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.

Subsidized Stupidity

Now that America's sugar program is - like many other costly forms of corporate welfare in this time of strained federal budgets - facing increased scrutiny, the subsidy-loving folks at Big Sugar have devised a new plan to keep all of their sweet, sweet taxpayer cash flowing:

Just days before the U.S. House of Representatives voted down the latest effort to gut U.S. sugar policy, Congressman Ted Yoho (R-FL) introduced a new “zero-for-zero” sugar policy that instructs the administration to target the foreign sugar subsidies that are distorting world prices and keeping a free market from forming.

The American Sugar Alliance (ASA) praised Yoho and the nine original co-sponsors of H.Con.Res. 39, which would also advocate for the end of U.S. sugar policy once market-distorting programs in foreign countries are eliminated.... 

Co-sponsors of the zero-for-zero policy include Reps. William Cassidy (R-LA), Lois Frankel (D-FL), Alcee Hastings (D-FL), Doug LaMalfa (R-CA), Trey Radel (R-FL), Martha Roby (R-AL), Tom Rooney (R-FL), Kurt Schrader (D-OR), and Frederica Wilson (D-FL). Weston says the industry is encouraging others to cosponsor.

In addition to the ASA, free-market advocates like the American Conservative Union have publicly endorsed the Yoho legislation.

As I explained in my big Cato paper on global subsidy reform, ideas like these are, despite their uniform awfulness, par for the course from subsidy recipients and their congressional benefactors:

Politicians and rent-seeking interest groups often claim that subsidies are essential to  offset the unfair advantages bestowed on subsidized foreign competition. This illogic is pervasive among protectionists in Congress, such as Sen. Sherrod Brown (D-OH), who routinely call for new U.S. protectionism in response to China’s “improperly subsidizing manufacturing industries,” but such thinking can infect even the most fiscally conservative members. For example, tea party icon Sen. Marco Rubio (R-FL), who represents sugar-producing Florida, recently justified his vote to protect the U.S. sugar program on the grounds that it is necessary to counteract foreign subsidies. That sort of logic is what propels the spiral of tit-for-tat subsidization.

Thus, it's wholly unsurprising to see Rep. Yoho and his sugarland colleagues support the zero-for-zero idea.  However, I must say that I'm a little shocked that supposedly "conservative" non-profit organizations - folks who don't represent Floridian sugar farmers and are supposedly guided by the principles of limited government and fiscal conservatism - have signed on to Big Sugar's latest scheme.  (According to Rep. Yoho's "Dear colleague" letter urging support for this plan, the following groups are big fans of the zero-for-zero legislation: ACU, Americans for Job Security, lessgovernment.org, 60 Plus Association, Citizen Outreach, Institute for Liberty, Let Freedom Ring, Frontiers of Freedom, Institute for Policy Innovation, Americans for Limited Government.)  Indeed, as I've frequently discussed (see, e.g., above), there is absolutely nothing conservative, libertarian or "free market" about implementing or maintaining subsidies, even where other countries are dumb enough to implement/maintain their own.  And Big Sugar's "zero-for-zero" scheme in particular fails from an economic, legal and logical perspective:

• Cato's Sallie James hits on most of the economics: "The question is: what should the United States do while we are waiting for this nirvana to materialise, a process that would be very lengthy indeed? I would suggest that doing ourselves a favour and abandoning the terrible U.S. sugar policy—costing the economy billions of dollars a year through artificially high sugar prices and, now, government sugar purchases—is a good start. Let other countries distort their markets and subsidise sugar importers’ consumption, as is their wont. We don’t have to follow them, and American consumers and businesses would benefit from a freer domestic market in sugar."  I'd just add the fact that, as I recently noted, America's sugar program imposes a regressive tax (at one point almost 50%) on American families who are forced by the US government to pay higher prices in order to line Big Sugar's pockets.  And it's immoral protectionism like this that keeps US food prices high and rising.

• On the legal front, the zero-for-zero idea, just like all other forms of this trite "unilateral subsidy disarmament" argument, completely ignores the fact that there are national "countervailing duty" laws and multilateral (WTO) anti-subsidy rules that protect domestic industries from the unfair, injurious subsidization of their competitors by foreign governments.  So if, as Big Sugar claims, the Brazilian government is using billions of dollars worth of predatory subsidies to try to kill the US sugar industry, Big Sugar or its workers can lawfully seek protectionist duties against subsidized Brazilian sugar imports, or they can lobby the US government to bring a WTO dispute against Brazil.  And, of course, if we eliminated our dumb subsidies, we'd be on much stronger, more principled ground to bring such cases.  So the idea that rampant, unilateral sugar subsidies and protectionism are necessary to protect Big Sugar from evil Brazilian (or other countries') sugar exports is absolutely false.

• Finally, it is simply mind-boggling that "free market" groups fail to grasp the horrible illogic and completely un-conservative implications of Big Sugar's zero-for-zero policy: it argues against the elimination of almost every form of corporate welfare provided by the US government.  For example, China is a global leader in solar panels production and trade, and Beijing undoubtedly provides billions of dollars worth of subsidies to Chinese solar manufacturers.  So does that mean that the ACU and those other "conservative" groups will support Solyndra and the rest of the Obama administration's solar subsidies until China agrees to stop subsidizing its solar panel producers?  The same could be asked of American wind power and other "green" subsidies, steel subsidies, ethanol subsidies, automobile subsidies (hooray bailouts!) and on and on and on.  As I noted in my Cato paper last year, almost all governments (unfortunately) are guilty of throwing billions of taxpayer dollars at their industries of choice. So should the US government therefore keep all of our immoral, inefficient and distortive corporate subsidies - $98 billion in 2012 alone! - until all foreign governments around the world wise up and terminate theirs (i.e., never)?  No. Of course not.

So, really, what's going on here?  Why on earth are these "conservative" groups siding with Big Sugar and against US taxpayers (and basic economics and reason)?  Well, I can see only two options, neither of which is very flattering: either they're wholly ignorant of the economics and law of global subsidies, or... well... I'll let you draw your own conclusions about option #2.

So USDA Is Pondering a "Sugar-for-Ethanol" Program. No, Really.

From earlier this week comes news of what could quite possibly be the most cronytastic US government program of all time:

The White House will decide in coming weeks whether to attempt to blunt low prices in the U.S. sugar market by buying hundreds of thousands of tons of surplus sugar and selling it at a loss to ethanol makers.

If approved, it would be the first time the sugar-for-ethanol program, created in 2008 and known as the Feedstock Flexibility Program, has been put into operation....

Large crops in the United States and Mexico have pushed New York futures prices below the trigger price for potential forfeiture by processors of sugar to the government.

The sugar is used as collateral on USDA price-guarantee loans.

Forfeitures could begin in July, with the expiration of USDA loans that guarantee growers will get at least 20.94 cents per lb for sugar. The remainder of the loans expire in September.

"We're doing it because it's the law," U.S. Agriculture Secretary Tom Vilsack said on Monday at the North American Agricultural Journalists meeting. The tonnage purchased "is still not decided," he said....

The 2008 farm law directs USDA to make surplus sugar available to ethanol makers, a provision penned in the early days of the biofuel boom with the goal of creating feedstocks in addition to corn.

"The law makes the Feedstock Flexibility Program the first line of defense. The other main option is to reduce the volume of imports through negotiation or by buying back certificates of quota eligibility," said Tom Earley, economist and trade policy specialist with consulting firm Agralytica.

Some $864 million in loans was in danger of forfeiture, by one estimate. The USDA forecasts the sugar stockpile at the end of this marketing year at 2.4 million tons.

At 20 percent of annual use, it would be the largest carryover since 2001. The USDA will update its forecast of the sugar surplus on Wednesday....

So a 2008 law forces USDA to (i) subsidize US sugar growers by buying their product at above-market prices and then (ii) subsidize US ethanol producers by selling them the exact same sugar at below-market prices.

Ladies and Gentlemen, the United States Government.

On a more serious note, insanity like this provides a perfect example of why it's just so darn tough to eliminate US subsidies - politicians shilling for the sugar growers form an unholy, subsidy-loving alliance with their colleagues shilling for the ethanol (mostly corn) producers. These "public servants" concoct mutually-beneficial programs like the "Feedstock Flexibility Program" to line their cronies' pockets, and they agree to oppose any attempts to trim those programs or any other subsidies that they've secured.

They win; taxpayers (and markets) lose; rinse; repeat.

Hostess Brands: A Case Study in Government Burdens and Global (Un)competitiveness

As most people know by now, Hostess Brands  -  the maker of such American junk food staples as Twinkies, Ding Dongs and Wonderbread - announced last week that it had failed to come to terms with the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union and its 5000 striking members, and thus would enter Chapter 11 bankruptcy to unwind the company, sell off its assets and eliminate 18,500 US jobs.  The latest news is that Hostess and the union have agreed to enter into mediation in an attempt to prevent the company's dissolution, but Hostess Brands' story remains a very useful example of how government regulations can impose huge costs on US businesses and either drive them offshore or out of business entirely.

Last week, I focused on how the United States' unreasonably high corporate taxes can hinder American companies' global competitiveness, and Hostess Brands' monthly operating report (required for bankruptcy proceedings) shows at page 15 that the beleaguered company was/is responsible for not only state, local and federal corporate income taxes, but also millions of dollars in other taxes, including (i) Federal Insurance Contributions Act (FICA); (ii) Federal Unemployment Tax (FUTA);(iii) State/Local Unemployment Tax (SUTA); (iv) State/Local Business Licenses; (v) State/Local Sales Taxes; (vi) State/Local Use Taxes; (vii) State/Local Mileage Taxes; (viii) State/Local Real Property Taxes; (ix) State/Local Personal Property Taxes; (x) State/Local Vehicle Personal Property Tax; (xi) State/Local Accrued Franchise Taxes; and (xii) State/Local Accrued Operating Taxes.

Gee, is that all?

Of course, taxes aren't the only thing that can kill a company's bottom line - regulations hurt too, and as Henry Miller notes in a recent op-ed, they're getting increasingly worse:

Stultifying, job-killing regulation has been a hallmark of the Obama administration. An analysis by Susan Dudley, director of the George Washington University Regulatory Studies Center, reveals that with respect to "economically significant" regulations, defined as impacts of $100 million or more per year, Obama has been an outlier. While Presidents George H.W. Bush, Bill Clinton and George W. Bush "each published an average of 45 major rules a year ... the outliers are Reagan, who issued, on average, a mere 23 major regulations per year; and Obama, who has published 54 per year on average, so far."

And there are many more in the pipeline: According to Dudley, fully a third of the final major rules with private-sector impacts have been postponed. And the government's spring 2012 "Unified Agenda of Federal Regulatory and Deregulatory Actions," which provides a preview of and transparency with respect to agency and OMB planning for the coming year, still has not been published.

In the case of Hostess Brands, the most obviously relevant regulations are those laws which permit or favor "closed shop" rules that force workers to join a union and pay dues (as opposed to states with Right-to-Work laws that prohibit closed shops).  It's difficult to quantify the costs that such closed rules impose on businesses and workers, but a recent examination of US job creation demonstrates that they could be significant (h/t Mark Perry):

Since the recession ended in June 2009, almost three out of every four jobs added to U.S. payrolls have been in Right to Work states (1.86 million out of 2.59 million), even though those 22 states represent only 38.8% of the U.S. population (120 million). In contrast, only about one of every four new jobs were created in forced-unionism states (730,000), even though more than 61% of Americans live in those 28 states (189 million). Relative to their population, the Right to Work states have been job-creating powerhouses during the recovery, and forced union states haven’t even come close to “carrying their weight” in terms of their share of the population. Adjusting for differences in population, Right to Work states created four new jobs for every one job added in forced union states, because those 21 RTW states created 2.54 times more jobs even though forced union states have 1.6 times as many people. 

Hostess Brands' problems provide anecdotal support for the above data on right-to-work versus closed shop states.  According to the press release announcing Hostess' bankruptcy, existing union arrangements had crippled the ability to continue its business operations:

The [union] in September rejected a last, best and final offer from Hostess Brands designed to lower costs so that the Company could attract new financing and emerge from Chapter 11. Hostess Brands then received Court authority on Oct. 3 to unilaterally impose changes to the BCTGM’s collective bargaining agreements.

Hostess Brands is unprofitable under its current cost structure, much of which is determined by union wages and pension costs. The offer to the BCTGM included wage, benefit and work rule concessions but also gave Hostess Brands’ 12 unions a 25 percent ownership stake in the company, representation on its Board of Directors and $100 million in reorganized Hostess Brands’ debt.

These views find further support in several news reports which indicate that Hostess Brands' bankruptcy will likely attract several bidders for iconic labels like Twinkies because the new owners won't have to deal with existing union obligations:

Daren Metropoulos, a principal of the Greenwich, Connecticut-based private equity firm, said of Hostess in an e-mail yesterday that ``shedding the complications of the unions and old plants makes it even more attractive.”

Tom Becker, a spokesman for Hostess, declined to comment on potential asset bids. While Hostess has seen interest in pieces of the business, its labor contracts and pension obligations have deterred offers for the whole company, Chief Executive Officer Gregory F. Rayburn said yesterday.

In short, the company is only an attractive investment without the unions.  Shocking, I know.

Unfortunately, even if Hostess Brands resolves the current union impasse through mediation, onerous labor regulations and obligations aren't the only thing raising the company's costs and hindering its competitiveness.  In fact, US sugar protectionism is also putting a serious crimp in the company's (and other American bakers' and confectioners') bottom line:

Since 1934, Congress has supported tariffs that benefit primarily a few handful of powerful Florida families while forcing US confectioners to pay nearly twice the global market price for sugar.

One telling event: When Hostess had to cut costs to stay in business, it picked unions, not the sugar lobby, to fight.

“These large sugar growers ... are a notoriously powerful lobbying interest in Washington,” writes Chris Edwards of the Cato Institute in a 2007 report. “Federal supply restrictions have given them monopoly power, and they protect that power by becoming important supporters of presidents, governors, and many members of Congress.”

Such power has been good for business in the important swing state of Florida, but it has punished manufacturers who rely on sugar in other parts of the United States, the Commerce Department said in a 2006 report on the impact of sugar prices.

Sugar trade tariffs are “a classic case of protectionism, pure and simple, and that has ripple effects through other sectors of the economy, and, for all I know, the Hostess decision is one of them,” says William Galston, a senior fellow at the Brookings Institution in Washington....

[Congressional] refusal to address tariffs that neither support infant industries nor provide national security has come despite damning reports from the Commerce Department about the impact on US jobs, including the fact that for every sugar job saved by tariffs, three confectionery manufacturing jobs are lost.

Some of those job losses came when candy companies like Fannie May and Brach’s moved the bulk of their manufacturing to Mexico and Kraft relocated a 600-worker Life Savers factory from Michigan to Canada, in order to pay global market prices for sugar.

The impending mass layoffs from 33 Hostess plants scattered around the US, economists say, might force Washington to take a more serious look at how public policy affects the ability of corporations to make money – especially in an economy where even iconic brands like Twinkies and Wonder bread aren’t safe.

“I think there are policy implications here,” says Mr. Edwards, an economist at the conservative Cato Institute. “The Department of Commerce, the Obama administration, and [Congress] need to look at Hostess as a case study: Why did this company have to go bankrupt? Why were its costs higher than it could afford? Are there regulatory issues with import barriers on sugar or unionization rules that we need to look at and change? We’ve got to understand why manufacturing in a lot of cases doesn’t seem to be profitable anymore.”

Unfortunately, congressional repeal of US sugar subsidies and protectionism doesn't look to be happening anytime soon; for example, the Senate in June voted 50-46 to maintain the sugar program in the new Farm Bill.  Thus, even if mediation saves Hostess Brands in the short term, American sugar protectionism, as well as other onerous US regulations and taxes, could still prevent the company from regaining profitability and competing at home and abroad over the long term.  As a result, Hostess - or a buyer of its most famous brands - could end up following many other US manufacturers facing competitiveness-crippling taxes and regulations:

[A]nother possible bidder hints at the future of Twinkies and maybe the US bakery business as a whole: Mexico’s Grupo Bimbo, the world’s largest bread baking firm, which already owns parts of Sara Lee, Entenmann’s and Thomas English Muffins.

Bimbo has already sniffed around the bankruptcy proceedings that have haunted Hostess for a decade, in a bid to further expand its North American portfolio and pad its $4 billion net worth. Bimbo reportedly put in a low-ball bid of $580 million a few years ago, Forbes reports, and may be rewarded for that move since the Hostess kit-and-kaboodle may fetch more like $135 million today.

But the big question is whether the same problems that haunted Hostess – high sugar prices tied to US trade tariffs, changing consumer tastes, and union pushback against labor concessions – will squeeze whatever profit is left in the brands.

Especially if a Mexican buyer is involved, production may go the way of the Brach’s and Fannie May candy concerns: south of the border. With US sugar tariffs set artificially high to protect Florida sugar-growing concerns, a non-unionized shop with access to lower-priced sugar in Mexico could be the Twinkie lifeline, economists suggest.

If Hostess or its new owners move offshore in order to avoid onerous sugar tariffs and other US regulations/taxes, Twinkies might indeed get that lifeline.  Unfortunately, the thousands of Americans who used to make them won't be so lucky.

America's Absurd, Immoral Sugar Policy

Today Andy Roth at the Club for Growth pointed my attention to a recent WSJ article about the USDA agreeing to allow more imported sugar into the United States because of dire predictions of imminent shortages.  The article itself is pretty boring - it's clearly written for a target audience of commodities traders, with the author reporting in a ho-hum manner USDA's decision and the current US and global market situation for sugar.  But intended or not (and I'm siding with not), this short article provides oodles of evidence of just how awful - economically and morally - American sugar policy is.  Consider the following passages:

Global sugar prices soared on Friday after the U.S. said it will ease import restrictions to help avert a national shortage.

The U.S. Department of Agriculture on Thursday said it will give foreign sugar producers a bigger window to send sugar to the U.S. over the next two months.

Translation: US sugar policy is so enormously trade-distorting that the mere two-month easing of sugar import quotas caused a huge spike in global sugar prices (as the US sucks in supply, thereby leaving less sugar for the rest of the world and, naturally, higher prices).  Yeesh.

World prices for raw sugar reached a five-month high on Friday, rising above 20 cents a pound during the day. Sugar for October delivery finished 2.4% higher at 19.95 cents a pound.... 

Farmers counter that the food companies are just seeking ways to boost profits. U.S. domestic sugar prices are at about 34.13 cents a pound, up 30% in 12 months. ... 

Sugar is the second-most common ingredient in many bread products, and bakers are distraught over high prices, said Robb MacKie, president and chief executive of the American Bakers Association. The fall is the peak time of sugar use, as many manufacturers start to build up inventories of finished products to go into the winter.

Translation: Because of US restrictions on sugar imports, American sugar prices are currently almost 75% higher than world market prices.  This extra cost is initially borne by sugar-users (e.g., American bakers), who will pass it on to American consumers (particularly families with sugar-loving kids).  In short, American parents are paying for US sugar protectionism; and by spending more of their hard-earned dollars for candy, sodas, cakes and cookies, cereal, etc. than they would in the absence of such protection, they have less money to spend on other family necessities (like shoes, clothing, other foodstuffs, etc).  So sorry, Timmy.  No new soccer shoes for you, because American sugar quotas make Mom and Dad's annual grocery tab a whole lot higher.  Pretty nice, huh?  Oh, and guess who benefits from this protectionism?

The USDA was responding to intense lobbying from sugar users, who claimed the country was in danger of running out of sugar. The USDA this year has twice increased its import quota at the behest of sugar processors and food manufacturers. The sugar users have long been vocal critics of the government's restrictions on sugar imports, which they argue are designed to protect American farmers by keeping U.S. sugar prices inflated....

The U.S.'s ability to tap the broader market is limited by longstanding import restrictions set by law. The so-called tariff rate quota is set every year at slightly more than 1.2 million tons, and the USDA can raise it only in April following the start of the fiscal year in October.

Oh, riiiiight.  So American sugar producers are cashing in on "longstanding import restrictions set by law," and American families are footing the bill.  And American sugar quotas are so absurdly, anti-marketly (not a word, I know) rigid, they can only be altered once per year after a six-month delay.  That makes perfect sense.

Or not.

Top-eds

Top-eds will be a recurring feature in which I highlight some of the better opinion pieces and editorials for the day/week. Hence, "Top-eds." Get it? Oh, shut up.

Obama's Summer of Discontent - Fouad Ajami, Wall Street Journal

-A literary chronicle of the demise of HopeChange and the WORLDSCOOLESTPRESIDENT.

Amateur Hour at the White House - Jay Cost, RealClearPolitics

-A must-read, reasonable, and non-partisan analysis of how the ObamaCare implosion has revealed the White House's inexperience.

Sugar Import Quotas Test Obama's Protectionist Impulses - Editors, WSJ

-The WSJ lays out how the Administration's sour stance on sugar quotas is another disheartening signal re: the future of US trade policy. More good analysis on this issue from my friends at Cato here and here. My only "counter-arguments" are: (a) this is merely a continuation of the country's miserable, decades-long, bi-partisan sugar policy, so it's no more a trade litmus test for Obama than it was for an avowed free trader like Dubya; and (b) Obama's support for agriculture subsidies, and sugar in particular, has never, ever wavered, so this should come as no surprise to anyone. In other words, sure, we can complain about the policy, but this doesn't really tell us anything new about Obama's trade policy.

There Aren't Enough Doctors For Universal Health Care - Dr. Kevin Pho, CNN

-Yet another practicing doctor - and one who deems universal coverage a "moral imperative"! - denounces ObamaCare's adverse effects on cost and quality. Seriously, this is getting ridiculous.