considering?  I'd assume that the White House and USTR have already considered this important procedural issue, so maybe I'm worrying about nothing; then again, considering that this is the same team that amateurishly allowed the President to set - and then miss - a very public November 2010 deadline for KORUS' completion, I'm not so sure about that anymore.  I guess we'll find out soon enough.

A little more food for thought.  Your thoughts on the last point would be particularly welcome.

[UPDATE: According to Reuters' Doug Palmer (via Twitter), USTR and the White House say that TPA will apply.  I'd prefer to hear that from the congressional experts - i.e., the House and Senate parliamentarians, and maybe the Ways & Means and Senate Finance trade counsels - not the agreement's salesmen.]

Mercantilist Max

Senate Finance Committee Chairman Max Baucus (D-MT) is known in Washington for being a reasonably strong advocate of free trade (except for his eternal love of farm subsidies, of course), but two stories from yesterday appear to show that he's enduring a serious internal conflict:

In a speech yesterday at George Washington University, Baucus called on President Obama to begin negotiations to join the Trans-Pacific Partnership (TPP) FTA, which presently includes Singapore, Chile, New Zealand and Brunei. As President Obama arrives in Asia for a two-week tour of the region, the public encouragement by the Senate's most influential member on US trade policy (Finance controls the fate of all trade legislation) is a strong message that the White House needs to get its free trade act in gear, particularly in Asia.  (Sounds familiar, eh?)

But in the very same speech, Baucus appeared to dramatically reverse course when he strongly advocated the inclusion of carbon tariffs in any future Senate climate change legislation.  As I've noted repeatedly, such "border measures" - intended to offset the competitive disadvantages that climate change policies have on domestic manufacturers by imposing at the border a tariff on imports of like products from countries do not have similar regulations - are highly controversial because of their questionable WTO-consistency and strong opposition among developed and developing countries who see them as "green protectionism." Indeed, China has repeatedly warned that the unilateral imposition of carbon tariffs would lead to an all-out trade war.

So what gives? Is Max Baucus still a "free trader," or is he growing his protectionist wings?  Or is he just suffering from a wicked case of multiple personality disorder?

I see two possible theories:

(1) He's posturing for Copenhagen.  Baucus knows that Cap and Trade is dead in the Senate (for 2009, at least), and is faking his "strong support" for carbon tariffs in an attempt to pressure China, India and other developing countries to stop opposing emissions caps and agree to concrete cuts during December's UN Conference on Climate Change.  Threatening unilateral protectionism in order to push developing countries into caving on a multilateral agreement would not be new for Baucus.  Indeed, he and his longtime Republican cohort, Sen. Charles Grassley, made similar plays over the last few years when they openly threatened to revoke duty-free access to the U.S. market for India and Brazil under the Generalized System of Preferences (GSP) because of those countries' resistance during the WTO's Doha Round of multilateral trade negotiations.  (Those countries remain covered by GSP to this day.)  So under this theory, Baucus is still a free trader deep-down; he's just faking the carbon tariffs protectionism to get a Copenhagen deal. 

(2) He's just a good ol' fashioned mercantilist.  If you look closely at Baucus' TPP comments, you'll see that they reflect a pretty mercantilist worldview (i.e., "imports are bad; exports are good") straight out of the 18th century.  For example:

"It is particularly important for us when it comes to Asia as a whole to recognize that in the absence of a more robust export strategy it is going to be hard for us to rebuild our manufacturing base and employment base in this country," he said....

[H]e said the United States could not afford to stand still while it develops a new approach, since boosting exports is vital to future U.S. economic growth.

"We must trade or fade," Baucus said, invoking a line used by former President John F. Kennedy, who called for an expansion of U.S. exports in the early 1960s....

Baucus, whose home state Montana is a major cattle producer, said South Korea must open its market to all cuts of U.S. beef from all ages of cattle and address concerns about access to its auto market before Congress will vote on that pact.

As you can see, conspicuously missing from Baucus' statements is any mention of the critical import benefits that FTAs, or of free trade more generally, provide American families and businesses.  And his export-only focus is evident in pretty much all of his "free trade statements" (see, e.g., here and here).  Viewed through a mercantilist lens, Baucus' statements on TPP and carbon tariffs aren't contradictory at all: the TPP FTA would boost US exports (particularly of the Montana beef that's very popular in Asia these days), and the carbon tariffs would protect domestic manufacturers from nasty ol' imports from developing countries.  It's a two-fer that would make even James Denham-Steuart proud.

So which one is it?  Is Baucus just posturing on carbon tariffs now that the Senate's Cap and Trade bill is on ice, or does he really support them (you know, deep-down in places you don't talk about at parties)?  Or is it both?  Well, only the good Senator and his staff know for sure, but I think it's probably a little of both.  The truth is that if Cap and Trade were on the verge of passage, I highly doubt that Baucus would be so supportive of carbon tariffs (if at all).  However, I don't think that his resistance would be out of a loving devotion to Adam Smith.  Instead, I bet that Baucus understands all-too-well that a trade war with India, China, and other developing countries could have dire consequences for US Beef exports, and that carbon tariffs are pretty much the quickest way these days to start such a war.  So it's Baucus' own mercantilism that would force him to resist carbon tariffs if there were even a snowball's chance that the Senate were going to vote on final Cap and Trade legislation this year.  But since they aren't, Baucus probably sees this as a great opportunity to make loud-yet-consequence-free statements about carbon tariffs in a last-ditch attempt to get developing countries to sign on to Copenhagen.  (Fat chance of that, but I guess you gotta give the guy credit for trying.)

That said, Baucus statement of support for carbon tariffs is undeniable, and I'm hardly qualified to deny him his rightful place on the ol' carbon tariffs scorecard (which is getting depressing these days, btw), so:

Pro carbon tariffs - Sen. Max Baucus, Sen. Ben Cardin, Senators Lindsay Graham and John Kerry, ten protectionist Senators, the US House of Representatives (in Waxman-Markey), France, and Paul Krugman.

Voting present - the White House.

Anti carbon tariffs - the rest of the world.