When there is a trade negotiation going on, people often try to bring various other policies into the mix. One way they do this is to argue that if another country wants to trade with the U.S., they should have to change some of the policies we don’t like. One recent example comes from the so-called Panama Papers. This is from the Washington Post: 

The Panama Papers’ detailed revelations of a massive international tax-haven scheme have snowballed this week into a fierce debate among Democrats over President Obama’s trade policies with the tiny Central American nation and again laid bare sharp divisions within the party over such agreements.

Trade critics lambasted the administration as failing to heed their prior warnings and win sufficient financial reforms from Panama before signing a landmark free-trade deal in 2011, missing a chance to disrupt the elaborate financial arrangements disclosed in a massive leak of private data last weekend.

…

“The Panama Papers just show once again how entirely cynical and meaningless are American presidents’ and corporate boosters’ lavish promises of economic benefits and policy reforms from trade agreements,” said Lori Wallach, director of Public Citizen’s Global Trade Watch. The Panama free-trade deal’s “investor protections and official U.S. stamp of approval made it safer to send dirty money to Panama,” she said.

… 

… Wallach, the consumer advocate, said the Obama administration did not push hard enough. The financial-transparency treaty, she said, “requires someone in the U.S. to know what to ask for. It’s not like in Canada, where a financial transaction is automatically reported.”

She said that the trade talks were “a potential opportunity, and if Panama really wanted that opportunity, the administration should have said, ‘These are the things you must do if you really want it and your government is interested enough to change some of this.’ But they didn’t even ask those things.”

There’s a general problem with this kind of criticism. There are many ways U.S. domestic policies might differ from those of other countries, and going down the road of using our leverage to change other countries’ policies is dangerous. We already use trade agreements to influence other countries’ intellectual property, labor and environmental policies. If we keep going in this direction, you could imagine governments taking aim at a wide range of additional domestic policies. (As an extreme example, trade could be used as leverage to encourage pro-choice abortion policies; or it could be used to encourage pro-life policies). And you could also imagine other governments with large economies doing something similar. The EU already does this to some extent. If it sees others doing so, China might decide to join in.

All in all, this approach to trade policy creates a mess for trade negotiations and trade liberalization, distracting everyone from their main purpose, and causing conflict rather than promoting economic integration.

As it happens, in the context of the Panama Papers, there is also a more specific criticism: It turns out that the critics may be wrong on the facts. The Washington Post editorial board explains:

Data culled from the documents by the International Consortium of Investigative Journalists, and presented in several charts on the group’s website, show that the Panama-based law firm Mossack Fonseca, which specialized in setting up offshore accounts and shell companies for wealthy people, has been steadily reducing its activity in Panama for about a decade. As it happens, the decline began about the time the Bush administration and Panama began discussing a free-trade pact — and accelerated after the deal took effect during Mr. Obama’s first term.

Specifically, the number of offshore incorporations fell from 4,741 in 2005 to 835 in 2015. Most important, as of last year Mossack Fonseca appeared to have nearly completely ceased incorporating the least transparent form of company — known as “bearer shares” — which often don’t need to register an owner’s name.

This should provide an effective rebuke to the critics here. On the other hand, it is problematic if it suggests this type of trade leverage can accomplish domestic policy change abroad, as it might encourage more such efforts. Much better to let trade agreements focus on free trade, and leave discussions of other issues to a separate forum.

News this week that Ford Motor Company will invest $1.6 billion to build a new small-car production plant in Mexico has elicited the usual responses from the usual politicians, each one decrying “un-American” companies and a U.S. trade policy that encourages multinational corporations (MNCs) to invest in countries with cheap labor or other “unfair” advantages over the United States. Republican presidential candidate Donald Trump, for example, called Ford’s decision an “absolute disgrace” that – similar to recent offshoring decisions by Carrier and Nabisco before it – shows just how badly America is “losing at trade” and just how horribly our free trade agreements have hurt the American working class. 

Trump’s critique, echoed by other protectionist candidates and the news outlets that love them, is nothing new: it’s basically the same dire warning of a “giant sucking sound” of investment moving offshore that candidates like Pat Buchannan, Ross Perot and John Edwards have been spewing ever since the United States first started liberalizing trade through the NAFTA. Yet, like most things Trump and trade, the candidate is very wrong, having erroneously treated a few highly-publicized and emotional anecdotes as if they are broadly representative of American economic reality. 

Indeed, a quick look at the latest facts on U.S. and global investment show that not only is there no “giant sucking sound” here, but America remains, by far, the world’s top investment destination.

First, American MNCs continue to invest far more in their domestic operations than in their offshore affiliates. In fact, the most recent Bureau of Economic Analysis report on the Activities of U.S. Multinational Enterprises finds that these firms spent about three times as much on capital expenditures and research & development at home as they did abroad in 2012 and 2013 (the latest data available). In fact, U.S. manufacturing MNCs alone invested about one-and-a-half times as much in the United States in 2012 and 2013 as all U.S. MNCs invested abroad during the same years:

The numbers for automakers like Ford aren’t this stark, but they’re still impressive: the Center for Automotive Research estimates that, of the $18.25 billion in additional North American investments that U.S. car companies announced in 2014, $10.5 billion was earmarked for projects in the United States, while $7 billion and $750 million was planned for Mexico and Canada, respectively. These numbers demonstrate that, while Ford and other MNCs might occasionally choose to invest in Mexico or elsewhere, they’re still investing heavily in the United States too. 

Furthermore, more investment by American MNCs abroad does not mean less investment at home. Additional crunching of the same BEA dataset by my colleague Dan Ikenson reveals that MNCs’ investments in their U.S. and foreign operations are complementary, not substitutes. In other words, one more dollar spent by U.S. multinationals abroad does not translate to one less dollar spent in the United States; in fact, it’s much the opposite: expansion abroad typically means expansion here at home too. These data destroy the myth, advanced by Trump and others, that when Ford and others choose to send their investment dollars abroad, American jobs go with them.

Second, there is little evidence that the United States is “losing” at the global investment game: America remains the world’s top destination for foreign direct investment (FDI), and it’s not even close. The UN Conference on Trade and Development estimates that FDI inflows into the United States in 2015 reached their “highest level since 2000” at $384 billion – more than double second place Hong Kong and almost triple third place China:

This pole position is not unusual – except for a one-time blip in 2014 due to a major telecommunications merger, the United States routinely sits atop UNCTAD’s FDI rankings. Such position makes clear that, despite America’s policy faults, the country remains the most attractive investment destination in the world.

And this foreign investment isn’t just going to sexy, innovative sectors like information technology; it’s going to American manufacturing too. According to new research from the Heritage Foundation’s Bryan Riley, the United States amassed a whopping $614 billion “manufacturing investment surplus” with the rest of the world between 2000 and 2015:

Riley’s data, also from the BEA, further demonstrate the eye-popping magnitude of the United States’ comparative advantage as a global investment destination – one that should finally put to rest the silly notion that U.S. and global trade and investment liberalization has caused American manufacturers and services providers to leave our shores for greener, cheaper pastures (or for foreign companies never to arrive). Sometimes U.S. (or foreign) companies invest abroad; more often they invest here. That decision is based on a complex, company-specific examination of cost and other factors, not some rudimentary quest for the cheapest labor or slackest environmental regulations.

There are certainly things that the U.S. government could do to improve the country’s attractiveness as a global investment destination – reforming one of the world’s most onerous corporate tax regimes is an obvious place to start, as is fixing our increasingly-sclerotic labor market. But the numbers here leave little doubt that, for now at least, the only “giant sucking sound” we’re hearing in America is the one of investment dollars being hoovered into the U.S. economy, not out.

The views expressed herein are Mr. Lincicome’s alone and do not necessarily reflect those of his employers.

In the latest print edition of National Review, you’ll find my lengthy cover story on international trade policy and its actual effects on the U.S. economy and labor market. The abbreviated version of my piece (though you certainly should read the whole thing!), is that, while free trade has provided overwhelming benefits for the vast majority of American families, workers and businesses, its inevitable displacement of some workers has revealed serious problems in the U.S. labor market’s ability to reallocate people from older, less productive sectors to new and innovative ones. This collapse in “labor dynamism” is a relatively new phenomenon and is hurting not only the U.S. economy, but also American voters’ confidence in it – effects that boost, ironically, protectionist candidates like Donald Trump, even though other government policies, and certainly not trade, are likely to blame for the problem. 

Over the last few days, my article has found additional support:

• First, there have been several new economic reports supporting the benefits of free trade for the U.S. economy. Two highly respected economic forecasts – from Brandeis’ Peter Petri and Moody’s Analytics – have bolstered my view that Trump’s protectionism would not only fail to solve the current problems in the U.S. labor market, but actually make things much worse. In particular, these studies each found that withdrawing the United States from the global economy would result in millions of American jobs lost, a full-bore recession (in the United States and in China and Mexico), and an actual increase in the U.S. trade deficit. I’d also recommend this Eduardo Porter look at NAFTA and the U.S. auto industry, in which he finds that the agreement’s creation of a globally-competitive North American automotive supply chain probably saved U.S. autoworkers’ jobs – jobs that without NAFTA would have disappeared in the face of intense Asian competition. Finally, for those who, like Trump, erroneously think that the U.S. manufacturing sector has been destroyed by trade, I invite you to check out the latest Global Manufacturing Competitiveness Index, which finds that the second-ranked United States will likely overtake China for the top spot by 2020.
• Second, my Cato Institute colleagues have gotten in on the fun: Alan Reynolds joins GMU’s Scott Sumner as expressing serious doubts about the new study on China trade and U.S. jobs that’s driving the American punditocracy’s latest bout of protectionist pearl-clutching, while Dan Ikenson warns about blaming trade for all of the real failures of U.S. domestic policy. Both are worth a look.
• Finally, commentary from across the pond mirrors my thesis that the real problem in the U.S. labor market isn’t trade but the multiple policy failures that have led to our distressing lack of labor dynamism. The Economist reiterates the “overwhelming benefits” of trade, while lamenting the U.S. economy’s sorry ability to help American workers cope with the ultimately-beneficial competitive forces unleashed by trade, automation or any other form of “creative destruction.” Charles Kenny, author of The Upside of Down: Why the Rise of the Rest is Good for the West, says much the same thing in a lengthy interview to the Financial Times. Kenny’s whole interview is worth reading, but this part really stuck out (emphasis mine):

I think there’s evidence from elsewhere that Chinese imports helped create jobs outside the manufacturing sector, not least by reducing prices and, in particular, reducing prices on goods purchased more by poor people. So I think there has been an effect on both consumption but also job creation outside of manufacturing, but not in the manufacturing sector. And lots of people in concentrated parts of the country lost their jobs as a response to growing Chinese imports.

The really sad part of the story is what happened next. What happened next was the Federal Government started spending some more money in those parts of the country. On what? On disability payments, on taking people out of the labour force.

This was where most of US Federal money went in response to this challenge. Not on retraining, not on helping people move to where the jobs were, not on creating new innovation, not on any of that, not on building the pie again, but on taking them out of the labour force through disability payments. That’s just chronic. I think it shows a real lack of political leadership.

Data in Kenny’s book, also excerpted in the FT, underscore these problems, and it ends with this mind-blowing statistic: “evidence suggests that about one in four hundred federal dollars helped workers retrain out of [trade-]exposed industries and the other $399 helped them retire or invalid out of those industries and the workforce completely.” 

I highlight many of these misguided policies in my NR article, tracing how each can discourage American workers from saving enough money to weather financial storms or take professional risks; from voluntarily moving from one sector to another; and from getting a new and different job after losing an old one. As I note therein, a lot more research is needed on this issue, so it’s good to see more attention being drawn to it. The sooner we abandon Trump’s fake solutions and get to working on the real ones, the better.

Scott Lincicome is an international trade attorney, adjunct scholar at the Cato Institute and visiting lecturer at Duke University. The views expressed are his own and do not necessarily reflect those of his employers.

This post originally appeared at National Review’s The Corner.

Ted Cruz’s campaign has produced a new ad targeting Wisconsin voters in the lead up to that state’s primary election tomorrow. As images switch back and forth between farms and factories, Cruz lists off a number of generic demographics and blue collar occupations that his campaign “is for.” He also complains about international trade.

Here’s the substantive part of the ad:

We will repeal Obamacare, peel back the EPA and all the burdensome regulations that are killing small businesses and manufacturing. 

I’m going to stand up for fair trade and bring our jobs back from China. 

We will see wages going up. 

We’ll see opportunity again.

Senator Cruz doesn’t tell us what he means by “fair trade” or promote a specific trade policy. The term “fair trade” is usually used by politicians as a euphemism for “protectionism.” In the past, Cruz has noted that the value-added tax (VAT) he has proposed is “like a tariff” because it imposes a greater burden on imports. Perhaps this is what he means by “fair trade.”

In any event, some simple facts about trade might be helpful to explain the problems with Cruz’s approach. For example, nearly 60% of imports are materials and capital goods used by American companies. So, Cruz’s “fair trade” is a tax on the very same “small businesses and manufacturing” whose burdens he wants to lift. Oh, and reduced employment in America’s thriving manufacturing sector is not due primarily to trade with China.

The biggest difference between Donald Trump and Ted Cruz on trade is that Trump has been more specific. Trump has singled out specific trade deals he opposes and has promised to tax specific companies specific amounts. Also, Trump’s disdain for trade has been apparent from the beginning of his campaign, while Cruz’s rhetoric and positions have been getting gradually worse in response.

While Trump has been getting lots of attention for his anti-trade rhetoric, it’s worth remembering that other candidates are not offering better policy proposals. They are simply less sensational in how they present the same flawed message.

Many worry about international trade and the increased competition to which it leads, while overlooking trade’s incredible benefits. In a refreshing Wall Street Journal article, the founder and CEO of FedEx, Fred Smith, reflects on how trade and deregulation have improved American living standards over the course of his lifetime. He recalls how many luxuries enjoyed by few during his youth plummeted in price and became accessible to more people than ever before. 

“Foreign travel was exotic, expensive and rare among the population as a whole” during the 1960s, Smith reminds us. Industry deregulation and international Open Skies agreements changed that. “Long-distance telephone calls were expensive, international calls prohibitively so,” and cell phones did not even exist yet. “From furniture to TVs and appliances, and especially automobiles, American brands dominated consumer spending” across the United States, and were often out of reach to the less affluent. Then trade worked its magic: 

[Trade] has rewarded Western consumers with low-cost products that have substantially improved standards of living. [Today] Americans and Europeans don’t need to be affluent to afford cell phones, digital TVs, furniture and appliances.

The moral of Smith’s story is clear: competition, which trade and deregulation facilitate, has an extraordinary tendency to enhance efficiency and bring down prices.

As we have documented, the falling cost of living improves the lives of ordinary people irrespective of how fast incomes rise. The few areas where costs have gone up instead of down—education, housing, and healthcare—have been subject to severe market distortions. Subjecting education, housing, and healthcare to more competition could have salutary results. Falling cosmetic procedure prices, for example, provide insight into how deregulated healthcare might affect healthcare costs. 

Smith’s article also recounts how increased competition has helped to move technology forward. Technology, in turn, has furthered expansion of trade—a virtuous cycle: 

During the 1970s and 1980s, while container ships and planes became increasingly efficient with each successive model, newly developed fiber-optic cables (patented in 1966) began running underseas, connecting the world at the speed of light, lowering voice and data-communication costs by orders of magnitude. Financial markets became globally integrated and transactions multiplied at an astounding rate.

In addition to improving lives in the United States, trade has also helped lift billions of people out of extreme poverty around the world, notably in East Asia. 

While the vast majority of Americans are made better off by trade, that is of small comfort to those working in industries that are having trouble competing with the rest of the world. Their disappointment contributes to the popularity of anti-trade political figures like Donald Trump and Bernie Sanders. 

It is important to acknowledge the “destructive” part of “creative destruction”—and trade contributes to creative destruction—but also to put trade in a proper perspective. The positives markedly outweigh the negatives. As Fred Smith concludes: 

More than three billion people are now connected to the Internet. Billions more have aspirations for a better life and are likely to come online as global consumers. The odds are good, therefore, that today’s remarkable transport systems and technologies will continue to improve and facilitate an even larger global economy as individual trade is becoming almost “frictionless.”

History shows that trade made easy, affordable and fast—political obstacles notwithstanding—always begets more trade, more jobs, more prosperity. From clipper ships to the computer age, despite economic cycles, conflict and shifting demographics, humans have demonstrated an innate desire to travel and trade. Given this, the future is unlikely to diverge from the arc of the past.

William Galston’s

Wall Street Journal column, “Why Trade Critics Are Getting Traction,” asks why U.S. employment in manufacturing fell from 17.2 million in December 2000 to 12.3 million last year. He suggests that “import penetration from China [not Mexico] has been responsible for up to 20% of U.S. job losses.” But “up to” 20% explains very little, and that figure is at the high end of a range of estimates about 1999–2011 from a working paper by David Autor, David Dorn and Gordon Hanson. They speculate that “had import competition not grown after 1999” then there would have been 10% more U.S. manufacturing jobs in 2011. In that hypothetical sense, “direct import competition [would] amount to 10 percent of the realized job loss” from 1999 to 2011. Since 2007, however, the study’s authors find “a marked slowdown in import expansion following the onset of the global financial crisis, which halted trade growth worldwide.”

Deep recession and weak recovery is what slashed manufacturing jobs since 2007, not imports. In reality, imports always fall in recessions. Although Autor, Dorn and Hanson emphasize imports of consumer goods (clothing and furniture), nearly half of U.S. goods imports (47.7% last year) are industrial supplies and capital goods which are essential inputs into expanding U.S. production. That is a big reason why imports rise when U.S. industry expands and fall in slumps.

Even if “up to” 20% of manufacturing jobs lost since 2007 could be blamed on imports from China, as Galston claims, that need not mean the overall numbers of U.S. jobs were reduced. “There is no evidence,” writes Galston, “that increased competition from China has produced offsetting employment increases in other industries whose products are traded internationally [emphasis added].” Confining overall employment effects to “traded goods,” as Autor, Dorn and Hanson do, arbitrarily excludes services – such as financial and legal services, accounting, advertising, travel, telecom and insurance. Services account for 32% of U.S. exports, and the U.S. runs a large and growing trade surplus with China ($28 billion in 2014) and with the world ($233 billion). Dollars foreign firms earn by exporting goods to the U.S. are commonly used to import services from the U.S. or to invest in U.S. real and financial assets; both those activities create U.S. jobs. Hollywood, Madison Avenue and Wall Street are big, high-wage U.S. exporters.

Confining the job impact to traded goods also excludes U.S. jobs in transporting, wholesaling and retailing Chinese goods (Walmart, Amazon…), as well as shipping U.S. exports to China and Hong Kong. Incidentally, the U.S. ran a $30.5 billion trade surplus with Hong Kong last year, which isn’t counted trade with China though it really is.

Galston acknowledges that “rising productivity” [output per worker] is “part of the story” about manufacturing jobs. In fact, it is essentially the whole story from 1987 to 2007, when U.S. manufacturing output nearly doubled. The deep recession and slow recovery explain what happened to manufacturing jobs over the past ten years, not foreign trade. 

After years of controversy and equivocation, a new federal catfish inspection program has finally come into force. The program—supported by the U.S. catfish industry—ranks among the crony-est of crony boondoggles. It’s also a blatant example of thinly-disguised regulatory protectionism and a violation of U.S. trade obligations.

Catfish inspections were originally conducted by the Food and Drug Administration, but under a provision of the 2008 Farm Bill, that responsibility has now been assumed by the U.S. Department of Agriculture. The excuse for the switch is that the USDA’s more rigorous inspection regime will help protect consumers. 

But it won’t. The USDA itself has said that the program will not reduce risks associated with catfish consumption, which is a very low risk food. The Government Accountability Office has flatly told Congress the program is wasteful and should be repealed. Despite bringing no measurable benefits to consumers, the USDA program will cost an estimated $14 million more per year than the original FDA inspection regime.

This damning analysis hasn’t kept the program from being implemented, of course, because it’s true purpose is to protect the politically powerful U.S. catfish industry from foreign competition. Here’s what I wrote a couple of years ago when there was still a chance that Congress might repeal the program:

The main impact of the new inspection regime—and its actual purpose—is that foreign catfish producers will be banned from the U.S. market until they can show equivalence to U.S. production standards. Regardless of how they produce the catfish, showing equivalence will take years. In the meantime, U.S. consumers will be left with nothing but domestic catfish at hugely inflated prices.

By far the most common source country for catfish in the U.S. market is Vietnam. There was a small hope that the some deal could be reached to reform the catfish program as part of the Trans-Pacific Partnership negotiations. Ultimately, the Obama administration agreed to an 18-month transition period before applying the new inspection standards to imports. 

The transition period will help alleviate much of the program’s harm to consumers and downstream businesses by giving producers time to demonstrate equivalence without shutting down export operations. However, catfish prices have already been reported to be on the rise in anticipation of the new regulatory environment.

Now that the inspection regime is officially in place, Vietnam has begun to make its case that the regulations violate the rules of the World Trade Organization. The WTO Agreement on Sanitary and Phytosanitary Measures prevents WTO members from abusing food safety rationales to impose protectionist import barriers. Specifically, food safety regulations must not be more trade-restrictive than necessary to meet the goals of the regulation and must be based on scientific evidence.

These rules—long championed by the United States as a way to prevent unjustified foreign trade barriers—are designed to prevent exactly the sort of protectionist shenanigans at play in the catfish inspection regulation. Moving catfish inspection to the USDA imposes a disproportionate burden on imports without being justified by any rigorous analysis or legitimate scientific research.

Vietnam has now formally raised the issue at the WTO but has not yet initiated dispute settlement procedures. If they do, Vietnam could eventually be authorized to retaliate by imposing tariffs on various products from the United States.