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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Some Interesting Subsidy Headlines

Several recent headlines reinforce many of the subsidy-related things that I've been discussing over the last few weeks and the themes of my new Cato paper:

• I spent a lot of time last week talking about the US Department of Commerce's final anti-dumping and countervailing duty determinations on Chinese solar panels and how the case encapsulates all that's wrong with current US subsidy and anti-subsidy policy.  The WSJ's Tom Orlik follows up with a fantastic analysis of the solar case and copycat cases in the EU and India.  The whole thing is worth reading, but here are the key grafs:

The Commerce Department's tariffs... will neither kill China's exports nor turn around the fortunes of U.S. manufacturers. For starters, solar panels assembled in China with imported cells won't be subject to the tariff. GTM Research says that even using slightly more expensive Taiwanese cells, Chinese firms will still be able to undercut U.S. competitors on price. 

For Chinese firms, the risk is that the U.S. tariffs are a sign of things to come. Europe accounts for 50% of the global market according to GTM, far more than 10% in the U.S. If the E.U. case goes against Chinese manufacturers, the result could be a significant hit to demand for their products.

Meanwhile, competition from conventional fossil fuels—not other solar panel producers—is a major challenge for the sector. Chris Namovicz, an analyst at the U.S. Energy Information Administration, says that solar is around 20% more expensive per watt than natural gas.

Western subsidies for alternative energy drove the massive expansion of China's solar power industry. Now it is cheap gas and Western protectionism that threatens to turn out the lights on China's solar exports.

• Mexico today filed a new WTO dispute over Chinese textile subsidies.  Not only does this add yet another subsidy dispute to my running tally (and one hitting an industry that was targeted by the WTO/OECD subsidy reports noted in my paper).   Reuters notes that Mexico has challenged a wide array of government programs, including may of the alleged subsidies (e.g., loan and land programs) that Commerce has found over the last few years in its CVD investigations of Chinese imports.  As I note in my paper, some of the things that Commerce does to find "subsidies" in those cases are not exactly kosher, so - assuming this new case goes to a WTO panel and isn't settled or dropped - it'll be fascinating to see how an independent third party handles those (and other) sticky issues.

• One of my paper's main themes is that multilateral and domestic anti-subsidy disciplines are necessary because the global subsidies race is partly fueled by politicians' - even some conservatives - use of foreign subsidy practices as an excuse to advocate for more subsidies or other forms of protectionism at home.  I actually want to dive into that theme sometime soon, but for now I'll just point to a little more evidence of this subsidy finger-pointing and its attendant harms, this time in Brazil.  According to a great new WSJ editorial, Brazil has been quick to defend its depressing protectionist backsliding by pointing to, you guessed it, US subsidies and monetary policy:

Brazil is the latest country to raise its import tariffs, targeting 100 items ranging from chemicals to paper to steel, with plans to add 100 more items soon. Brasilia claims the tariffs will only last a year, but such things have a way of remaining permanent as they build domestic political constituencies. The move is technically legal under World Trade Organization rules because it doesn't target a single country and doesn't exceed the tariff ceilings Brazil negotiated when it joined the WTO.

This could nonetheless cost U.S. exporters tens of billions of dollars annually, given that Brazil is America's eighth-largest export market. Brazil is part of the Mercosur trade compact, so Argentina and Uruguay may also feel obliged to follow suit.... 

Brasilia is pointing to U.S. policy to justify its protectionist outburst. In a testy exchange with U.S. Trade Representative Ron Kirk last month, Brazil's Foreign Minister Antonio Patriota wrote that "the world has witnessed massive monetary expansion and the bailout of banks and industrial companies on an unprecedented scale, implemented by the United States and other developed countries" that harms Brazilian exporters. 

There's no doubt that the Federal Reserve's easy-money policy has pushed the dollar down against some currencies, including Brazil's real. Brazil would be wiser economically to let a rising currency raise living standards for Brazilian consumers and make its producers more competitive. But Brazil's protectionist response is further proof that the Fed's weak-dollar policy has global economic costs.

Brasilia has other trade complaints against the U.S., including the Obama Administration's "Buy America" program and agricultural subsidies, which distort domestic production and global prices. Brazil challenged America's egregious cotton subsidies at the WTO and won in 2008. The Obama Administration appealed the ruling, lost in 2009 and still hasn't changed its policies. Brazil can now retaliate legally under WTO rules.

Something to think about the next time you hear an American politician arguing that some taxpayer subsidy is desperately needed to counteract pernicious foreign protectionism.  Not only are we frequently guilty of the same offense, but we often got the ball rolling in the first place.  

And the global subsidy race rolls on.

Time for a change, don't you think?

Good News: Canada Joins the TPP, But At What Price?

As expected, the US and Canadian governments announced today that Canada would join the Trans-Pacific Partnership negotiations.  (To get caught up, Peter Clark has some great backstory on the recent machinations.)  First up with the good news was Canadian PM Harper:

Opening new markets and creating new business opportunities leads to jobs, growth and long-term prosperity for all Canadians," said Prime Minister Harper in a statement about the Trans-Pacific Partnership (TPP).

"A TPP agreement will enhance trade in the Asia-Pacific region and will provide greater economic opportunity for Canadians and Canadian businesses."

Then USTR made its formal announcement:

President Obama announced today that the United States and the eight other countries negotiating the Trans-Pacific Partnership (TPP) Agreement have extended an invitation to Canada to join the TPP negotiations, pending successful conclusion of domestic procedures. In addition to the United States, the current TPP countries are Australia, Brunei Darussalam, Chile, Malaysia, New Zealand, Peru, Singapore, and Vietnam.

“Inviting Canada to join the TPP negotiations presents a unique opportunity for the United States to build upon this already dynamic trading relationship. Through TPP, we are bringing the relationship with our largest trading partner into the 21st century,” said Ambassador Kirk. “We look forward to continuing consultations with the Congress and domestic stakeholders regarding Canada’s entry into the TPP as we move closer to a broad-based, high-standard trade agreement in the Asia-Pacific region.”

Next steps will parallel those for Mexico, which was also invited to join the TPP negotiations yesterday. The Administration will shortly notify Congress of our intent to include Canada in the TPP negotiations. The notification will trigger a 90-day consultation period with Congress on U.S. negotiating objectives with respect to Canada. We also will publish a notice in the Federal Register seeking public comments.

As I said last night, the addition of the conservative, (mostly) free-market Harper government to the TPP negotiations is undoubtedly a good thing for proponents of of trade liberalization in both countries.  Hopefully its participation will reinvigorate the flagging talks and encourage more countries to jump on the TPP bandwagon.  And, as Heritage's Derek Scissors noted yesterday, Mexico's inclusion is also a very good thing - an important point that I unfortunately neglected to mention in my rush to get into the weeds of the NAFTA partners' negotiating status.  

Speaking of that status, while the benefits of adding Mexico and Canada are clear, what isn't clear at this stage is precisely what Canada conceded to the United States in order to finally - finally - get Washington to sign off on its Northern neighbor's TPP participation.  The Obama administration told Inside US Trade [$] that Mexico (and presumably Canada) would not be able to participate in any way - not even as an observer - until the full 90-day period for congressional consultations had expired, essentially meaning that neither party will join any TPP talks until mid-September or so.

But once they get the all-clear on that front, will there be any limitations on their participation?

As I noted yesterday, the Obama administration last Friday allegedly asked both Canada and Mexico to agree to some pretty onerous procedural conditions before it would agree to let them join the TPP - essentially demoting the Canadians and Mexicans to "second-class" participants.  However, before today's big announcement, Harper surrogatesmade clear that they would in no way accept such a demotion:

Canada and Mexico were told they could join if they agreed to several conditions that ensured new entrants didn’t slow down negotiations. Canada and Mexico could not reopen any agreements already reached among current TPP partner countries – unless these nations agreed to revisit them. And the two nations would not have “veto authority” over what was agreed upon by the original members.

Both countries were also supposed to agree to this before they’d even seen the latest version of negotiating texts.

A Canadian official said Monday there was no way Canada would agree to be a junior, or second-class, member at the talks.

So what exactly did they agree to?  I honestly have no idea, nor do others who are watching Canada's TPP participation very closely.  And when asked about what Canada gave up to join the talks, PM Harper and other Canadian officials weren't entirely clear:

Harper said there were no conditions attached to Canada's entry to the TPP talks when asked if he would put supply management on the negotiating table.

"Canada has not agreed to any specific measures in terms of an eventual Trans-Pacific Partnership Agreement," he said.

"Canada aims, whenever it gets into a trade negotiations, to promote and to protect all of its interests across all the range of industries ... and Canada's record in terms of dealing with those particular issues in trade negotiations under our government has been very strong and that will continue to be our position," he said.

He said Canada would not seek to undo any progress already made by existing TPP partners and that the negotiations were in very preliminary stages. "As in any negotiations, nothing is agreed to until everything is agreed to by all parties."

Canada's accession to the TPP will take a period of time, he said, without giving details....

Gerald Ked, parliamentary secretary to the minister of international trade, reaffirmed on Tuesday that Canada did not give anything away to be part of the talks.

Sounds strong, right?  Well, Harper and Ked appear to be talking mainly about substance (in particular Canada's controversial system of agricultural supply management), not about process (in particular whether Canada is a "full" TPP participant will the same procedural rights as all other countries).  On that front, the Canadians' strong statements are, well, less strong, although Harper is most definitely correct that the agreement is far, far from finished, so Canada's agreement not to harm completed FTA chapters is a very minor concession.

I'm sure that we'll find out about these details in due time.  In the meantime, let's celebrate Canada's and Mexico's entry into the TPP - it was a long and arduous path that required a lot of hard diplomatic work from both US allies (unfortunately).

Now if only we can get Japan on board.

(I know, I know, best to quit tonight while I'm still in a good mood.)

VIDEO: Six Former USTRs Speak Frankly About US Trade Policy

CSIS held a cool event last week with six former US Trade Representatives speaking about US trade policy.  The whole video is posted below, and I highly recommend a full viewing for anyone who's interested in better understanding US trade policy (especially you foreigners out there who don't obsess over it like I do):

If you don't think you have time to view the whole video, AEI's Claude Barfield provides a nice summary on his organization's blog of some of the USTRs' more interesting points.  The title of the post - "Why the Doha Round is dead and much more" - gives a bit of the game away, but here's the more-robust accounting:

First, there was almost unanimous agreement that the Doha Round is dead and the US and other major trading nations should move on. Coming from fervent supporters of the WTO, this judgment is an important message for the trade community, and mirrors the judgment of the US business community. Only Carla Hills, the most dedicated multilateralist, expressed misgivings about jettisoning Doha negotiations.

Of more immediate interest, the group had much to say—partly in response to high interest from the audience—on the only serious negotiations now on the table: the nine-nation Trans-Pacific Partnership Agreement. The Obama administration wants to conclude these negotiations this year, but the USTRs all doubted this was possible. The question that has arisen then is what to do about the desire of Canada, Mexico, and Japan to join the negotiations. At a trilateral summit this past week, both Canadian PM Harper and Mexican President Calderon pressed Obama hard on this decision—with inconclusive results.

Interestingly, the USTRs almost unanimously supported the quick inclusion of both nations into the negotiations (on Japan there was more skepticism that the political situation in Japan itself would allow entrance this year). The group took this position for two reasons: one, to their credit, the trade leaders view the TPP not only as an economic agreement but also as part of a larger US diplomatic push to retain leadership in the Asia-Pacific. From this, they are convinced that only with the heft that will come from additional large economies (Canada, Mexico, Korea, and later, Japan) will the TPP emerge as a real vehicle for a trans-Pacific economic architecture. The administration will have to bite the bullet and respond over the next few months. It is hard to know what weight the USTRs collective judgment will have—but if the president does respond affirmatively he will clearly have this group at his back.

One final partisan note: at the end of the session came a political question: to wit, why had trade policy virtually stopped when the Obama administration came into office. Barshevsky gave a general answer pointing to the economic crisis in 2009. Fair enough, but what was missing here and often in these sessions is a clear statement of political reality: on trade issues, a Democratic president for at least two decades has faced a deeply divided party. In general, a majority of House Democrats oppose new trade liberalizing agreements. A Republican president, on the other hand, in general has a united party on trade, backed strongly by the business community.

This makes a huge difference on White House calculations—not least when elections loom every two and four years.

Barfield then added one more interesting point over email:

[N]ot a single USTR supported the president’s reorganization plan — or at least folding USTR into Commerce or a new department.

Ouch.  I'm happy to note that the esteemed USTRs' consensus views closely mirror my own, less-esteemed opinions.  (I promise that I will try not to tear a rotator cuff patting myself on the back.)  

That critically-important point aside, I hope that the few summary points above will convince you to take the time to watch the video and learn a good bit about the current - and frustrating! - state of US trade policy.

Enjoy.

Guess Who's Blocking Canada's Participation in the TPP [UPDATED]

Back when Japan announced that it was interested in joining the ongoing Trans-Pacific Partnership negotiations - which currently include the United States, current US FTA partners Australia, Chile, Peru, and Singapore, as well as new FTA partners Brunei, Malaysia, New Zealand and Vietnam - I noted that admitting the economic power and close US ally was a no-brainer.  Certain TPP participants (and their political allies at home), however, weren't so gung-ho about Japan's inclusion in the agreement, and Japan has its own internal politics to sort out, so our friends in Tokyo are still waiting around to see if they're on the TPP VIP Guest List.  Joining Japan on the wrong side of TPP's velvet rope are Canada and Mexico, who announced their interest in joining the agreement shortly after Japan.  Readers of this blog know my affinity for the Harper Government's pro-market, pro-trade reforms over the last few years, so of course I think that Canada's inclusion in the TPP would be a very welcome development.

Unfortunately, however, it appears that certain members of the Obama administration don't agree, and thus the United States might just be the last holdout on Canada's TPP participation.  My source for this juicy gossip, you ask?  Well, none other than PM Harper himself:

Harper sat down with Obama and Mexican President Felipe Calderón for their first such meeting in almost two years -- and the last before Calderón leaves office this fall -- and for all the jovial friendship on display for the cameras in the Rose Garden, some issues clearly rankled.

The meeting, which came up considerably short of the advertised three hours, ended without Canada getting an invitation to join negotiations for a new Trans-Pacific Partnership....

Canada's system of supply-management of eggs, milk and other farm products is seen as a stumbling block to participation in the new free-trade zone.

In scripted remarks, Harper emerged from the meeting to say he was "especially pleased" Obama had welcomed Canada's interest in the trade talks.

But he later pointed the finger squarely at the White House for holding up Canada's formal inclusion. "Our strong sense is that most of the members of the Trans-Pacific Partnership would like to see Canada join," Harper told an audience at the Woodrow Wilson Center. "I think there's some debate, particularly within the (Obama)  administration, about the merits of that."

For his part, Obama did not duck a question that specifically asked if Canada's dairy and egg marketing boards would have to go in order for Canada to join the party.

"Every country that's participating is going to have to make some modification," Obama said, flanked by Harper and Calderón at a news conference in the Rose Garden. "That's inherent in the process because each of our countries has their own idiosyncrasies, certain industries that in the past have been protected."

The prime minister did not answer a direct question on whether he was prepared to abandon the marketing boards, but said his government would do what is needed to protect industries. "Canada will attempt to promote and to defend Canada's interests, not just across the economy but in individual sectors as well," said Harper.

Although some of Canada's agriculture policies are undoubtedly suspect, the idea that its marketing boards - which have been in place for several decades and haven't impeded NAFTA (as a new IBD editorial helpfully notes) - are preventing the United States - one of the largest agriculture-subsidizers on the planet - from signing off on Canada's TPP participation is laughable.  The laughs get even louder when one considers that the "too protectionist" Canada has been unilaterally opening large swaths of its market to imports, while the "free trade" Obama administration has been working hard, in FTA negotiations and via US trade law, to keep ours closed (and to keep those US farm subsidies firmly in place).  Or when one considers the Obama administration's long history of playing the "you're too protectionist on issue [X]" card to justify FTA-related delays (just ask South Korea or, as noted above, Japan).

Then again, if I were in the White House (stop laughing) and had to choose between (1) admitting into the TPP the unilaterally-liberalizing, corporate tax-cutting, FTA-completing Harper Government (and its directly-competitive Canadian farmers, manufacturers and service providers), or (2) just making up some silly "protectionist" excuse in order to stall Canada's admission and cover for my own government's trade/tax policy ineptitude, I'd probably be pretty darn tempted to choose Door #2 too.

Of course, if I were in the White House (seriously, stop laughing), the United States wouldn't be in this embarrassing position to begin with.

UPDATE: A reader passes along this great 2010 op-ed from Peter Clark on the United States, ahem, recalcitrance re: Canada's admission to the TPP.  Clark focuses on one reason for the White House's exasperating Canada-TPP position that I glossed over last night but deserves direct mention: rampant US mercantilism.  US exports already have mostly-duty-free access to the Canadian market through NAFTA, and, as mentioned above, if Canada is allowed into the TPP, competitive Canadian exporters would gain equal footing with their US counterparts in the rapidly-developing, high-demand TPP (especially Asian) markets.  Clark further notes that Canada would likely not support the United States' mercantilist push to retain all the sweet, sweet carveouts and import protection that are embedded in its existing FTAs with TPP participants like Australia.  His arguments seems quite logical - and depressing - to me.  Alas.  (Clark raises other issues in another good, detailed op-ed from earlier this year.)