Showing posts with label Romney. Show all posts
Showing posts with label Romney. Show all posts

Sunday, November 4, 2012

The Last Four Years and the Next

With the election only two(!) days away and with every "pundit" with an internet connection offering his/her views on President Obama's first term, there's no better time than now to provide my opinion on the United States' trade and related policies in the Obama years.  Unfortunately, there's simply no way to sugarcoat it: the President's international economic policies have fallen short on almost every level.

This conclusion will likely come as no surprise to readers of this blog, and I'm not going to spend all night reiterating the many criticisms that I've explored here since mid-2009.  Instead, I'd like to keep this (relatively) short, so if you want more support for anything said below, feel free click the hyperlinks below at your leisure.

But before I start kvetching, let me quickly note the "good" things that the Obama administration has done since they took over US trade policy in 2009:
  • First, and most importantly, they have avoided serious backsliding into protectionism, particularly with China.  As I explained the other night, the President and his team have resisted the strong calls from their Democrat allies in Congress to label China a currency manipulator or to impose duties on Chinese imports on the basis of alleged currency manipulation.  Each of these policies is economically, legally and strategically wrongheaded, so it's good that the administration ignored them.  Moreover, they have avoided the imposition of broad-based protectionism, although they have implemented (or failed to stop Congress from implementing) many discrete anti-trade policies (discussed below).  However, as I've repeatedly explained, there is a big difference between pushing good trade policies and not destroying the economy (and US diplomatic relations) through protectionism.  In other words, "Obama 2012: Not Totally Horrible" is hardly a good campaign slogan.  We deserve - and really need - better.
  • Second, I think the administration has done a reasonably good job of using WTO dispute settlement to advance US and broader free trade interests.  They are on pretty solid ground to brag about the number of cases that they've initiated to end other WTO Members' anti-trade practices.  Dispute settlement is a legitimate and effective way to curtail foreign protectionism, and it's good that, instead of imposing unilateral measures, the administration went to the impartial WTO.  However, it's important to note that (1) three of those disputes (challenging Chinese trade remedies actions against US chicken, automobile and steel exports) are the direct result of US protectionism (China retaliated after President Obama imposed tariffs on Chinese tires); (2) the administration didn't have much of a choice: dispute settlement is what WTO Members are supposed to do when faced with foreign protectionism, and most unilateral alternatives violate global trade rules; and (3) as discussed below, the administration's stubborn non-compliance with adverse WTO rulings and continued imposition of WTO-inconsistent trade and subsidy policies has undermined the moral force of the United States' anti-protectionism efforts at the WTO.  So the disputes are good, but bad policy prevents them from being much, much better.
Unfortunately, these reasonably-good things are significantly outweighed by the following policy failings:
  • A dramatic decline in global competitiveness.  As I detailed in July, the United States has declined - in some cases significantly - in every independent study of global economic strength and competitiveness since President Obama took office.  These studies reflect a failure by the Obama administration to implement tax, trade and regulatory policies that could help US businesses and workers compete and prosper in the global economy.  Since July, the World Economic Forum's latest Global Competitiveness Index has dropped the United States another two places (now 7th, from 2nd in 2009, 4th in 2010 and 5th last year); respondents' top three problems with the US economy are inefficient government bureaucracy, tax rates and tax regulations - all things that the Obama administration could've addressed (especially when Democrats had total control of the US government in 2009-2010) but instead completely ignored.  The United States also has dropped from 10th to 12th in the Legatum Institute's Prosperity Index, with the US economy a mediocre 20th overall.  This is not good at all.
  • A dramatic decline in economic freedom.  The United States' drop in global competitiveness has - perhaps not surprisingly - coincided with a decline in economic freedom.  According to the Heritage Foundation's Index of Economic Freedom, the United States now ranks a depressing 10th in the world overall (down from 6th in 2009) and an even-more-depressing 37th in trade freedom.   The Fraser Institute's 2012 Economic Freedom of the World Report shows a similar decline, ranking the United States only the 18th(!) freest economy in the world, down from 8th in 2005.  I won't debate here whether economic freedom means economic prosperity (despite strong correlations among the two), but you can draw your own conclusions.
  • Trade policy stagnation.  As I explained last week, US trade policy has slowed to a crawl during the Obama years, and American leadership - a staple of the global trading system since the 1940s - has all but disappeared.  There is no better indicator of this stagnation than US involvement in free trade negotiations.  The President spent the first three years of his term letting the WTO's Doha Round of multilateral trade talks die on the vine and working up the "courage" to  face down his own party and submit implementing legislation for FTAs with Colombia, Panama and South Korea that had been completed and signed by President Bush in 2006-07.  And when Obama finally did get around to these deals, he made the most economically-significant one - the Korea free trade agreement - less free by raising or extending tariffs on automobiles in both the United States and Korea, and he refused to send them to Congress unless he received a billion dollar extension of the problematic Trade Adjustment Assistance worker subsidy.  (For details on the FTA debacle, go here.)  Furthermore, the only new trade negotiations that the Obama administration has formally initiated are those for the Trans-Pacific Partnership - talks that were actually started by the Bush administration, have moved interminably slowly due to US recalcitrance on various issues, and, because most TPP members are already US FTA partners, will only produce significant economic gains if other countries - like Japan or China - end up joining down the road.  Meanwhile, other countries are liberalizing at a breakneck pace (for example Canada, which has concluded nine FTAs since mid-2007 and is currently negotiating four more).
  • Rampant proliferation of trade-distorting subsidies.  Starting with the Stimulus* bill in 2009 and snowballing ever since, the dramatic expansion of federal subsidies on President Obama's watch has hurt the US economy, bred cronyism, distorted trade and investment patterns, undermined US efforts to push needed trade reforms in other areas, and raised diplomatic tensions.  Need proof?  Just read my paper or related blog posts (or take a look at Solyndra).  'Nuff said.
  • Trade remedies malfeasance.  Just as the United States has cranked-up the subsidies and screamed about Chinese subsidization, it has also employed trade remedies - particularly anti-subsidy (countervailing duty) measures - against foreign imports.  As I explain in my new paper and elsewhere, the application of CVDs can, in theory, help curtail foreign and domestic subsidies, but the administration's current anti-subsidy policies - particularly those related to China - reflect capture by domestic industries and unions, often violating US law and WTO rules and leading to taxes on US businesses and consumers that are far in excess of that needed to remedy foreign subsidization.  Meanwhile, the administration has also proposed numerous changes to US anti-dumping policies, again targeting China, that also will likely lead to more and higher duties.  And let's not forget the utter debacle that was the President's decision to impose tariffs on Chinese tires pursuant to the "special safeguard mechanism" (Section 421) of US trade law.  Thus, while support for trade remedy-based protectionism is undoubtedly a bi-partisan affliction, President Obama has proven himself to be especially ill over the last few years.
  • Discrete protectionism.  The administration hasn't totally avoided protectionism over the last few years.  Beyond the tire tariffs, we saw, among other things, bans on Chinese chicken and Mexican trucks, as well as the proliferation of "Buy American" policies.  We also saw significant increases in "regulatory protectionism," including through the Lacey Act and Dodd-Frank's conflict minerals provisions.  Most of these anti-trade actions (and many others) were the result of the administration's consistent view that trade policy is a political tool to buy votes or to secure other, more important policies, regardless of the harms imposed on US businesses and consumers.  All of these actions are deserving of scorn.
  • WTO non-compliance.  The Obama administration also has failed to comply with various adverse WTO rulings against, for example, US aircraft and cotton subsidies and several AD/CVD measures on Chinese imports.  You may remember that the cotton case is particularly galling, as the administration has agreed to pay $130 million per year to Brazilian - yes, Brazilian - cotton farmers in order to avoid formal retaliation from Brazil.  The federal government is also still paying out money - and facing retaliatory tariffs - under the Byrd Amendment, which was ruled WTO-inconsistent in 2003(!).  And we still haven't fully resolved the ongoing mess of zeroing in anti-dumping investigations.  (All that campaign bragging about WTO disputes doesn't look so hot now, eh?)
  • Trade rhetoric and advocacy.  Finally, the Obama administration has promulgated some of the most problematic rhetoric on trade and international economics of any presidential administration of the last 30 years.  Yes, President Obama and his staff occasionally speak well of free trade (typically in theory or outside of DC), and every administration unfortunately advocates "fair trade" and overemphasizes exports.  But this President and his staff have been pretty darn awful, particularly during election years, as they have vocally pushed mercantilism, attacked outsourcing, treated our trading partners as adversaries, and routinely decried foreign "cheating."  As I've repeatedly explained, the Executive Branch is politically and legally positioned to be the US government's foremost advocate for trade liberalization, and when the President shirks this duty, it can have serious repercussions at home and abroad.  And here we are.
These points make clear that "Not Totally Horrible" really is the best thing you can say about US international economic policy in the Obama years.  This is hardly a ringing endorsement, and as I noted the other night, I see very little chance that the President and his team will ditch their political cynicism and dramatically improve US trade and related policies during a second Obama term.  And since there's no chance that Gary Johnson will be the next President of the United States, that leaves Mitt Romney, who - as I explained previously - is much more likely than the current President to actively pursue trade liberalization and reassert US leadership in the global trading system.  It's by no means guaranteed, but - considering just how far US trade policy has fallen over the last few years - it simply can't get any worse.

Indeed, the President's record goes beyond the discrete trade, tax and regulatory policies outlined above; it's indicative of his administration's political worldview and why I think Obama's not deserving of another four years.  As I have repeatedly explained, a politician's - particularly the President's - views on trade and protectionism speak volumes about his or her broader political principles:
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... ideals and prey on voter fears for short-term political advantage.
Viewed through this lens, the aforementioned trade policy failings look even worse, wouldn't you say?

Of course, it didn't have to be this way.  Until the middle of the last decade, American trade and global economic policy wasn't really a partisan issue - just look at Bill Clinton, who not only championed NAFTA and the WTO but also forcefully pushed for China's entry into the World Trade Organization.  And for a few fleeting moments in 2009, President Obama and his team looked to be following in Clinton's free trade footsteps.  Heck, Cato's Dan Ikenson and I even gave them a pretty detailed road map on how they could do it.  But then Obamacare happened, and Chinese tires, and Dodd-Frank, and green subsidies/protectionism, and Mexican Trucks, and "Make It in America," and Bain Capital and so on and so on.  For political gain, they willfully turned away from decades of bipartisan, pro-trade consensus; they made their choice.

And on Tuesday we get to make ours.


P.S. I honestly have no idea what will happen in this week's election; my gut says narrow - 15 electoral votes or so - Romney win, but I could easily see it going the other way.  I sincerely hope that, regardless of who wins, the next four years of international economic policy are better than the last.  This economy, and global trade policy, can use all the help they can get.

Thursday, November 1, 2012

Leading from Behind on Trade

Last night, I lamented the last four years of politics-driven US trade policy stagnation and the United States' abdication of its traditional role as the world's global trade leader.  My longwinded essay was admittedly light on links and examples, but did happen to finger Canada as one of several countries that have left the United States in the trade liberalization/leadership dust over the last few years.  Tonight comes a great example of just what I meant:
The Honourable Ed Fast, Minister of International Trade and Minister for the Asia-Pacific Gateway, today announced that Canada will soon begin the first full round of trade negotiations with Japan, the world’s third-largest economy and Canada’s fourth-largest merchandise export market....

Known as the Canada-Japan Economic Partnership Agreement, the first full round of official talks, which will begin on November 26 in Tokyo, will build on the recently released joint study that found a trade agreement between Canada and Japan could translate into gains of up to $3.8 billion a year in Canadian gross domestic product. The study also found that Canadian exports to Japan could increase by as much as 67 percent and lead to gains for Canadian exporters of goods and services, as well as enhanced investment opportunities. That is equivalent to the creation of more than 26,000 new jobs, and expected to bring strengthened bilateral trade opportunities in a variety of areas, including in Canadian agri-food products and natural resources....

In less than six years, the Harper government has concluded free trade agreements with nine countries: Colombia, Honduras, Jordan, Panama, Peru and the European Free Trade Association member states of Iceland, Liechtenstein, Norway and Switzerland. In addition to ongoing negotiations with the European Union and India, Canada recently joined the Trans-Pacific Partnership.
Nine FTAs concluded and three - now four - major agreements under negotiation.  Very impressive.  By contrast, since mid-2007, the United States has concluded precisely zero trade agreements, and is currently negotiating exactly one deal, the TPP.  I've repeatedly criticized the Obama administration for not getting Japan into the TPP when it had the chance, and it was great to see that Governor Romney's team announce that, as President, he'd welcome the country - one of our closest allies and largest trading partners - into the only trade negotiations that the United States is now pursuing.

But, hey, maybe if President Obama gets re-elected, we can just count on the Harper Government to push for Japan's inclusion.

Talk about leading from behind.

Monday, September 24, 2012

No, the President Will Not Extend His Favorite Protectionist Tariffs This Week (Thank Goodness)

A couple weeks ago, I openly asked why, considering how much President Obama just loves the tariffs on Chinese tires that he imposed in 2009 under "Section 421" of US trade law, they were going to expire at the end of this month.  This morning, however, the Huffington Post's Jon Ward had some pretty reasonable-sounding speculation that Obama will, in fact, extend the tariffs before they expire this Wednesday, September 26th:
President Obama plans to travel to Ohio for campaign events on Wednesday, the same day that a three-year tariff on the import of Chinese tires is set to expire.

It's not likely that Obama will let that happen, especially on a day when he is in a major tire manufacturing state, a state that is key to victory in the fall election and where many voters blame China for a long list of economic ills...

On Monday, the Obama campaign again showed its sensitivity to any attacks on the president's record on China and responded immediately with a memo from national spokesman Ben LaBolt, who pointed to the multiple investments by Romney's fund managers in Chinese companies and to the number of trade complaints brought by the administration at the WTO.

But LaBolt also mentioned the tire tariff, calling it "aggressive action against China on behalf of American tire workers."

"When he visits Toledo this week, those tire workers will welcome Romney to remind him that when it mattered most, President Obama stood up for them and he turned his back on them," LaBolt wrote.

The Huffington Post asked LaBolt last week about the tire tariff's pending expiration, but the normally responsive spokesman did not have anything to say about it. A White House spokeswoman on Monday morning also did not return an email requesting comment...

[W]ith the president headed to Ohio and the tire tariff now a gambit in the campaign, as each candidate bills himself as the most committed to "stand up to China," as the Romney campaign puts it, it seems likely that Obama is planning to announce an extension of the tariff at his campaign events in Bowling Green and Kent.
When I read Ward's blog post this morning and then saw this new Obama Campaign ad bragging about the tire tariffs (and bashing Romney's wise opposition to them), I admit that I was pretty concerned that my previous analysis of the legal basis for extending the tire tariffs was wrong.  However, after re-reading that analysis a few times and reassuring myself that the President had absolutely no legal authority to extend the tariffs at this late stage, I then became concerned that the White House was simply preparing to ignore the law's plain text.  (It wouldn't be the first time they've ignored the law on a China-related matter, and what journalist is knowledgeable enough - or willing - to call them on it?)  It turns out, however, that my concerns were misguided.  Shortly after noon today, Ward updated his earlier blog post with the following news from the White House and others:
UPDATE: 12:36 p.m. -- A White House official said Monday that the tire tariff will in fact expire, because the United Steelworkers felt that the provision had had the intended effect.

LaBolt, Obama's campaign spokesman, said in an email that "the President's action achieved its goals of saving 1,000 jobs and protecting American businesses against a surge of Chinese tires."

UPDATE: 1:30 p.m. -- A senior Romney adviser, asked Monday whether the tariff should be allowed to expire or not, did not directly answer....

The tariff's expiration on the day that Obama arrives in Ohio may sound an off-note; but if the tariff's primary beneficiary, USW -- which has not requested an extension, according to the White House -- is on board, criticism of the president is likely to be minimal.

UPDATE: 1:47 p.m. -- United Steelworkers President Leo Gerard said in an emailed statement that the organization informed the administration in March that it would not request an extension of the tariff.

"Since [Obama's] decision, by every measure, success has been achieved: jobs have been retained and created, production has rebounded, investments in plant and equipment have been made and many companies have returned to profitability. That’s why the law was enacted, and it worked," said Gerard.

The USW added that "under an unacceptable, but existing provision of international trade law, compensation for a fourth year of relief might have had to be paid to China."

"We refused to pursue an option that could potentially reward China for their actions," Gerard said.

The Wall Street Journal reported in January, however, that the impact of the tariff was negligible because low cost tires started coming into the U.S. from other foreign countries.
And, of course, the tariffs cost at least $900k/per union job allegedly saved - but hey, that's "mission accomplished" according to Leo Gerard.  Nice work, dude.  Way to go.

But I digress.

So, as I originally reported, it looks like we'll finally be rid of the tire tariffs this week after all.  That's certainly great news for American businesses and consumers, huge protectionist costs notwithstanding.  However, I now am left wondering what President Obama has up his sleeve when he visits Ohio on the day that the tariffs expire.  Another WTO case maybe?  Something else?  Shudder to think.

We'll know soon enough, I guess.

Wednesday, September 12, 2012

New Study on Import Benefits

The Heritage Foundation published a great study today further debunking the protectionist myth that imports into the United States harm the US economy and destroy American jobs.  In "Trade Freedom: How Imports Support U.S. Jobs," Heritage scholars Derek Scissors, Charlotte Espinoza and Terry Miller argue:
It is a common misperception that importing goods to America comes at the cost of American jobs. In fact, imports contribute to job creation on a large scale. The increased economic activity associated with every stage of the import process helps support millions of jobs in the U.S. This Heritage Foundation analysis shows that over half a million American jobs are supported by imports of clothes and toys from China alone. These jobs are in fields such as transportation, wholesale, retail, construction, and finance. Understanding the positive role of imports with respect to jobs, in addition to their other benefits, is critical to adopting the correct trade policy and thus to bolstering the economy.
The whole report is worth reading, but I especially like how Heritage dismantles other "studies" out there - relied on by certain, ahem, campaigning politicians - that erroneously connect the US trade deficit with job losses.  On the China version of these studies, the authors state:
Those who attack China often do not examine real economic events: They do not measure actual failed businesses and actual job losses. Instead, they assume the U.S.–China trade deficit means that both production and production jobs are moving from the U.S. to China. If this were true, many jobs would have moved back to the U.S. from China when the bilateral deficit fell by more than $30 billion in 2009. Of course, no jobs actually moved. Instead, millions of jobs were lost, due not to trade flows, but simply because of economic contraction during the financial crisis.

Even absent a crisis, the U.S.–China trade deficit does not have the impact on jobs that many protectionists believe it has. If the bilateral trade deficit were eliminated, jobs would not move to the U.S., because the U.S. does not trade with China alone. Furniture production and similar jobs would move from China, not to the U.S., but rather to other countries where furniture can be made cheaply. The idea that millions of American jobs have been lost to China relies on bad trade numbers, bad economics, and a completely fictional view of the world.
Yep.  Now, if only certain campaigns would stop parroting politically-convenient numbers based on absolute hokum in a shortsighted attempt to scare up a few votes.  Alas.

Be sure to read the whole Heritage study here.

Monday, August 27, 2012

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

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

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

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

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

Because American workers have shown that, on a truly level playing field, they can surpass the competition in international trade, we call for the restoration of presidential Trade Promotion Authority. It will ensure up or down votes in Congress on any new trade agreements, without meddling by special interests. A Republican President will complete negotiations for a Trans-Pacific Partnership to open rapidly developing Asian markets to U.S. products. Beyond that, we envision a worldwide multilateral agreement among nations committed to the principles of open markets, what has been called a “Reagan Economic Zone,” in which free trade will truly be fair trade for all concerned.
I've been over most of these ideas before, so there's no need to get long-winded tonight.  Instead, here's a quick summary of the good, the bad and the ugly in the GOP platform's international trade section:

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

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

The Ugly.  I guess it shouldn't be a surprise, but it's really a shame that America's "free market" party has warmly embraced Romney's zealous contempt for all things China trade-related.  This includes support for (i) countervailing duties on Chinese imports due to currency manipulation; (ii) mysterious "punitive measures" on foreign firms found engaging in IPR theft; and (iii) support for a "Buy AmericanAnything-But-Chinese" procurement policy.  Leaving aside for the moment the fact that each of these proposals raises serious legal and practical concerns (see, e.g., here on currency; there's not really a vehicle under US law for the second; and the third could violate WTO rules if it singled out China), there are much bigger problems with such talk: 
  • First, the scary chest-thumping overshadows far more legitimate gripes about bad Chinese trade policies (like subsidies and IPR enforcement).  When you're screaming about attacking imports and investment, people tend not to notice your more subtle gripes about real problems in the Chinese market. 
  • Second, and more importantly, these proposals expressly condone self-destructive retaliatory protectionism that defies economic sense and free market principles.  As I've repeatedly warned, there is absolutely no reason why such "logic" couldn't be applied to other "offending" countries, and the protectionist slope is very, very slippery.  Saying "we only meant it for China" is likely not going to serve as an adequate defense when the well-funded protectionists come knocking on the White House door.  And, by empowering these anti-trade forces, such proposals also won't help improve tepid American support for free trade.  In short, Pandora's Box has been opened, and it remains to be seen whether Republicans can control the nastiness inside.  The Democrats - who once supported things like NAFTA, China trade and the WTO (see, e.g., Bill Clinton) - sure couldn't.
Granted, each of the GOP's China trade proposals allows for ample wiggle-room, and it's very likely that a President Romney would pursue a much less aggressive approach (indeed, the platform later on page 49 states that the GOP "welcome[s] the increase in trade and education alliances with the U.S. and the opening of Chinese markets to American companies").  Regardless, "Commercial discrimination will be met in kind" is a recipe for heightened protectionism and possibly a trade war, not a responsible, economically and legally sound policy from the supposed "adult in the room" on US international trade policy and politics.  And the sign that such rhetoric - in GOP's defining policy document, no less - sends to the rest of the world is nothing short of embarrassing.  The only bright side for Republicans, I guess, is that the Democrats' platform promises to be even worse.

Hooray, lesser of two evils!

More to come, I'm sure.

Thursday, August 16, 2012

On China Trade, Paul Ryan Toes the (New, Fake) Company Line

Well, that certainly didn't take long:
In his first remarks touching foreign policy since becoming Mitt Romney's running mate, Paul Ryan had tough words for China in this manufacturing-heavy battleground state.

"They steal our intellectual property rights. They block access to their markets. They manipulate their currency."

He continued, "President Obama promised he would stop these practices. He said he’d go to the mat with China. Instead, they’re treating him like a doormat. We’re not going to let that happen. Mitt Romney and I are going to crackdown on China cheating. We’re going to make sure that trade works for Americans."
Sigh.  Although I'm certainly not a fan of Ryan's comments, they're utterly unsurprising given that China-bashing has been a central plank of Romney's economic platform for almost a year now, and that his new running mate has hardly been a strong and outspoken champion for trade liberalization during his twelve years in Congress.  (Something I acknowledged again last night.)  However, as I noted on Sunday, Rep. Ryan has a pretty good voting record on China trade, having approved Permanent Normal Trade Relations for China back in 2000 (as part of its WTO accession) and, more importantly, opposing a 2010 bill that would have authorized the Department of Commerce to treat "currency manipulation" as a countervailable subsidy - virtually identical to one of the things that Governor Romney promises to do on "Day 1" of his Presidency.

A smart reporter was quick to note this blatant conflict, to which the Romney campaign responded with a classic bit of political non-speak:
The Romney campaign responds that the president already has sufficient authority to act on China's currency manipulation, and a Romney-Ryan administration would do exactly that.

“Like Gov. Romney, Congressman Ryan believes America must take aggressive action to confront nations like China that cheat on trade," says spokesman Brendan Buck. "He believes this can be done most effectively when the president has the freedom to take appropriate action, and that we need a president like Gov. Romney who is committed to doing just that instead one like President Obama who has shown he won’t.”
Umm, yeah, if you can make sense of Mr. Buck's soundbite, please let me know because I certainly can't.  However, because campaign journalists don't understand the basics of US trade law, it appears he got away with it... for now, at least.  That said, I'd be remiss not to counter the paraphrased notion above that President Romney could unilaterally label China a currency manipulator or impose duties on Chinese products on his first day in office.  As I explained back when Romney's big plan first landed:
First... Treasury's assessment and designation of foreign countries as "currency manipulators" is conducted pursuant to US law (22 U.S.C. § 5301-5306), which defines "currency manipulators" as countries that "manipulate the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance of payments adjustment or gaining unfair competitive advantage in international trade.” Treasury's assessment must be done in consultation with the IMF and pursuant to pretty strict guidelines. In short, the President can't just tell Treasury to designate a country a "currency manipulator," and he/she certainly can't do it publicly via Executive Order (as Romney's plan promises). To do so would not only violate the letter of the law, but also destroy the Treasury report's credibility.

Second, the President can't just instruct the Commerce Department to begin imposing countervailing duties on Chinese goods. Pursuant to US trade law and regulations, the imposition of countervailing duties on imports requires (i) a petition from an affected industry or self-initiation by Commerce (something that never happens) requesting remedial tariffs on a discrete subset of allegedly subsidized imports; (ii) preliminary and final findings, based on extensive evidence (including rebuttal from Chinese producers, US importers and the Chinese government), of that said imports are being subsidized; and (iii) preliminary and final findings by the non-partisan International Trade Commission that said imports are injuring the US industry. Each of these steps is required by US law and WTO rules. So Romney's plan to, on the very first day of his presidency, just start imposing CVDs on Chinese imports would be in direct conflict with both US law and the United States' WTO obligations.
On the second point, it's also important to note that, even a more subtle approach which simply directed Commerce to begin treating "currency manipulation" as a countervailable subsidy would raise red flags because the Department has repeatedly found that currency policies do not meet the definition of a countervailable subsidy under US law.  (This is why anti-China protectionists have been begging for China currency/CVD legislation for the past several years!)  Now, yes, DOC can theoretically change its policy where it has a reasonable basis to do so, but it is extremely unlikely that "Presidential pressure" would qualify as such (and that still wouldn't obviate some serious WTO concerns).  And, anyway, is the Romney campaign really trying to say that its big China trade plan is to strong-arm the Commerce Department into reversing its longstanding policy of not treating currency undervaluation as a countervailable subsidy?  I doubt it.

But, of course, no one in the press pool or on the Obama campaign will ever get into these thorny issues with the Romney/Ryan team, so this is all just me ranting into the interwebs academic anyway.  And, like I've said a few times now, there are good reasons (Rep. Ryan's pro-trade votes being one of them) to expect that President Romney would, like President Obama before him, ditch the China protectionism the minute he arrived in the Oval Office.

But that doesn't mean I have to sit back and enjoy it.

Wednesday, August 15, 2012

Why Free Traders (and Policy Fans) of All Political Stripes Should Root for Paul Ryan

A few days ago, I examined Republican Vice Presidential candidate Paul Ryan's congressional votes on subsidies and international trade, and concluded that he had a pretty good, but not great, record.  But that unfortunate fact doesn't mean that I'm not rooting for the guy - I definitely am, and if you support better US trade policies or simply wish for political campaigns to focus more on real policy issues rather than stupid trivia, then you should too.

Regardless of your political affiliation.

In today's Wall Street Journal, the Hoover Institute's Robert Barro begins to explain what I mean by the bold statement above.  He first notes that "The level of economic commentary during the presidential campaign has not been high" - a disturbing fact that I've repeatedly lamented here.  Then, after quickly explaining the basic - and almost universally-accepted - economic truths about the overwhelming benefits of free trade (including outsourcing) and the undeniable harms of "socialistic" business subsidies, Barro discusses why Mitt Romney's selection of Ryan - most definitely not a vocal free trade zealot - matters for these issues:
With the addition of conservative thinker and budget expert Rep. Paul Ryan to the Republican presidential ticket, we can hope that the economic dialogue will become more serious. And perhaps this added substance will extend beyond the important issue of long-term fiscal reform to encompass the enduring but still crucial debate about socialism versus capitalism.
The post-Ryan political conversation thus far appears to be fulfilling Barro's hopes.  For example, earlier this week, the WSJ reported that Ryan's selection has set off a debate about the proper scope of government:
Amid growing complaints about the pettiness of American politics, the 2012 presidential campaign is turning into a far-reaching, big-picture debate over the size and scope of government.

Mitt Romney's choice of Rep. Paul Ryan of Wisconsin, an uncommonly assertive spokesman for free markets and small government, to be his running mate on the Republican ticket has highlighted the differences between them and President Barack Obama...

Until now, in a 2012 campaign bristling with negative attacks and accusations about the character of the two candidates, big policy choices have been eclipsed.

That changes with the selection of Mr. Ryan, author of detailed conservative budget plans that call for major changes to many social programs, offering voters a choice: Are welfare services a safety net, or can they breed dependency? Is Medicare a social contract with the elderly, or unsustainable and in need of repair? And will cuts in government spending hurt economic growth, or foster a more robust private sector?
Myriad stories along the same lines have emerged over the last few days, and it seems that almost everyone with a Twitter or Facebook account has seen or posted something about the Ryan plan, the budget, Medicare cuts or some other serious policy issue.  Contrast this with the last several months of soul-crushing, superficial "debates" about tax returns, Olympic uniforms, who ran Bain Capital and when, fast food chicken, dogs (on car roofs or dinner plates), and... well, you get the idea.  The level of election-related discourse has undeniably improved in the last week.

Now, I have no idea whether this improvement will last through November.  I actually think it will because both sides seem to think that the other's fiscal position is political kryptonite, but, frankly, it's not just the public budget and economics debate that has me rooting for Paul Ryan - it's what a Romney/Ryan victory would mean for the longstanding behind-the-scenes fight between policy advisers and political hacks, especially during campaign season.  As I've repeatedly mentioned here in the context of trade, that fight - one that I've unfortunately experienced firsthand - tends to go something like this:
Adviser: There is ample historical and empirical evidence showing that policy [X] is the superior  position from an economic and moral perspective.
Hack (briefly looking up from his blackberry): Umm, yeah, that's great, dude, but policy [X] polls poorly, and we're just not gonna take the risk in an important election year. On the other hand, the public just loves policy [Y], so we're gonna stick with that, even though we all know it's an inferior position.  Now if you'll excuse me, I gotta jet - need to meet [politician] at Morton's for a fundraiser.
Adviser (mumbling under his breath): I hope you get hit by a taxi.
I The adviser may or may not have said that last thing, but you couldn't really blame him if he did.  This debate plays out over and over in political offices and on related conference calls across the country: principled wonks want a political debate about important policy issues, but political consultants, armed with polls and focus group testing, are scared to death of "real" debates' repercussions and thus seek to avoid them like the plague.  So we're stuck with month-long political fights about whether Harry Reid's friend's cousin's dogsitter saw Mitt Romney's 1997 1040EZ - fights that, by displacing real policy discussions, prevent better public understanding of important issues and thus doom the political discourse to repeat its vicious cycle of vapidity over the next election cycle.

As a result, real policy solutions rarely, if ever, materialize.

This is precisely what's caused our dismal political discourse about international trade, and US trade policy has therefore suffered.  The debate over entitlement reform has faced a similar fate: the debts have mounted as the political can has been kicked down the road, and both parties' political cowardice is to blame.  With the Ryan pick, however, it appears that we'll finally have a substantive debate about the need for serious entitlement reform - an issue that, also like free trade, is politically risky but supported by ample economic evidence (see Barro's op-ed for a refresher course, if needed).  And while it's totally unclear whether a Romney/Ryan victory will actually ensure real entitlement reform, what seems clear is that it should have a serious impact on the future of America's political discourse.  If they win, the wonks finally have proof that forcing a real debate about real policy in the face of uncertain public opinion is not a political deathblow.  In short, it shows that the American people can, given the right message and the right facts, overcome their ignorance, sift through the demagoguery and vote for good policy instead of good hair.

If Romney/Ryan lose, however, the policy advisers - and the political discourse more broadly - are in pretty deep trouble for the foreseeable future.  In the aforementioned internal debate, the hacks will have not only those risky poll numbers, but also the following conversation-ending addendum:
"And you do remember what happened with Romney and that Ryan guy, right?  Yeah, that's what I thought."
And at that point, I will pack up my briefcase and move to the countryside, forever unable to turn on the TV for fear of watching yet another bipartisan assault on outsourcing or Medicare reform or whatever.  (Shudder to think.)

So I root for Paul Ryan.  He might not be the best free trader; he might not be my "perfect candidate"; and his victory might not even ensure a conservative solution to our real entitlement crisis.  But if he loses, lord help us, the hacks will have won, and our political discourse will get even worse.

And our TV-watching won't be the only thing to suffer.

Sunday, August 12, 2012

Paul Ryan on Trade and Subsidies: Not Perfect, But Reason for Optimism (UPDATED)

Since the political world is currently obsessed withfocused on Mitt Romney's VP choice, Wisconsin Congressman Paul Ryan, there's no better time than now to steal a few cheap pageviews and look at how the dashing young nerd voted on trade barriers and subsidies during his 12-plus years in the US House of Representatives.  Fortunately, the good folks at Cato have done most of the legwork and have tabulated Ryan's votes on these issues between 1999 (his first year there) and 2011, and overall, Rep. Ryan's record is a mixed bag: he's been very good on trade barriers (supporting the free trade position 87% of the time - 46 of 55 votes) and so-so on subsidies (opposing subsidies 50% of the time - 11 of 22 votes).  The full list of Ryan's votes is pasted  at the bottom of this blog post here (and, of course, is available at Cato's website).  If you click on the legislation itself, you'll find Cato's "free trade" take on the bill.

A few comments:
  • Cato's list doesn't yet include votes for 2012, and there are two pretty big ones from this year that warrant mention.  First is Ryan's unfortunate 2012 vote in favor of H.R. 4105 - the bill to apply the US countervailing duty law to imports from countries like China and Vietnam that are designated as "non-market economies" under the US antidumping law.  I've discussed at length why that protectionist law was a very bad idea, and the legislation was opposed by grassroots fiscal conservative groups like the Club for Growth, FreedomWorks and National Taxpayers Union.  But considering only 39 House Republicans were brave (and smart) enough to oppose H.R 4105, Rep. Ryan's "aye" vote certainly doesn't mean he's suddenly become a hardcore protectionist.  In fact, if you look at Ryan's voting history below, it appears he has a small blind spot for trade remedies measures (as do many Republicans, unfortunately), so this vote may be consistent with Ryan's previous position on trade and protectionism.  On the other hand, Ryan joined 90 other fiscal conservatives and voted against the 2012 reauthorization of the Export-Import Bank - a reversal from several previous votes in support of the Bank and its subsidies, so the Congressman may actually be a little better on subsidies than his Cato scorecard indicates.
  • Ryan's Ex-Im epiphany also parallels an overall improvement on trade and subsidies since entering Congress in 1999.   Ryan's worst vote in support of trade barriers is easily his 1999 support for steel quotas - an utterly indefensible vote - but, other than a few votes related to national security (Cuba, Burma, etc.), a couple inexplicable votes against letting Mexican trucks travel on US roads, and those aforementioned trade remedies votes, he's been quite good since the early 2000s.  Contrast this with a "fiscal conservative" like Rick Santorum, who not only voted consistently in favor of trade barriers but also sponsored myriad bills seeking to prohibit import competition and force US consumers to subsidize US producers (many of whom just-so-happened to be his constituents).  Clearly, Ryan's a big improvement over that kind of Republican.  Meanwhile, he seems to have been more willing to support subsidies - including farm subsidies - during his first few terms (although that 2008 auto bailout vote certainly isn't pretty).  However, more recently - perhaps in tandem with his position as a budget leader in the House - he has opposed almost all business subsidies, including those for US agribusiness.  This "evolution" reflects either shrewd political calculation (casting more principled - yet politically sensitive - votes as his seat becomes more secure) or a real policy improvement (perhaps as he learned just how these votes breed cronyism and harm the economy).  Maybe it's a little of both.
  • Perhaps Ryan's most interesting recent trade/subsidy vote is his 2010 opposition to the Currency Reform for Fair Trade Act, which would have authorized the US Department of Commerce to impose countervailing duties on imports from countries that have "misaligned" currencies (h/t Marc Ross).  That bill - a WTO-inconsistent mess that would've provoked a trade war with China and opened the door to painful duties on imports from many countries, not just China - passed overwhelmingly in the House by a vote of 348-79.  Thus, Ryan's opposition reflects an admirably principled position in defiance of not only the House majority, but also a majority of his GOP colleagues.  It also puts Rep. Ryan in the entertaining position of disagreeing with his possible future boss, Mitt Romney, who unfortunately has supported labeling China a "currency manipulator" and slapping CVDs on Chinese and other imports due to their governments' currency policies.  As I've repeatedly lamented, Romney's position on China trade is bad policy and politics, but it's also likely nothing more than campaign bluster.  Ryan's opposition to China currency protectionism - when it actually mattered, no less - could be a welcome sign that, contrary to his promises, President Romney wouldn't attack Chinese imports on his first day in office.  Of course, Ryan's recent support for HR 4105 tempers this enthusiasm a bit, but that bill wasn't nearly as toxic as the currency measure.  So overall, this is a good sign that a Romney administration would, like Ryan's record on trade and subsidies more broadly, be good - but not great - on trade.
Not to mention a marked improvement over the current occupant of the White House.

[UPDATE: The Ryan trade vote table that was pasted into this post was causing some serious problems for the blog's formatting and interface, so it's been moved here.]

[UPDATE2: The Club for Growth's Andy Roth notes via email that Ryan also supported the 2010 "Congressional Made in America Promise Act"  - a bill that wasn't on the Cato scorecard and would "clarify the applicability of the Buy American Act to products purchased for the use of the legislative branch, to prohibit the application of any of the exceptions to the requirements of such Act to products bearing a Congressional seal, and for other purposes."  Again, Ryan joined a very large majority, but still: we all know how dumb such Buy American provisions are.]

[UPDATE3: Cato's Simon Lester opines on Ryan's Cuba-related votes, concluding that he is, in fact, a politician.  Shocking, I know!]

Thursday, July 26, 2012

New Podcast on TPP (UPDATE: Team Romney Reverses Course, Supports Japan's Inclusion)

The good folks at Coffee & Markets had me on again to discuss international trade stuff.  This time, we went over the Trans-Pacific Partnership negotiations and whether a Romney administration would pursue the same course - on TPP and trade issues more broadly - as the Obama administration.  (As always, I try to be optimistic - really, I do! - but it's hard out there for a free trader these days.)

The full podcast is available to stream or download here.  Enjoy!

UPDATE: From Chris Nelson of the Nelson Report comes excellent news that Team Romney has reversed course on the Governor's earlier (and depressing) skepticism re: Japan's inclusion in the TPP.  Top Romney econ adviser Glenn Hubbard tells Japan's Nikkei[$] that the Governor is very much in favor Japan's participation in the Asia-Pacific FTA:
Q: Can you tell us about Mr. Romney's policies toward Japan and other Asia-Pacific partners? Japan is especially anxious to know what's happening with the TPP.

HUBBARD: I think Gov. Romney fully supports the TPP and Japan's participation in it. He is trying to promote a variety of free-trade initiatives around the world. The present U.S. administration has both neglected more free-trade openings and, frankly, neglected Asia in particular. And I think that's just not something Gov. Romney will do. He's spoken a lot about China, but I think his concern is really the U.S.'s standing in Asia, writ large. And, obviously, Japan is our longest-term ally in the region.
Great news here.  I mean, the China-bashing is nauseating but almost excusable from a purely-cynical political perspective. The Japan stuff, on the other hand, was truly beyond the pale.  Further proof that, China nonsense notwithstanding, a Romney administration would likely be much better for US trade policy than the last three-plus years under President Obama.

Tuesday, July 17, 2012

Breaking the Mercantilist Campaign Feedback Loop

In a new post at his Foreign Policy blog, Dan Drezner argues that, sure, the protectionist rhetoric coming from both US presidential campaigns is mind-numbingly bad, but - hey - don't worry about it:
It's ridiculously offensive, however, because it baldly asserts that doing business with Mexico, China or Switzerland is un-American. Other idiocies like the Olympic-uniform controversy feed into the public perception that having the other countries make stuff is an abomination of the first degree.

So, does it matter for policy? Well.... no.

Mario Cuomo once said "You campaign in poetry. You govern in prose." Now, Mario Cuomo was clearly the world's worst poetry connoisseur. Still, to update his observation for our current needs, we can say, "You campaign as a mercantilist; you govern as a free-trader."...

Americans loooooooove mercantilism, so this kind of [protectionist] rhetoric makes tactical sense during a campaign. As stomach-churning as I find this kind of ad, I must reluctantly agree with Yglesias and Brooks that it doesn't matter all that much for governing....
Although I agree wholeheartedly with Drezner that President Obama and Governor Romney don't actually believe much of the protectionist nonsense that they're spewing on the campaign trail, I must disagree that their rhetoric "doesn't matter for policy."  Sure, neither candidate will enter office and instantly start a trade war with China or throw US "outsourcers" in jail.  But that doesn't mean that mercantilist - and outright protectionist  - campaign rhetoric doesn't take a toll on American trade policy, which is actually pretty crappy these days.  I covered much of this stuff last month (and in this 2011 Cato paper with Dan Ikenson), so I'll just paste the highlights here, but be sure to read the whole thing if you haven't already:
[W]hile Romney's position probably won't lead to the implementation of new protectionist policies if he becomes President (undeniably good news), Obama's similar protectionist proclamations in 2008 show us that such rhetoric is far from harmless. Indeed, as Ikenson and I noted last year, historical data from Pew's annual survey of US views on trade show that American attitudes toward trade are shaped largely by what Americans hear from the media and their elected (or campaigning) officials:
The dramatic decline in pro-trade sentiment between 2007 and 2008 coincided with a U.S. presidential primary election campaign season in which the Democratic candidates routinely criticized U.S. trade policy and certain trade partners. Perhaps most memorable was the late-February 2008 debate at Cleveland State University on the eve of the Ohio primary, when the late Tim Russert extracted renunciations of NAFTA and pledges from candidates Hillary Clinton and Barack Obama to reopen and renegotiate terms of the agreement...

The results of the 2009 Pew poll... suggest that political leaders can indeed influence public opinion about trade. The greatest fluctuation in public support for trade between 2007 and 2009 came from self-identified Democrats — those paying most attention to the Democratic primary elections and President Obama's early speeches — with opposition swinging wildly from 37 percent in 2007 up to 50 percent in 2008 and down to 30 percent in 2009. Meanwhile, support among Republicans remained steady during this period, as the issue was almost nonexistent during the GOP primaries and rarely discussed by Republican nominee John McCain during the general election campaign.
Assuming that Romney's China-bashing speeches and commercials have a similar effect on the electorate in 2012, it's quite likely that public support for free trade will wane this year and into next. Indeed, the harmful effects of Romney's message on US trade sentiment could be even bigger than in 2007-08, given that the Democratic party (including President Obama) routinely engages in protectionist pandering during election season, and Romney's position as the leader of the Republican party will certainly diminish the GOP's traditional pro-trade counterweight.

Thus, while Romney's political advisers may view his China-bashing as a harmless way to help pave the road the White House in 2012, President Romney and his team may arrive there in 2013 facing an trade-hostile US electorate that makes any major free trade policies too politically unpalatable to be undertaken.

And they'd have only themselves to blame.

So, if/when this all happens, does anyone actually expect the Romney administration to advocate its new trade proposals using anything except the same old, self-defeating mercantilist arguments? I try to be optimistic - really, I do! - but it sure ain't easy.

So we'll probably do this all over again in 2014 and 2016 and, well, until we find a politician brave - and smart! - enough to ditch the mercantilism and adopt a new approach to trade based on the realities of today's global economy and the abject falsity and immorality of the anti-trade position. Trust me, these politicians do exist (I've worked with them), but it's increasingly - and depressingly - clear that they won't be in the White House anytime soon.
I think that just about covers it, but let me add a few points:



First, I think that one of the reasons why Americans' views on trade policy are so malleable is because it's just not a big concern for them - consistently 
falling outside the top 10 issues that voters consider "very important."  Most people don't have direct interaction with trade (i.e., they're not importers or exporters or trade lawyers or policy wonks).  The issue also isn't in the news much, and when it is, the reporting is typically shoddy or simply parroting some dumb politician's protectionist demagoguery.  Thus, people are far more likely to buy into politicians' campaign "facts" and promises on trade than on other issues, like education or health care, where they have direct experience and strongly-held views.

This lack of interest, as public choice theory teaches us, also permits unprincipled politicians to pursue protectionism/mercantilism while in office or to spew ridiculous protectionist myths on the campaign trail because the only people really paying attention are those that stand to reap the concentrated benefits of such policies.  Only the most principled politicians avoid such temptations and pursue an unabashed and "true" free trade position (i.e., no trade barriers and no subsidies).

Second, the combination of malleable public opinion, a lazy/uniformed media and a large number of unprincipled, poll-driven politicians creates a vicious negative feedback loop (one I've experienced firsthand), whereby hackish politicians and their super-smart political consultants cite to sagging poll support for trade to justify their own protectionism or mercantilism, without ever acknowledging that their rhetoric might very well be driving those bad poll numbers.  This feedback loop is illustrated by the following (very high-tech) graphic: 
Mercantilist/protectionist pablum --> bad poll result --> more mercantilist/protectionist pablum --> another bad poll result.
Rinse. Repeat.  And, of course, American trade policy will continue to suffer. (See my June post, and the great article by Ramesh Ponnuru cited therein, for more details on that.)

Finally, it already appears that we're seeing this dynamic play out again in 2012.  The Financial Times reported earlier this week that "The Mellman Group, a Democratic polling organisation, and North Star Opinion Research, a Republican counterpart, will on Monday release the results of a survey showing 62 per cent of Americans want to get tough with China 'and use every possible means to stop their unfair trade practices.'"  The FT goes on to note that this poll - being pushed by (surprise!) an anti-trade US manufacturing group - explains why Obama and Romney are racing to out-protectionist each other on China trade, but neither the article nor the poll's snazzy factsheet ever considers the undeniable fact that economically-anxious American voters have been constantly bombarded by protectionist propaganda - from both political parties and a lot of mainstream media outlets - over the last couple years.  This is bound to have an effect on future US policy: sure, President Romney or President Obama won't be starting a trade war with China in 2013, but the tit-for-tat US-China protectionism will almost certainly continue.  And the American economy will be worse off for it.


And until we start having a better political discussion about trade and globalization - maybe, oh I don't know, starting with smart pundits like Drezner and Brooks getting a little more worked up about the stuff our "leaders" are saying on TV for 18 straight months - other, more significant (and much needed) reforms to US trade policy also will remain out of reach.

I guess that's a really long-winded way of saying that, yes, this stuff matters for policy.  Unfortunately.

Sunday, July 15, 2012

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.

Wednesday, July 11, 2012

Just Who's the Real Outsourcer-in-Chief? (UPDATED)

Over the last few weeks, the Obama and Romney campaigns have waged a massive multimedia war over who is the biggest "outsourcer."  Perhaps unsurprisingly, the majority of this political debate is depressingly nonsensical - each side accusing the other of supporting supposedly-awful policies that "ship American jobs overseas" without ever acknowledging the fundamental and repeatedly-proven economic and moral truths about outsourcing and offshoring in America.  I will not waste your time repeating those truths tonight (you can go here and spend a few days reading up, if you'd like) and instead want to look at one aspect of this debate that's been mostly overlooked but, unlike the pablum referenced above, actually does affect private companies' decisions to move certain business activities offshore: whether the economic policies of President Obama and his fellow Democrats have made the United States a more or less attractive place to do business, relative to other countries.

The Washington Examiner's Conn Carroll today picks up on this important point in a great new article.  After warning against wallowing in protectionist ignorance about outsourcing, Carroll notes:
Romney should make the case that Obama ships jobs overseas not just with clumsy green energy investments, but by keeping the U.S. corporate tax rate as the highest rate in the world. His impending Environmental Protection Agency global warming regulations are not helping either. Neither is Obama’s impending tax hike, which is more than double the size of President Clinton’s 1993 tax hike.
This is exactly right, and it's something I'd like to expand upon tonight.  Whether Obama's policies have increased the cost of doing business in the United States is far more important than, for example, whether Bain Capital helped a few companies outsource certain business operations to other countries or whether some stimulus dollars were spent in foreign countries, because such policies actually can encourage - or even force - businesses to locate certain operations and jobs in more hospitable jurisdictions.  And, unlike biased, misinformed pieces from supposedly unbiased newspapers or the campaigns themselves, there are actually two independent, annual studies - one from the World Bank and the other from the World Economic Forum - that measure the relative burdens of business regulations on job creators in pretty much every country in the world.

The evidence from these two reports is abundantly clear: since President Obama and congressional Democrats took charge in 2009, the United States has become an increasingly hostile business environment.  The US government has increased a wide range of tax and regulatory burdens, thereby causing the United States to decline relative to other countries in terms of its ability to attract and retain companies and jobs.  Thus, it appears that President Obama, not Governor Romney, more aptly deserves the title of "outsourcer-in-chief."

That's a pretty significant accusation, so let's dig into the studies.  First up is the World Economic Forum's Global Competitiveness Index, which describes itself as follows:
The GCI comprises 12 categories – the pillars of competitiveness – which together provide a comprehensive picture of a country’s competitiveness landscape. The pillars are: institutions, infrastructure, macroeconomic environment, health and primary education, higher education and training, goods market efficiency, labour market efficiency, financial market development, technological readiness, market size, business sophistication and innovation.  The rankings are calculated from both publicly available data and the Executive Opinion Survey, a comprehensive annual survey conducted by the World Economic Forum with its network of Partner Institutes. This year, over 14,000 business leaders were polled in a record 142 economies. The survey is designed to capture a broad range of factors affecting an economy’s business climate.
The latest GCI is a depressing read for the United States.  It finds that America's overall global "competitiveness landscape" dropped from 2nd in 2009-10 (reflecting policies from the previous year), to 4th in 2010-11 to 5th this year.  According to the country fact sheet accompanying the latest GCI (emphasis mine):
The United States continues the decline that began three years ago, falling one more position to 5th place. While many structural features continue to make its economy extremely productive, a number of escalating weaknesses have lowered the US ranking in recent years. US companies are highly sophisticated and innovative, supported by an excellent university system that collaborates admirably with the business sector in R&D. Combined with flexible labor markets and the scale opportunities afforded by the sheer size of its domestic economy—the largest in the world by far—these qualities continue to make the United States very competitive. 
On the other hand, there are some weaknesses in particular areas that have deepened since past assessments.  The business community continues to be critical toward public and private institutions (39th). In particular, its trust in politicians is not strong (50th), it remains concerned about the government’s ability to maintain arms-length relationships with the private sector (50th), and it considers that the government spends its resources relatively wastefully (66th). In comparison with last year, policymaking is assessed as less transparent (50th) and regulation as more burdensome (58th). A lack of macroeconomic stability continues to be the United States’ greatest area of weakness (90th). Over the past decade, the country has been running repeated fiscal deficits, leading to burgeoning levels of public indebtedness that are likely to weigh heavily on the country’s future growth. On a more positive note, after having declined for two years in a row, measures of financial market development are showing a hesitant recovery, improving from 31st last year to 22nd overall this year in that pillar.
In short, the US government's dramatic and widespread fiscal mismanagement and heightened regulatory burdens have caused a significant drop in America's business environment, and only certain systemic, non-governmental factors prevent us from falling even further.  Moreover, according to the surveyed CEOs, four of the top five "most problematic factors for doing business" in the United States are directly related to the government's fiscal policy: Tax rates (14.8% of respondents); Inefficient government bureaucracy (13.2%); Tax regulations (10.9%); and Inflation (9.8%).  (Access to financing (12.9%) was the other major concern.)

Unfortunately, the World Bank's Doing Business Report tells a similar story.  I described the Report's methodology in an earlier blog post as follows:
[The Report] ranks 183 national economies on their ease of doing business based on an analysis of ten economic factors: Starting a Business, Dealing with Construction Permits, Getting Electricity, Registering Property, Getting Credit, Protecting Investors, Paying Taxes, Trading Across Borders, Enforcing Contracts, and Resolving Insolvency. As the Bank explains, "a high ranking on the ease of doing business index means the regulatory environment is more conducive to the starting and operation of a local firm." In short, the higher a country is on the list, the better its business environment.
The World Bank Report only started doing relative rankings in 2011.  This year's version - which covers regulations measured from June 2010 through May 2011 - showed that the United States stayed steady in fourth place overall between 2009-10 and 2010-11 - President Obama's first two years in office.  However, the breakdown of the US score reveals that we dropped in five of the ten economic categories listed above, didn't improve in any category, and rank in the top ten globally in only three:

TOPIC RANKINGS
DB 2012 Rank
DB 2011 Rank
Change in Rank
13
11
-2
17
17
No change
17
16
-1
16
11
-5
4
4
No change
5
5
No change
72
70
-2
20
20
No change
7
7
No change
15
14
-1


As with the World Bank, the things that the United States does well - enforcing contracts, getting credit and protecting investors - aren't really affected fiscal policies and instead relate to longstanding systemic and legal matters.  On the other hand, one issue that has been in the news a lot recently and most definitely is a fiscal policy matter is the United States' dismal, and dropping, 72nd place ranking in "paying taxes," which the Bank defines as "the taxes and mandatory contributions that a medium-size company must pay in a given year as well as... the administrative burden of paying taxes and contributions."  I explained at the time the ranking came out that--
Basically, US companies pay higher taxes - and have a more difficult time paying them - than 71 other countries. Such a tax burden has a crippling effect on American companies global competitiveness, and the World Bank study is further proof of just how desperately the current US tax system needs a fundamental overhaul.
As Carroll notes above, the United States now has the industrialized world's highest statutory corporate tax rate.  It also has one of the highest effective rates, and the complexity of our existing tax system further increases the immense burden on American businesses.  For example, according to the World Bank's breakdown, the average business located in New York City (the only city surveyed) makes 11 different tax payments, costing 187 hours of preparation time and a whopping 46.7% of its profits (over 25% in federal taxes).  Assuming a 40-hour workweek, this means that the typical New York businessman must dedicate a little under 5 weeks and almost half of his profits to meeting his annual tax obligations.

Yet when they had total control of the US government in 2009 and 2010, President Obama and Congressional Democrats did nothing to reform these long-term tax burdens and instead fought tooth and nail to increase them, most notably through the myriad new taxes in Obamacare.

And just this past week, the President and his fellow Democrats have sought to make things even worse by seeking to raise taxes on over 900,000 small businessmen who pay taxes at the individual level (while maintaining current rates for all others) and to pass short-term extensions of piecemeal tax breaks for certain small businesses.  The latter measures are intended to "help" small businesses but, as most economists will tell you, don't improve America's business climate because (i) prohibit long-term business planning; (ii) increase tax complexity (which disproportionately hurts small businesses that can't afford armies of lawyers and accountants); and (iii) encourage system-gaming and outright fraud, while discouraging business growth (i.e., small businesses becoming larger businesses and thus outgrowing their eligibility for the tax breaks).

We rank 72nd in the world – 72nd – in terms of total business tax burden, yet this is President Obama's latest plan?  But I digress...

As I've repeatedly explained here, a private company's decision to move certain business activities offshore is a complex determination of whether the total cost of doing business - including things like labor costs, transportation, and regulatory burdens - is higher in a foreign jurisdiction or in the United States.  When these costs become unbearable here, the company is faced with two choices: end the business activity or move offshore to a more hospitable environment.  Two detailed, independent and well-regarded studies show unequivocally that, over the last three years, the tax and other regulatory policies of President Obama and his fellow congressional Democrats have significantly increased the cost of doing business in the United States, thereby creating a job-killing riptide that pulls US companies offshore.  It's simply beyond the pale for them to now condemn any private company for going with the flow.

UPDATE 1:  In an amazing coincidence, Cato's Dan Ikenson this morning (Thurs) publishes an epic rant about this very same issue and, in the process, takes a fun jab at one of my favorite protectionist punching bags - the Economic Policy Institute.  I highly recommend you check Ikenson's article out.

UPDATE 2:  Also today, the Washington Post's wonkbook notes the publication of a new study on manufacturing offshoring in the United States.  Main conclusion:
[T]he researchers found that increasing offshore jobs by 1 percent is linked to a 1.72 percent increase in overall U.S. employment of native workers, though they describe the effect as neutral overall because the 0.72 percent difference is too small to be statistically significant. Offshoring also tends to push native U.S. workers toward more complex jobs, while offshore workers tend to specialize in less-skilled employment.
This, of course, is consistent with every other reputable study out there on the subject (sorry, EPI).  My only question: when will the wonkbook folks talk with their WaPo colleagues who ignorantly published this nonsense about the supposed harms of outsourcing?