VIDEO: Me on Trade Politics, Messaging & Policy

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

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.

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?

How Does Your Congressman or Senator Measure Up on Trade and Subsidies?

As readers of this blog know, I frequently rely on the Cato Institute's free trade ratings to quickly note a Congressman's or Senator's voting record on free trade and subsidies, and with the November elections only a few weeks away (thank goodness), there's no better time than now to review the performance of our elected officials.  Cato released the latest update of its invaluable, easily-searchable trade ratings today, and trade policy analyst Bill Watson blogged on some of their topline findings (none of which should come as a surprise to those of us who follow this stuff on a regular basis):

The site offers excellent insight into the positions and ideologies of our elected officials, and I encourage you to investigate it at your leisure. As a primer, I would like to point out two important observations of my own in this post.

First, free trade is not a partisan issue. It is true that Free Traders tend to be Republicans and Interventionists tend to be Democrats, but the bulk of both parties are somewhere else on the graph and there is no obvious partisan correlation. For example, John Boehner (R-OH) and Nancy Pelosi (D-CA) have fairly similar scores that place them between Interventionist and Internationalist. There are plenty of Democrats who vote against trade barriers and plenty of Republicans who vote in favor of subsidies. It’s often regional interest rather than partisan affiliation that affects voting patterns, as demonstrated by Marco Rubio’s (R-FL) support for sugar subsidies.

Second, senators from the same state can have widely different approaches to trade, especially in swing states. Three large swing states in the current presidential election have a Democratic senator elected in the 2006 midterm election and a Republican senator elected in the 2010 midterm election. Senators Rob Portman (R-OH), Pat Toomey (R-PA), and Roy Blunt (R-MO) have earned high marks so far since joining the Senate in 2011. Senators Sherrod Brown (D-OH), Bob Casey (D-PA), and Claire McCaskill (D-MO) have established themselves as solid Interventionists. Brown and Casey are among the most devout protectionists in Congress today.

The votes database suggests the hypothesis that giving lip service to free trade while advocating protectionism to boost manufacturing is a middle-of-the-road position for swing state voters that candidates are wise to adopt. But it also says that free trade can win elections in Ohio and Pennsylvania.

Each of these points is important, and it's one of the reasons why I've repeatedly said that an elected official's trade/subsidy record, rather than his/her party or rhetoric, is an excellent guide as to whether he or she is a principled politician.  As I noted in a somewhat-recent IBD oped:

A candidate's stance on trade is predictive of whether he, once elected, will put facts and principle before politics and self-interest. Politicians who reject protectionism turn down eager corporate and union campaign donations from unseemly rent-seekers trying to thwart international competition at the expense of American families and companies.

They ignore demagogic attacks on their patriotism. And they openly support policies which, despite their overwhelming economic and historical support, are met with public hostility or disinterest and an unethical opposition willing to take full advantage thereof.

On the other hand, politicians who peddle protectionism are either ignorant of history and economics or are willing to discard their conservative ideals and prey on voter fears for short-term political advantage.

Such principle transcends partisan identity or local politics, and there's no better example of this than the comparison of the stellar free trade record of Tea Party champion Sen. Jim Demint (R-SC) with the pretty bad record of his Palmetto State GOP colleague Sen. Lindsay Graham.  (Indeed, Graham regularly partners with also-bad Sen. Chuck Schumer to sponsor protectionist China currency legislation.)  It's also quite telling that a lot of the Tea Party "radicals" like DeMint, Toomey, Sen. Rand Paul (R-KY) and several freshmen House Republicans have great trade/subsidy records.  These folks clearly get it.

Hopefully they'll be joined by even more principled colleagues in 2013.

An Outsourcing and Protectionism Thought Experiment

The political news is replete these days with discussions of outsourcing and trade, and two stories are driving the chatter: (1) whether US presidential candidate Mitt Romney's firm Bain Capital outsourced US-based business operations to foreign countries; and (2) why the Ralph Lauren-designed uniforms of the US Olympic team are made in China, instead of the United States.  The political discourse on both of these issues has been soaked in economic ignorance, with a depressing, bi-partisan consensus among our political "leaders" that both foreign outsourcing and the private purchase foreign-made goods are "bad" things for America and even downright unpatriotic.  In response, President Obama and Senate Majority Leader Harry Reid have proposed legislation restricting, respectively, (i) US corporations' ability to engage in foreign outsourcing and (ii) the US Olympic Committee's purchase of foreign-made uniforms for the Games.  And, unfortunately, neither the Romney Campaign nor the Republican Party has challenged the underlying assumption in the Democrats' allegations and proposals that somehow outsourcing and free trade are bad, unpatriotic things.

I will not waste my time today again going over just how economically-ignorant these proposals are, nor will I re-hash the vast academic agreement, supported by mountains of empirical evidence, that both outsourcing and trade improve public welfare in the United States and abroad.  Instead, I simply want to pose a basic question for those who accept, promote or even consider the idea - supported by myriad politicians, journalists and pundits - that these private international transactions are somehow "wrong" and deserving of derision:

If it is unpatriotic or immoral for a private company to outsource certain operations to foreign entities or for a private organization to purchase foreign goods, is it also unpatriotic and immoral for private American citizens travel abroad?  And should the government therefore restrict that activity too?

Before you answer, let's walk this through:  Each of these activities involves an American's private, voluntary purchase of a foreign product.  In the case of outsourcing/offshoring, a private US party chooses to spend its money to purchase foreign labor.  In the case of Olympic uniforms, it's the private (remember: the USOC is a private entity) purchase of foreign goods.  And in the case of travel abroad, private citizens are choosing to directly purchase non-US goods (clothes, souvenirs, etc.) and services (hotels, rental cars, restaurants, etc.) in foreign countries, as opposed to having them shipped here.  Each activity involves a voluntary transaction between an American party and a foreign party that, theoretically, replaces the American's purchase of a similar product from a US-based competitor, be it a worker, manufacturer or service-provider.  And the only differences among these private, international transactions are the type of product purchased and the point-of-sale - neither of which should affect one's views on the subject (unless maybe he or she has an irrational hatred of container shipping).

So, again, is my private decision to travel abroad and, for example, to spend my hard-earned American dollars at EuroDisney instead of Orlando - thereby depriving Floridians of those dollars - somehow "unpatriotic" or immoral?  Obvious jokes aside, should I be prohibited from, or condemned for, going to EuroDisney?

If not, then why do politicians loudly and confidently assert - almost entirely unchallenged by the media or their political opponents - that a company's or individual's voluntary decision to purchase foreign labor or foreign goods is somehow unpatriotic or immoral?  And why do these same politicians advocate policies seeking to discourage, restrict or even ban such activities?

If so, then why don't our politicians also support government restrictions - for example, taxes or outright prohibitions - on or condemn foreign travel?  Or, at the very least, why don't they create a system to ensure "balanced trade" in tourism by, for example, passing a law permitting US citizens to travel abroad and purchase foreign goods or services only when foreign citizens purchase equal amounts of stuff when they travel to the United States? ("Sorry, sir, you can't get a federal travel permit go see the Great Wall of China because we haven't had enough Chinese citizens come here to see the Grand Canyon.")  In a similar vein, why don't President Obama and Senator Reid fight for a new law authorizing the US Department of Commerce to monitor "unfair" pricing of, of government subsidies to, foreign tourist attractions and to tax Americans traveling to these places in the amount of the "unfair" or subsidized price? ("Sorry, sir, you must pay us an extra 23% tax on your plane ticket to France because the French government unfairly subsidized the construction and maintenance of the Eiffel Tower.")

These might sound like silly questions but, really, they shouldn't be taken so lightly: we already have laws on the books restricting similar exercises of consumer freedom, and our politicians routinely propose further limits.  For example, the US government often forces American citizens to pay an extra tax on imported goods because these items are supposedly priced at hypercompetitive - and thus "unfair" - prices (aka "dumping").  Senator Reid and his colleagues routinely propose legislation limiting or restricting American purchases of certain "fairly traded" foreign goods or services - the Olympic uniforms being only the most recent example - and they also oppose efforts (e.g., free trade agreements) to eliminate these restrictions.  And, of course, President Obama has repeatedly advocated that the US government raise taxes on private American companies who purchase foreign labor (i.e., "eliminating tax breaks for companies that move jobs overseas.")

So, seriously, why don't President Obama and Senator Reid propose similar limits on Americans' foreign travel and tourism purchases?  Instead of simply demanding that US Olympic Uniforms be made in the United States, why doesn't Senator Reid also demand that all American citizens be prohibited from going to London to watch the Games at all?  Just think of all those private American Dollars that  Senator Reid's patriotic law could force to be "better" spent at Disney World or a NASCAR race, thus supporting American jobs?

And instead of only assailing Mitt Romney's patriotism for being affiliated with a company that engaged in outsourcing, why doesn't President Obama drive a few miles to Dulles International Airport and browbeat the happy American families there who are just about to enjoy a week in Europe?  

I could go on, but I think you get the idea.

The fact is that our politicians don't propose such forcible restrictions on Americans' voluntary international transactions because doing so would be political suicide.  For some reason, the American people are inherently suspicious of government restrictions on their freedom to travel abroad and thus require an immense burden of proof from the government - most notably on national security grounds - to accept any such limits.  Perhaps this is because travel restrictions are imposed directly on individual citizens (instead of in bulk to US importers at the border) or are closely associated with totalitarian/communist regimes, but for whatever reason, a majority of Americans oppose laws that forcibly limit or prohibit their freedom to leave the United States and spend their time and money abroad.  Thus, broadbased travel restrictions have have absolutely zero political support and only very limited ones exist today (e.g., to specific countries like Cuba, Iran or North Korea). 

Yet, other than the insignificant differences mentioned above, there is nothing separating foreign tourism restrictions from the limits that Senator Reid and President Obama are demanding be placed on American companies.  In this light, it's clear that such proposals are not only economically ignorant, but also quite obviously immoral.  And it's these policies, not the voluntary, private actions of their targets that deserve our derision.  Or, to put it another way, the accusers, not the accused, should be roundly criticized for their transparently cynical advocacy of restrictions on our personal freedoms.

So isn't it time Republicans stopped playing along with these offensive political ploys and started asking some very basic questions about the moral implications of their political opponents' allegations and policies?  Is this really too much to ask?

On second thought, maybe I should quit while I'm ahead.

The Morality of Profit

One of this blog's most frequent subjects is the moral case for free trade (i.e., voluntary, mutually beneficial commercial exchange across national borders) and the immorality of efforts to thwart such exchanges through protectionism or market-distorting subsidies.  From the Atlas Network's Tom Palmer comes a great new video on the morality of profit that touches on some of the themes raised here.



I understand that the Atlas Network will be making more videos on the inherent morality of the free market. Hopefully, they'll do one specifically on free trade and protectionism.

(Assuming, of course, that the world doesn't end tonight.)

Remember, Kids: "Fair" Is Just Another Four-Letter Word That Starts with "F"

Every time I walk into Starbucks to grab a venti triple skim latte, I get irked by the place's incessant moral preening about "fair trade" coffee - its walls papered with pictures and stories of happy Central American coffee growers, each picture/story letting me know that I should not - I repeat NOT - feel guilty about being stinkingly rich enough to regularly drop 5 bucks on a giant, steamy cup of caffeinated water and milk foam.  Starbucks is certainly not alone, and these purveyors have every right to produce, market and their products however they see fit.  But those of us who work in the trade field know all too well that "fair trade" is really just secret code for "the malicious use of subjective hokum to employ latent protectionism" or "the brazen imposition of developed country standards on the developing world" or, at best, "well-intentioned, but misguided (and economically ignorant) marketing efforts that do nothing but raise prices."  (Sometimes all three!)  So the sight of the "fair trade" label has never sat well with me.

I've always thought that it was this last definition - the well-meaning-but-economically-ignorant one - into which almost all "fair trade" coffee efforts fell, so when I walk into Starbucks, or pretty much any other hipster coffee hangout, I get irked (and smugly so), but not irked enough to walk out.  (I do love me some overpriced latte.)  While the marketing efforts were clearly feel-goodism gone awry, I never really thought that they were hurting anyone other than the dumb/lazy, rich consumers who were willing to pay a little bit more for our "fair trade" drinks.  However, after reading this illuminating piece by Duke University's Mike Munger about the troubling effects of the "fair trade movement" on poor local farmers, I might just need to start getting my sweet, sweet caffeine fix elsewhere:

Here is the basic economics--a rent is being created: a price above market price is being charged. In countries where property rights, contracts, and rule of law is tenuous, feel-gooders and scam artists have put together an unholy coalition. The feel-gooders create something called "Fair Trade" certification, which means that the farmers get paid well above market price for the coffee they produce.

Not surprisingly, many farmers want to get in on this action. But less than all can be certified "fair trade" recipients, since a price that much above the market price would create a surplus. The fair trade feel-gooders would never be able to sell the glut of coffee if EVERYONE gets fair trade certification.

So, the feel-gooders stick their fingers in their ears and shout "LA-LA-LA-LA-LA" and pretend that their partners the scam artists are doing the right thing when they hand out the "fair trade" certifications.

But remember that these are countries with little rule of law, and shoddy police enforcement. So what the scam artists in effect do is sell off the rent (the high price of fair trade certification) to the highest bidder.

The result is that, after a fairly short period, three years at most, the "fair trade" farmers are getting no more, and maybe less, than everyone else, and no more than they got before the "fair trade" scam was started. The scam artists, it's true, are skimming the profits, but the competition to become a scam artist then becomes the valuable commodity, and rent-seeking to get to be the guy who certifies "fair trade" then also dissipates THAT rent. Some government official in the country, the one who licenses the guy who licenses the guy who certifies "fair trade" farmers ends up sucking down the rent.

Consumers pay more, and feel good about themselves. The feel-gooders who started the program move on to abuse some other group of farmers with false promises. And the results are a substantial increase in dead-weight loss.

Don't believe me? Article in the National Post, by Lawrence Solomon, founder of Green Beanery in Toronto, a suburb of Buffalo.

And the German study that really reveals how it all works.  In fact, as the Hohenheimers note, the certification process is so corrupt many don't even bother, and just mislabel the coffee as "fair trade" from the get-go.

Solomon's National Post op-ed summarizes the German study and Solomon's own experiences with the fair trade coffee movement, and let me tell you, it ain't a pretty sight:

Today, on World Fair Trade Day, we have something else to feel guilty about. That fair-trade cup of coffee we savour may not only fail to ease the lot of poor farmers, it may actually help to impoverish them, according to a study out recently from Germany's University of Hohenheim.

The study, which followed hundreds of Nicaraguan coffee farmers over a decade, concluded that farmers producing for the fair-trade market "are more often found below the absolute poverty line than conventional producers.

"Over a period of 10 years, our analysis shows that organic and organic-fair trade farmers have become poorer relative to conventional producers."

These findings do not surprise me. I speak as someone who has had contact with various Third World producers in my capacity as president of Green Beanery, a company I founded seven years ago to raise funds for Energy Probe Research Foundation, a federally registered charity that I manage....

The fair-trade business is filled with contradictions.

For starters, it discriminates against the very poorest of the world's coffee farmers, most of whom are African, by requiring them to pay high certification fees. These fees -one of the factors that the German study cites as contributing to the farmers' impoverishment -are especially perverse, given that the majority of Third World farmers are not only too poor to pay the certification fees, they're also too poor to pay for the fertilizers and the pesticides that would disqualify coffee as certified organic.

Their coffee is organic by default, but because the farmers can't provide the fees that certification agencies demand to fly down and check on their operations, the farmers lose out on the premium prices that can be fetched by certified coffee.

To add to the perversity, it's an open secret that the certification process is lax and almost impossible to police, making it little more than a high-priced honour system. Although the certification associations have done their best to tighten flaws in the system, farmers and middlemen who want to get around the system inevitably do, bagging unearned profits. Those who remain scrupulous and follow the onerous and costly regulations -another source of inefficiency the German study notes in its analysis -lose out....

Most merchants of certified coffees are aware of these contradictions, but most won't be aware of other problems in the certification business. For Third World farmers to qualify as fair-trade producers, and thus obtain higher prices for their coffee, farmers must join co-operatives. In some Third World societies, farmers readily accept the compromises of communal enterprise. In others, they balk. In patriarchal African societies, for example, the small coffee farm is the family business, its management a source of pride to the male head of the household. Joining a co-operative, and being told when and what and how to plant entails loss of dignity....

Some believe that certified coffee is superior in some way. But it is not always so. The small-scale farms whose local ecologies produce distinctive, niche coffee beans can't operate on a scale that would justify official certification. As the German study notes, "Certified coffees have distinct production and marketing systems with different associated costs than the conventional system."

Neither is certified coffee different at all. In fact, at Green Beanery we have received bags of coffee, some labelled fair trade, some not, grown on the very same farm and identical in every respect. The fair-trade certified farmer himself can't tell which beans will be sold as fair trade and which not -that decision is made by the higher-ups.

Because the fair-trade associations are intent on keeping the price of fair-trade coffee up, they limit the supply of coffee that can be labelled as certified. To the certified farmer's chagrin, most of his fair-trade certified crop could end up being sold as uncertified conventional coffee.

And in this well-intentioned pricefixing game, the fair-trade farmer is the pawn and the joke is on the customer.

Be sure to read the whole op-ed.  It's well worth your time.  As the title of this blog post (crassly) states, in the trade world "fair" is just another four-letter word that starts with the letter "F."  And in the case of coffee, it looks like impoverished African and Latin American farmers are getting royally, ahem, faired just so rich coffee-drinkers can feel better about themselves.

(h/t Art Carden)

On Protectionism's Alleged "Conservativism"

A few weeks ago, I documented - in admittedly excruciating detail - the many failings of Donald Trump's anti-China trade policy.  Given Trump's magically evaporating poll numbers, the man himself is quickly becoming an afterthought in the US political discussion (thank goodness), but unfortunately his protectionist trade policy isn't making a similarly hasty retreat.  In fact, several misguided souls have taken to the interwebs to loudly defend Trump's indefensible (and hilariously hypocritical) stance on free trade.  I think that my original post and others like it handle a large majority of these defenses, so I won't rebut them here.  However, one new defense deserves further discussion because it comes from someone who really, really should know better - current trade lawyer and former USTR official (under Reagan) Robert Lighthizer - and whose argument rests not on the economic, strategic or moral strengths of Trump's grand plan, but instead on its alleged "conservativism" - something I superficially addressed in my original blog entry.

In today's Washington Times, Lighthizer argues that, while Trump's support for eminent domain abuse and universal health care might be liberal, his trade policy is actually quite "Republican" and "conservative":

Mr. Trump’s GOP opponents accuse him of wanting to get tough on China and of being a protectionist. Since when does that mean one is not a conservative? For most of its 157-year history, the Republican Party has been the party of building domestic industry by using trade policy to promote U.S. exports and fend off unfairly traded imports. American conservatives have had that view for even longer.

Lighthizer's op-ed essentially trots out two arguments to support his thesis that anti-China protectionism is a "conservative" policy.  First, he notes that lots of Republicans and Founding Fathers - like Hamilton, Clay and Lincoln, McKinley, Taft, Coolidge, Nixon and Reagan - supported protectionist policies, while liberals like FDR and Woodrow Wilson supported free trade.  Second, Lighthizer argues that anti-China protectionism is really, deep-down a "core conservative" principle:

On a purely intellectual level, how does allowing China to constantly rig trade in its favor advance the core conservative goal of making markets more efficient? Markets do not run better when manufacturing shifts to China largely because of the actions of its government. Nor do they become more efficient when Chinese companies are given special privileges in global markets, while American companies must struggle to compete with unfairly traded goods.

Thus, Lighthizer concludes:

When viewed in this context, the recent blind faith some Republicans have shown toward free trade actually represents more of an aberration than a hallmark of true American conservatism. It’s an anomaly that may well demand re-examination in the context of critically important questions facing all conservatives on trade policy.

Given the current financial crisis and the widespread belief that the 21st century will belong to China, is free trade really making global markets more efficient? Is it promoting our values and making America stronger? Or is it simply strengthening our adversaries and creating a world where countries who abuse the system - such as China - are on the road to economic and military dominance? If Mr. Trump’s potential campaign does nothing more than force a real debate on those questions, it will have done a service to both the Republican Party and the country.

Now, leaving aside some of Lighthizer's more dubious assumptions - such as China's inevitable dominance or the pro-tariff motivations of certain conservative leaders - do either of his two primary arguments really hold water?  Is protectionism - in particular aggressive, unilateral trade action against China - really a policy that "true conservatives" should inherently embrace?

In short, no.  Of course not.

First, the idea that conservatives and Republicans should support protectionism - or any other policy for that matter - because certain of their former leaders did so is laughably misguided.  For example, President Nixon also supported economy-crushing wage and price controls, so should Republicans support those too?  President Eisenhower was a pretty big fan of the New Deal, so should conservatives support similar progressive expansions of the American welfare and regulatory apparatus?  (And let's not even get into some of the misguided policies of our antebellum conservative founders.)

Indeed, conservatives rightly advocate the exact opposite of such an approach to policy - a government, as arch-conservative John Adams famously quipped, "of laws and not men."  In that sense, conservativism and libertarianism, unlike progressivism, are not about discrete, ephemeral policies or individual leaders but instead about fundamental principles.  The policies and leaders change, but the principles are constant.  Among them are devout commitments to limited government, economic liberty, the free market and the rule of law.

Yet Lighthizer's anti-China protectionism reflects none of these principles.  As Dan Ikenson and I wrote a few months ago:

[V]oluntary economic exchange is inherently fair, benefits both parties, and allocates scarce resources more efficiently than a system under which government dictates or limits choices. Moreover, 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 are the triumph of coercion and politics over free choice and economics. Trade barriers 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.

Protectionism is akin to earmarks, but it comes out of the hides of American families and businesses instead of the general treasury. Policymakers on the right should support free trade because it is consistent with their principled opposition to higher taxes on American businesses and consumers and to big government telling people how and where they should spend their money. A vote for free trade is a vote to cut taxes and to get government out of the business of picking winners and losers in the market....

[W]hen people are free to buy from, sell to, and invest with one another as they choose, they can achieve far more than when governments attempt to control their decisions. Widening the circle of people with whom we transact brings benefits to consumers in the form of lower prices, greater variety, and better quality, and it allows companies to reap the benefits of innovation, specialization, and economies of scale that larger markets afford. Free markets are essential to prosperity, and expanding free markets as much as possible enhances that prosperity.

I recently applied these arguments to the very protectionism -  Trump's anti-China tariffs - that Lighthizer so vigorously defended:

[Protectionism is] the height of statist redistributionism. Trump forgets that American consumers are buying Chinese goods voluntarily - last time I checked China wasn't loading missiles with TVs and launching them into the US (although that would be kinda awesome). And he freely admits that the goal of his policy is to force American businesses and families to subsidize (by paying higher prices) that small minority of American manufacturers who directly compete with China. So not only is Trump saying that he knows better than us about what we should be consuming, but Trump's also saying that because we just can't help ourselves but buy cheap Chinese goods ("ooh, they're so cheap and pastic-y"), he has no choice but to enlist the full force of the US government to stop us from harming ourselves. President Trump will tell us to pay more for less in order to line the pockets of a select few because we're just too dumb and helpless, and we can't be trusted to make the decisions that he, and he alone, deems "right."

It's for our own good, you see. Now please someone, anyone, explain to me how this is the policy of a fiscal conservative?

(Answer: it's not.)

But hey, Presidents Taft and Nixon opposed free trade, so who cares about all those crazy principles, right?!

Lighthizer's second, "intellectual" argument in support of Trump-style, unilateral protectionism - that conservatives should support it because China is cheating at trade and destroying the American economy thereby - is equally problematic.  Leaving aside the economic illiteracy of this argument (cleverly captured today by Cafe Hayek's Don Boudreaux and also shown in my original blog post on Trump) or the fact the term "fairness" is a loaded term routinely championed by progressives and derided by conservatives (including Milton Friedman in this classic video), I'm frankly surprised that Lighthizer, an accomplished trade lawyer, would so freely allege that China is rampantly and wantonly engaging in "unfair" and "injurious" trade.

As he well knows, such terms have very precise meaning under US law, and by that metric - one that's extremely favorable for American companies, by the way - only a small minority of Chinese imports into the United States are "unfairly traded."  And according to the Petersen Institute's Gary Clyde Hufbauer and Jared Woollacott, the level of trade disputes between the US and China is quite "normal" given the nations' rapidly growing commerce (about 12% of total bilateral trade, similar to the US-Canada relationship in the late 1980s).  If Lighthizer and his clients would like to challenge the "fairness" of any of the other Chinese imports that American families and companies are voluntarily purchasing each year, they are certainly free to do so under the US anti-dumping or countervailing duty law (and, of course, they can challenge fairly-traded, surging Chinese imports under Section 421).  Heck, they can even lobby Congress to have US trade laws changed (again) to make findings of injury or unfair dumping or subsidization even easier.  Questionable economics aside, such actions are at least arguably "conservative."  But what clearly isn't conservative are public demands (or backroom lobbying requests) that our political leaders circumvent US law and global trade rules to implement protectionist tariffs by fiat based on unsupported allegations of "unfair" and "injurious" trade.

Even when such demands invoke the dear old ghost of William McKinley.

The Unbearable Asininity and Immorality of Donald Trump's China "Policy"

I was really hoping to stay out of the whole "Donald Trump is Running for President" thing, because I truly believed (and pretty much still do) that (a) the spectacle was just a really good, and slightly depressing, publicity stunt for the reality TV star; and (b) anything I said would just give the guy another free commercial (albeit for an extremely limited market).  Thus, any discussion of this unserious "candidate's" completely unserious "trade policy" - which is literally nothing more than the immediate imposition of tariffs on all Chinese imports - was really just a waste of my and, by extension, your time.  

But then I saw the (admittedly early and utterly unpredictive) polls, and then I read that he's deathly serious about running for President, and then I went on the Laura Ingraham Show and found that smart conservatives like Laura (and a lot of her listeners) actually sympathized with Trump's "get tough on China" plan.

So here I am wasting a quiet Easter Weekend screaming into the interwebs about Donald Trump's - Donald Freaking Trump's - China trade policy.  I hate to say it, but this really does need to be done.  So let's just hold our collective noses and get this over with.

As noted above, Trump's entire trade policy boils down to slapping unilateral tariffs on all Chinese imports as soon as he gets into office.  Here's the man himself describing his big plan to NBC News:

"I would tell China, very nicely, fellows, you are my friend, I like you very much. I've made a lot of money on China by the way, a lot of money with China. I would say we are going to put a 25 percent tax on all your products coming in, and that's going to do a number of things," Trump said.

"Number one: as soon as they believe it's going to happen, they will behave so nicely, because it would destroy their economy,” said Trump in an interview with NBC’s Today show on Tuesday.

Playing up to voter fears on the loss of jobs to China, Trump said the transfer of cash to the Chinese was down to Beijing’s controversial currency peg.

"When you see what China is doing to us, what we're going to lose this year, $300 billion to China. And they are taking all of our jobs, and they are doing it through manipulation of their currency," Trump said.

Trump's China policy is wrong on just about every possible level: factually, legally, economically, strategically, morally and even politically.  Let's systematically address each of these now.

1. Trump gets his basic facts wrong. 

Before we get to Trump's tariff policy itself, it's important to understand the serial fallacy of Trump's basic factual assertions, i.e., that (a) China's currency remains extremely undervalued versus the US dollar; (b) China's currency policies are driving both the US-China trade balance and US unemployment; and (c) that the US trade deficit, and especially the United States' bilateral trade deficit with China, is a big problem for the US economy.

As I've noted here many times, China's currency policies are not nearly the vehicle of economic destruction that Trump and others claim them to be.  First, Trump erroneously focuses on the nominal US-China exchange rate (what the government says the currency is worth), rather than the real exchange rate (what the currency is actually worth).  It's the real rate that matters, as any "businessman" like Trump should know,  because it measures what tradeable goods and services actually cost.  And, as I've noted repeatedly here, the real dollar-yuan exchange rats has increased dramatically - almost 50% percent - since 2005.  Second, as the real value of China's currency has increased, American unemployment has gone from about 5% in 2005 to slightly under 9% today, and the US-China trade deficit has (except for the recession) steadily increased.  So there's no strong connection between China' currency and total American jobs or the trade balance (as the Congressional Research Service has repeatedly noted).

Next, Trump's assertion that $300 billion annual US-China trade deficit is a sign that America is "losing at trade" is the height of economic ignorance.  First, there's actually a strong correlation between US economic growth and an expanding US trade deficit.  As Cato's Dan Griswold recently wrote in a must-read paper on the subject:

An examination of the past 30 years of U.S. economic performance offers no evidence that a rising level of imports or growing trade deficits have negatively affected the U.S. economy. In fact, since 1980, the U.S. economy has grown more than three times faster during periods when the trade deficit was expanding as a share of GDP compared to periods when it was contracting. Stock market appreciation, manufacturing output, and job growth were all significantly more robust during periods of expanding imports and trade deficits.

And if fixating on the overall US trade balance weren't dumb enough, Trump goes one further and obsesses over an even more economically meaningless stat when he worries about the US-China trade balance.  As I've noted here repeatedly, the proliferation of global supply chains and multinational investment has rendered bilateral trade balances a totally unimportant trade policy metric.  Indeed, old school trade stats like these have become so obsolete that the WTO has launched a new global initiative to determine how better to account for actual trade flows.  The most common example of the indisputable obsolescence of the US-China trade deficit is the iPhone (and the iPod before that): each device imported into the US from China accounts for about $300 towards the bilateral trade deficit, yet the Chinese get only about six bucks worth of value from the item's assembly and shipment.  Meanwhile, the US-based Apple and its affiliates get hundreds of dollars from an iPhone's final US sale (for things like design, marketing, and even some manufacturing).

Even the idea that China is totally dominating the United States is absurd.  Yes, China has experienced impressive GDP growth, but (a) that's what developing countries do; and (b) America is still much, much wealthier, greener, and more productive.  Moreover, China's incessant quest for GDP growth through industrial planning has led to some pretty scary inflation (which is driving China's the increase in the Yuan's real value), some major league economic distortions (e.g., a frightening property bubble and an increasingly troublesome high-speed rail system), and a lot of other serious problems that, if not solved pretty quickly, could implode the entire Chinese economy.  Always the empiricist, Trump once "proved" how China was "eating our lunch" by noting how big and shiny China's cities are.  Well, on that, he's right, but that's because no one is actually living in them.  I mean, it's so easy to keep a city clean without the, you know, citizens.

There are several other factual problems with Trump's assertions, but let's just forget about these big flaws and examine Trump's actual policy - unilateral tariffs on Chinese imports to counteract Chinese currency "manipulation" (aka the "Trump Tariff").  As you'll see, it's just as wrong.

2.  The Trump Tariff has major legal problems. 

First and most obviously, the President can't just slap a tariff on Chinese goods.  The US Constitution (Article I, Section 8) gives Congress the sole authority to impose tariffs on foreign-made goods (i.e., "to regulate Commerce with foreign Nations"), so Trump would have to get congressional approval for his big China plan.   But considering that the most protectionist Congress in the last 20 years couldn't even pass legislation making currency undervaluation an illegal subsidy (and fretted for months over the WTO-consistency of the bill), does Trump really think that this new Congress - and its gaggle of free trade-supporting freshman - would agree to his plan?  Highly unlikely.

Second, there are several US laws that govern the imposition of remedial tariffs on Chinese (and other) imports, and these laws have strict procedural, evidentiary and substantive requirements that can't just be ignored.  Illegally subsidized imports from China (and other countries) are governed by the US countervailing duty law, while market-distorting surges in Chinese imports may be addressed under Section 421 (a China-specific safeguard).  President's Trump's remedial tariff would totally (and unlawfully) circumvent these laws.

Finally, the Trump Tariff would be inconsistent with two of the United States' most fundamental obligations under the WTO agreements: (i) Most Favored Nation (GATT Article I - the principle that a WTO Member must treat imports from all other Members equally) and (ii) the United States' tariff bindings (GATT Article II - the rule that a WTO Member cannot impose tariffs above the "bound rate" set forth in its tariff schedule).  Such a blatant violation of WTO rules would have serious consequences for the United States, as we'll discuss next.

3.  The Trump Tariff is economically ignorant.

Even assuming that Trump somehow convinced Congress to impose the Trump Tariff, its effects wouldn't be anything like Trump hoped or planned.  In fact, the tariff would end up causing a lot of pain (for both China and the US) for little or no economic gain.   First, as noted above, the Trump Tariff is blatantly WTO-inconsistent, so China would go straight to the WTO and easily win the right to impose retaliatory tariffs on US exports in the amount of the damage caused by the tariff.  Based on 2010 stats, the retaliation would be something like 25% (the proposed tariff level) of about $365 billion (total Chinese imports), or about $91 billion.  Considering that US exports to China totaled only about $100 billion in 2010, this WTO-legal retaliation would effectively close the United States' third largest export market - a devastating result for one of American exporters' fastest-growing markets (US exports to China have more than doubled since 2005).

Second, the economic pain wouldn't stop with US exporters because the Trump Tariff, just like any other consumption tax, would inevitably increase US prices of everything that American consumers currently buy from China.  Remember, US importers, not Chinese exporters, pay US tariffs and pass those on to American consumers.  This, of course, means that American families, many of whom are already struggling to get by, would end up paying more - a LOT more - for food, clothing, electronics, Smithsonian souvenirs, and everything else that now says "Made in China."  However, individuals wouldn't be the only ones screwed by the Trump Tariff - American businesses (and their many workers) would also be hit hard.  Because almost half of what we import from China is industrial supplies and materials or non-automotive capital goods - i.e., inputs used by American companies - lots and lots of these firms would inevitably pay more for the things that they need to remain globally competitive.  These higher costs, of course, also mean fewer employees, if not outright bankruptcy.  Awesome.

Third, it's highly unlikely that the Trump Tariff would lead to a significant increase in US manufacturing.  Sure, a few directly competitive US companies would benefit from that sweet, sweet import protection (by being able to milk US consumers for more money, natch), but the far more likely result is trade diversion - i.e., our imports would shift from China to other (more expensive) foreign countries like Vietnam, India or Mexico.  This is exactly what happened when the US imposed tariffs on Chinese tires under Section 421, and it's the very common result in anti-dumping and CVD cases.

Finally, even if the Trump Tariff succeeded in getting China to rapidly appreciate its currency (and, as noted below, it won't), it's far from certain that such appreciation would harm China's global competitiveness.  As Cato's Dan Ikenson stated last year: "RMB appreciation not only bolsters the buying power of Chinese consumers, but it makes Chinese-based producers and assemblers even more competitive because the relative prices of their imported inputs fall, reducing their costs of production. That reduction in cost can be passed on to foreign consumers in the form of lower export prices, which could mitigate entirely the intended effect of the currency adjustment, which is to reduce U.S. imports from China."  As an intermediate producer and big assembly hub, China is importing more these days than they did during the last period (2005-2008) of nominal currency appreciation, so Ikenson's insights likely hold truer today than they did even a few short years ago.

In sum, the Trump Tariff would cause massive pain for very, very little gain.

4.  The Trump Tariff is strategically unsound.

Even if the Trump Tariff weren't legally and economically dubious, it's still an awful strategic play.  The idea that the Chinese government would just roll over and concede "defeat" in the face of President Trump's big, macho tariff is absurd.  First, Trump fails to grasp that the Chinese government would never, ever do anything that makes it appear weak in the face of American aggression.  Instead, retaliation, not concession, is the far more likely reaction (just as China did when President Obama imposed those tire tariffs), and such sinophobic chest-thumping would likely retard, not quicken, the gradual appreciation of the yuan that China needs to undertake.  Second, China's not nearly as dependent on the US market as Trump seems to think.  The EU is now China's biggest export market, and Chinese exports to the US represent under 30% of China's exports to its top 10 export destinations.  So while the US market is big and important, China has other options.  Third, China couldn't rapidly and dramatically appreciate its currency even if it wanted to because any such move would implode the Chinese - and by extension, global - economy.

But, you know, other than that, it's a fine plan.

5.  The Trump Tariff is immoral.

Leaving aside the Trump Tariff's legal, economic and strategic problems, perhaps most offensive is its immorality.  As noted above, one of the most obvious effects of the Trump Tariff would be higher prices for American consumers. Trump even seems to recognize this obvious fact, and when asked about it he calmly explained:

But that's a risk Trump is willing to take. He says his son can live with fewer toys, as long as jobs come back to the United States.

"I have a son, and he loves little airplanes ... Most of them are made in China ... He has so many of 'em," Trump told CNBC's Larry Kudlow last month. "If he had half of 'em, and if they were made in this country, I'd be very happy ... and he'd be just as happy."

Other than the fact that those jobs wouldn't come "back to the United States," this kind of statement is mind-blowingly insulting, even for someone like Trump.  As I've repeatedly explained on this blog, tariffs are regressive taxes that harm poor Americans far more than wealthy ones like Donald Trump because they force the former to pay a bigger share of their (much smaller) paychecks for basic necessities like food, clothing and shelter.  Tariffs on Chinese products are even more problematic because lower income Americans buy a lot more Chinese stuff than rich Americans.  In short, when prices at Walmart go up, Donald Trump doesn't notice, but a working mom sure does.  And the only ones who benefit from those higher prices are a few well-connected American manufacturers and their workers.  Nice.

And this gets back to the brazenness of Trump's "toys" statement: sure, he can tolerate his son only having 10 higher-priced toys instead of 20 Chinese-made toys, but what about the dad who can currently afford only one toy for his son?  Last time I checked, he can't buy half a toy (or tire or shirt or TV or whatever), so for many lower income American families, the Trump Tariff doesn't mean ten fewer toys, it means no toys (or tires or shirts or TVs or whatever).

Stay classy, Donald.


6.  The Trump Tariff is the exact opposite of fiscally conservative, libertarian or "Republican."

A lot of people have dismantled Trump's born again conservativism by noting how he until very recently supported things like universal health care and eminent domain abuse, but his protectionism is just as bad or worse.  Indeed, it's the height of statist redistributionism.  Trump forgets that American consumers are buying Chinese goods voluntarily - last time I checked China wasn't loading missiles with TVs and launching them into the US (although that would be kinda awesome).  And he freely admits that the goal of his policy is to force American businesses and families to subsidize (by paying higher prices) that small minority of American manufacturers who directly compete with China.  So not only is Trump saying that he knows better than us about what we should be consuming, but Trump's also saying that because we just can't help ourselves but buy cheap Chinese goods ("ooh, they're so cheap and pastic-y"), he has no choice but to enlist the full force of the US government to stop us from harming ourselves.  President Trump will tell us to pay more for less in order to line the pockets of a select few because we're just too dumb and helpless, and we can't be trusted to make the decisions that he, and he alone, deems "right."

It's for our own good, you see.  Now please someone, anyone, explain to me how this is the policy of a fiscal conservative?

(Answer: it's not.)

Look, the truth is that China presents some real challenges for American businesses and the US government, and they should both continue to smartly and lawfully pressure China to reform its troublesome policies (while getting the United States' own messy house in order).  But it's absurd to think that the Great Red Menace is coming to steal our jobs and eat our lunches.  In reality, China's economy is at a very precarious point, and if the Chinese government doesn't find a way to change course, the country's headed for a Japan-style collapse, as this recent article made clear.  But, hey, maybe that fact explains why Trump, while (fake) contemplating the presidency back in 1990, said the exact same things about Japan that he's saying about China today.

Then again, maybe just like 1990, Trump's once again pulling a fast one on all of us and is just sopping up some free publicity in order to hawk his ties board game cologne TV show.  Unfortunately, even if Trump's candidacy is a joke (and I still think it probably is), his China "policy" has gained real traction among the American public and some influential conservative pundits.

And that's far more disturbing than Trump's current poll numbers.

Tuesday Quick Hits

A lot of very interesting things have come across my (virtual) desk over the last few days, and many of them support the things I've been discussing here over the last few months.  I highly recommend reading some, if not all, of these in full:

• Harvard's Edward Glaeser discusses why the "morality" of modern economics is rooted in human freedom (h/t Fred Smalkin).  In so doing, he underscores one of the big themes of Dan Ikenson's and my new paper on the broader case for free trade, its inherent morality: "Improvements in welfare occur when there are improvements in utility, and those occur only when an individual gets an option that wasn’t previously available. We typically prove that someone’s welfare has increased when the person has an increased set of choices. When we make that assumption (which is hotly contested by some people, especially psychologists), we essentially assume that the fundamental objective of public policy is to increase freedom of choice. Our opponents have every right to contend that economists are unwisely idolizing liberty, but they err by saying we sail without a moral North Star. Economists’ fondness for freedom rarely implies any particular policy program. A fondness for freedom is perfectly compatible with favoring redistribution, which can be seen as increasing one person’s choices at the expense of the choices of another, or with Keynesianism and its emphasis on anticyclical public spending. Many regulations can even be seen as force for freedom, like financial rules that help give all investors the freedom to invest in stocks by trying to level the playing field.  The belief in freedom does, however, create a predilection for human interaction and trade.  As [Milton] Friedman wrote, 'The most important single central fact about a free market is that no exchange takes place unless both parties benefit.' For many economists, defending free trade isn’t just about gross domestic product; it’s fighting for core values of freedom and human interdependence.  As [Adam] Smith said, 'To give the monopoly of the home market to the produce of domestic industry, in any particular art or manufacture, is in some measure to direct private people in what manner they ought to employ their capitals, and must, in almost all cases, be either a useless or a hurtful regulation.'  Economists are often wary of moral exhortation, as many see the harm so often wrought by arguments that are long on passion and short on sense. But don’t think that our discipline doesn’t have a moral spine beneath all the algebra. That spine is a fundamental belief in freedom."

• The Economist: based on a rough (but very reasonable and scholarly) esitmate, trade with China has saved American consumers approximately $780 billion(!) between 2001 and 2010.  Chinese President Hu Jintao said it was around $600 billion, and the magazine's back-of-the-envelope confirmation of Hu's claim definitely calls for more research.  Nevertheless, WOW!

• Dallas Fed further confirms what we already knew: China's currency policy is not the primary driver of the US-China current account balance: "Normally, a fast-growing economy such as China would borrow money from the rest of the world instead of lending. An obvious suspect in China’s mounting current account surplus is the fixed exchange rate between its yuan and the dollar. An undervalued yuan makes Chinese products cheaper than those of competitors in international markets. As a result, China exports more than it imports. According to this explanation, yuan appreciation could rebalance the global economy. This argument has at least two flaws. First, the durability of the U.S.–China imbalance is difficult to explain. In order for the exchange rate to affect import prices, those prices can’t adjust.... Although in reality prices cannot change instantly, they do adjust over the long run; therefore, the exchange rate has only short-term effects on import prices and the current account. China has run a significant trade surplus against the U.S. for about 10 years (Chart 2). It is hard to imagine that prices have not fully adjusted to offset the exchange rate after such a long period. Second, an appreciating yuan may only minimally reduce the imbalance. Even in the short run, the exchange rate’s impact on import prices would be quite limited, studies have shown. Exporters usually pass on only a fraction of exchange rate movements when setting prices. About 20 percent of exchange rate changes were reflected in U.S. import prices during the past decade, Federal Reserve economists Mario Marazzi and Nathan Sheets found. Profit margins usually absorb some of exchange rate movement as exporters seek to maintain market share. Additionally, the currency under which import prices are invoiced also affects the exchange rate pass-through. Most U.S. imports from China are priced in dollars, and their prices are fixed in the short run. In this case, depreciation of the dollar against the yuan has no short-run effect on import prices from China."

• The FT's Clive Crook (rightly) dismantles Obama's State of the Union Address (h/t Phil Levy).  He hits on many of the problems with "competitiveness" and "investment" that I've discussed here at length.  My favorite lines: "The metaphor of growth as a race with winners and losers – all that stuff in the speech about Sputnik moments, falling behind, winning the 21st century – is nonsense. Over the long haul, if US productivity rises, so will US living standards. Why should growth in China or India hold back US productivity? No reason at all. Once conditioned to think “productivity” whenever a politician says “competitiveness”, you look at economic policy differently. Winning begins to seem overrated. What exactly do we win, you wonder? Being number one in worldwide production of solar panels would be nice, but how would that raise economy-wide productivity? The key to improving living standards lies not in winning the race to develop showcase technologies, but in accumulating capital, diffusing knowledge and accommodating the disruption that this entails."

• China is starting to experience some pretty significant trade diversion, but (unsurprisingly) very little of the sourcing is heading to the United States: "More than half of international buyers have tended to increase their sourcing from India and Vietnam due to continuous export price hikes from China, according to a recent survey by the Global Sources, a trade information provider.... Workers in Vietnam, however, are said to need twice as much time to finish one task, the Global Sources said. 30% of respondents said they plan to increase sourcing from Thailand. However, export price may not be the polled buyers' sole consideration, for 7% of them are considering increasing imports from countries that have higher production costs than China, including South Korea, Japan, the United States and the European Union."

• Meanwhile, the NYT notices (again) that Chinese inflation may shrink the US-China trade deficit.  Color me shockedtotally and utterly unsurprised.  Although most of this article just updates what we've already known for a while now, I think it's worthwhile to note this passage about the deleterious effects of higher Chinese import prices on US consumers: "The higher Chinese prices will tend to show up mainly in products like inexpensive clothing and other commodity goods in which labor and raw materials represent a bigger part of the final value — rather than in sophisticated electronics like Apple iPads, in which Chinese assembly is only a small fraction of the cost."  In short, the pain will mainly be felt by poorer American consumers and US manufacturers.  Wealthier Americans?  Not so much.  And yet it's the politicians who claim to "care" most about America's poor and the US manufacturing sector - and who demonize America's "rich" - that have for years now been demanding more expensive Chinese imports.  Maybe they're not telling us the whole story, huh?

• WTO Director General Pascal Lamy, channeling Cato's Dan Ikenson, explains in the FT why "Made in China’ tells us little about global trade": "As recently as 30 years ago, products were assembled in one country, using inputs from that same country. Measuring trade was thus easy. 2011 is very different. Manufacturing is driven by global supply chains, while most imports should be stamped “made globally”, not “made in China”, or similar. This is not an academic distinction. With trade imbalance causing friction between leading economies, the measures we use can gravely exacerbate geopolitical tensions at a time when co-operation is more vital than ever."  Good stuff from DG Lamy, but, yes, it should all sound very familiar.  However, I did find this stat to be new and interesting: "Measures we use also change the way trade affects jobs too. Research on Apple’s iPod shows that out of the 41,000 jobs its manufacture created in 2006, 14,000 were located in the US. Some 6,000 were professional posts. Yet since US workers are better paid, they earned $750m, while only $320m went to workers abroad. Indeed, the iPod may have never existed if Apple had not known that Asian companies could supply components, while both Asian workers and Asian consumers would manufacture and buy it. Statistics that measure value added can provide a more reliable way of seeing how trade affects employment."  And speaking of the WTO and trade statistics, the trade body is hosting a big seminar on the subject this week.

• The Heritage Foundation's Anthony Kim explains just how far Colombia has come in terms of economic and political freedom.  Maybe it's time we implemented that FTA, huh?

• China expert Lee Miller explains why the conventional wisdom (and hope?) that China's banking sector will be more, ahem, reserved in 2011 may be misguided.  Bizarre stuff.

• America is silly rich and relatively equal.  Also from the NYT's Economix blog comes your chart of the day on global income inequality, which shows that (i) contrary to the breathless claims of certain lefty bloggers out there, the United States is absolutely nothing like Brazil (or other major developing countries) when it comes to income inequality;and (ii) the "bottom 5 percent of the American income distribution is still richer than 68 percent of the world’s inhabitants" and "about as rich as India's richest."  Check it out:

• The always-great Becker-Posner Blog has more on inequality here (and here).  It's nothing groundbreaking, but definitely worth a read.

• More of the same: US manufacturing sector expands for the 18th straight month. Yawn. BUT, there is this little nugget: "The ISM Employment Index increased in January to 61.7%, which is the 16th consecutive month of growth in manufacturing employment and the highest reading for the ISM manufacturing employment index since April of 1973."  Don Boudreaux has more insights, including a link to a neat new story from MSNBC on the state of US manufacturing, here.

That should keep you busy for a while.  Now get to reading!