In the context of discussing the Trans Pacific Partnership (TPP), and the U.S. role in the Asia-Pacific region, Robert Kagan of Brookings raises the specter of competition with China and says this:

Economically, China would like to turn Asia into a region of Chinese hegemony, where every key trade relationship is with Beijing.

Along the same lines, law professor Noah Feldman says:

China is using its close economic relationship with its neighbors as leverage to build its geopolitical position. Its ultimate goal is to displace the U.S. as the regional hegemon.

I’m puzzled by statements like these. What do Kagan and Feldman think Chinese economic “hegemony” in Asia would look like? What exactly do they fear?

I don’t know the answer to what’s going on in their minds, but I have tried to look at what China is actually doing. One thing it is doing is signing trade agreements with other countries in the region. So are these trade agreements part of a scheme to dominate its neighbors? Well, the text of the agreement China signed with Australia was just released, so let’s take a look at some of what it says. As described by the Australian government, China would liberalize a lot of its trade with Australia, including the following:

• Health and aged care services: China will permit Australian service suppliers to establish profit-making aged care institutions throughout China, and wholly Australian-owned hospitals in certain provinces. This will greatly expand the Australian private health sector’s offering of medical services through East Asia.

So Australia is touting the agreement as a way to build hospitals in China, and more generally to sell products there. (Australia also notes that 92.9 per cent of China’s imports of resources, energy, and manufactured products from Australia will enter duty free right away, with most remaining tariffs removed within four years.) This makes the whole idea of China’s “economic hegemony” sounds a lot less scary. Rather than setting up a system to compete with the United States, China seems to be participating in the same rules-based, liberalizing trading system that the United States and just about everyone else is in.

I wrote more about this issue in a recent Free Trade Bulletin.

Senator Lindsey Graham likes to march onto war, and off into economic swamps, as well. Recently, Senator Graham mounted a counter attack on fellow Republicans who opposed the reauthorization of the Export-Import Bank. Indeed, the Senator said “…I’m not going to unilaterally disarm.” Yes, it is clear that the senator has mounted a surge.

The Export-Import Bank (Ex-Im) provides financing and loan guarantees at below-market rates to foreign purchasers looking to buy products from American exporters. For example, if Emirates Air wants to buy planes from Boeing, Ex-Im can provide a loan guarantee, reducing the interest rate Emirates will pay, and thus incentivizing Emirates to buy from Boeing rather than Airbus.

Ex-Im’s supporters claim that these subsidies create jobs and finance domestic economic growth. But, they fail to consider the ensuing downstream effects. As Cato scholar Daniel Ikenson makes clear, every dollar Ex-Im provides to subsidize foreign purchasers of U.S.-produced products discriminates against U.S. consumers of the same products. For example, when Emirates receives a subsidy for planes because it is a foreign company, Emirates gets a leg up on Delta.

An edifying account of how this system works was presented many years ago by the late Prof. Yale Brozen in his foreword to Prof. Leland Yeager’s classic Proposals for Government Credit Allocation (1977):

Whom you know and with whom you have influence becomes more important in obtaining capital than how productively you can use it. Capital is diverted from more productive uses to politically determined applications […]. The national income pie shrinks as an increasing proportion of our capital is allocated by the political process – not only because of its diversion from more productive uses but also because more and more of our resources are devoted to winning political influence, as that becomes the road to access to available capital and subsidies.

For the record, Ex-Im isn’t small potatoes. In FY 2015, Ex-Im’s loans and loan guarantees will total $30.9 billion, or 6.7% of all non-housing federal credit programs. The Ex-Im’s total cumulative loans and guarantees outstanding (read: credit exposure) currently sits at $112 billion. Because the loans are granted at below-market rates, the Ex-Im does not receive fair compensation for the $112 billion of risk it takes on.

Instead of adopting a policy that makes a few U.S. exporters winners at the expense of many losers, there is a way to make all U.S. firms more competitive: just lower the grueling corporate tax rate. Yes, according to the Organization for Economic Co-operation and Development (OECD), the U.S. has the highest corporate tax rate of the 34 OECD member countries.

There is clearly a better way to unburden U.S. corporations and make them more competitive internationally than to sponsor a “bank” in which politicians and bureaucrats, not capital markets, choose winners and losers. It is time to move away from a mercantilist view of trade towards one that puts the market back in control.

A widespread criticism of Trade Promotion Authority (TPA), which remains in limbo after a surprising legislative mess last Friday, has come from conservative skeptics who believe that TPA will permit President Obama to change US immigration laws unilaterally. Originally a fringe argument, it gained momentum earlier this month when WikiLeaks published the confidential draft negotiating texts on the Trade in Services Agreement (TiSA), which is currently under negotiation. Among those texts was an Annex on “Movement of Natural Persons” – one of the standard “modes” of supply (Mode 4) negotiated in trade agreements that cover services. The leaked annex, TPA critics claimed, was “smoking gun” proof that President Obama was, in fact, secretly negotiating with foreign governments to liberalize US immigration restrictions without congressional input, and that TPA would grant him the power to lift such restrictions in the very near future. The facts surrounding TPA, TiSA and global services trade, however, effectively rebut such claims.

BACKGROUND

Before getting to these facts, it’s important to understand just what TiSA is. The TiSA is a plurilateral free trade agreement on services being negotiated among 27 participants (including the US and EU). TiSA began in 2012 but only picked up momentum over the last year or so, as the World Trade Organization’s (WTO) Doha Round, which also included services, faded.

If signed and implemented, TiSA would likely represent a major economic win for the United States, given that (i) the vast majority of the US economy is services; (ii) the United States has a large comparative advantage in global services; and (iii) unlike goods, global trade in services remains relatively restricted. TiSA’s basic goals include that each participant offer to all other parties, at a minimum, the best commitments that it has made in preferential FTAs, and, importantly, the eventual “multilateralization” of the agreement into the WTO such that it is open for accession by all WTO Members. As such, the architecture and principles of the TiSA reflect those of WTO’s General Agreement on Trade in Services (GATS), which was finalized in 1995 and covers all WTO Members including the United States. Any final, multilateralized TiSA deal would be a very good thing for those who support free markets and, of course, the US global economies.

Despite these benefits, the leaked TiSA has caused an uproar among skeptical (and in many cases, anti-immigration) conservatives. (It’s also upset anti-trade liberals who see the deal as “global deregulation,” but that’s a canard for another time.) As mentioned, however, there are a lot facts that undermine the argument that the TiSA represents an immigration “smoking gun.”

HISTORICAL LIMITATIONS

The most basic reason for skepticism is the history of Mode 4 negotiations. First, the TiSA is far from the first international trade agreement to address Mode 4, which is one of the four basic “Modes of Supply” covered by the GATS:

• Mode 1: Cross border trade (delivery of a service from the territory of one country into the territory of other country);
• Mode 2: Consumption abroad (supply of a service of one country to the service consumer of any other country);
• Mode 3: Commercial presence (services provided by a service supplier of one country in the territory of any other country); and
• Mode 4: Presence of natural persons (services provided by a service supplier of one country through the temporary presence of natural persons in the territory of any other country).

The leaked TiSA Annex – despite being unfinished and heavily bracketed – is quite similar to the original GATS Annex completed over two decades ago. These facts belie the idea that the TiSA represents some sort of pathbreaking global agreement on immigration – these issues have been with us for decades.

Second, US involvement on Mode 4 has been relatively minimal. Despite providing major economic benefits, Mode 4 liberalization has been controversial in the United States and, as a result, no US FTA negotiated after those with Chile and Singapore includes provisions on Mode 4 (See: Congressional Research Service). In a letter to Senate Finance Chair Orrin Hatch, US Trade Representative Froman confirmed that “the United States is not negotiating and will not agree to anything in TPP [Trans-Pacific Partnership] that would require any modification to U.S. immigration law or policy or any changes to the US visa system.” Also, past Mode 4 commitments have been very limited. For example, in the WTO’s Uruguay Round, “commitments scheduled under Mode 4 were largely limited to two categories: intra-company transferees regarded as ‘essential personnel’, such as managers and technical staff linked with a commercial presence in the host country; and business visitors, i.e. short-term visitors not in general gainfully employed in the host country.” Hardly the massive immigration overhaul that some TPA critics now claim.

Third, the leaked TiSA text was not nearly as big a revelation as the TPA opponents claim: public readouts of the TiSA negotiations have long made clear that Mode 4 was under discussion. The leak simply added details to basic concepts that were already easily Googleable. Hysteria nevertheless has ensued, to the surprise of many who have actually been paying attention to these things for the last few years.

Fourth, even though many trade agreements to which the US is a party (e.g., the GATS) contain provisions on Mode 4, none of these agreements – even those with actual US commitments – has (i) led to a significant, unregulated increase in legal immigration (even temporary); (ii) provided US presidents, including President Obama, with a “backdoor” means of liberalizing US immigration restrictions without the full consent of Congress; or (iii) forced the US government, against its will, to change its immigration laws. No US trading partner has used these Mode 4 provisions (e.g., through dispute settlement) to push the United States to further open its labor market – India did once yell about a proposed doubling of certain US visa fees, but never actually did anything about it. Anyway, even if a trading partner did try to challenge the United States under Mode 4, global services agreements contain broad exceptions – including for national security (e.g., GATS Art. XIV bis) – that permit the US to derogate from these commitments (e.g., by banning temporary workers from one trading partner) for a host of reasons. And finally, as noted below, the United States could simply refuse to comply if none of the exceptions applied. Because the TiSA is based on, and intended to be folded into, the GATS, it will unquestionably contain similar rules and exceptions.

US LAW LIMITATIONS

US law provides other reasons for skepticism of the idea that the leaked TiSA text will cause a significant and near-term erosion of US immigration law. As discussed in my recent analysis of TPA and the TPP, the law provides significant checks on the ability of a US president or a US trading partner to force changes to US law (including on immigration) without the full consent of Congress. Two of these checks bear repeating:

• First, because TiSA is a US trade agreement, it must be approved by Congress before any of its provisions may be implemented. As such, even assuming TiSA included actual US commitments on Mode 4 (and this is far from clear), and even assuming the TiSA were completed any time soon (and this is far from certain), those provisions could not affect US immigration policy until approved by Congress and passed into law. 
• Second, even assuming TiSA contained US commitments on Mode 4, and that Congress agreed to implement the TiSA with these commitments (again, highly unlikely), no foreign country could compel the United States to adhere to these commitments. The United States would retain absolute authority to refuse to implement the commitments, and future US presidents or Congresses could change US law. There is nothing a TiSA party could do the United States for such a violation, other than to litigate the claim at the WTO and, possibly, eliminate certain benefits for US services exports under the TiSA.

It’s also worth reiterating that TPA would subject any agreement, including the TiSA, to ample transparency requirements – including publication long before Congress voted on the deal. Thus, the US public would have months, if not longer, to review any trade agreement and register objections prior to any congressional vote. As the recent furor over President Obama’s executive actions on immigration makes clear, the public objections to a global agreement broadly liberalizing US immigration law would be substantial (to put it mildly!).

Finally, according to reports, Rep. Paul Ryan has included new language in TPA that would ensure that would remove an FTA from “fast track” consideration if it contemplates changes to US immigration law.

OTHER LIMITATIONS

Outside of US law and the checks on presidential power under TPA, several other issues undermine the idea of President Obama using TiSA to liberalize US immigration restrictions. Thus, even if you don’t trust the US congress to act as a check on President Obama’s actions under the TiSA, there are still plenty of other reasons to doubt the “smoking gun.”

Timing. First, there is almost no chance that TiSA will be completed while President Obama is in office. The most ambitious timeline for completing the TiSA is December 2016. This deadline, however, is very likely unrealistic. (FTA negotiations are notorious for setting, and missing, deadlines for completion; TPP, for example, was originally supposed to be completed in 2012.) Instead, it is far more likely that completion of the TiSA will fall to the next US President, because it will require:

• Completion of the basic agreement, which includes 17 texts, none of which is reportedly completed. (Hence all the brackets in the leaked texts.)
• Agreement among all members on all other members’ services offers, which are detailed “schedules” of specific, line-by-line commitments (or lack thereof) in listed services sectors across all 4 modes of supply. These schedules are highly technical and involve intensive, time-consuming negotiations, offers and counter-offers.
• Agreement among members as to membership and “multilateralization” of the agreement – i.e., folding it into the WTO GATS structure and extending TiSA commitments to all WTO Members on a “most favored nation” (MFN) basis. The big problem here is that China wants to participate in the TiSA, but adding China and other important developing countries would greatly delay the process. On the other hand, multilateralizing the TiSA would be politically difficult, if not impossible, if important trading countries like China remained outside as “free riders.” It’s thus accepted that there must be a “critical mass” of TiSA participants, including large developing countries like China, before the agreement could be multilateralized. This takes time. Lots of it.

Text. Second, the actual text of the leaked TiSA Annex on Mode 4 plainly establishes other major limitations on the agreement’s near-term impact on US immigration policy. These include—

• The text contains no actual commitments from the USA or any other TiSA party to liberalize trade in services under Mode 4. The annex is merely the basic disciplines (transparency, non-discrimination, etc.) that would govern any agreement among TiSA parties on Mode 4 and any eventual specific liberalization commitments by TiSA members in their service schedules. Parties to services agreements like the GATS and TiSA can, and often do, provide no such commitments in sensitive sectors/​modes. There is nothing here to suggest that the United States has made any such commitments, and, in fact, there are very few US proposals at all, even on the basic Annex disciplines.
• It’s unfinished. The vast majority of the Annex text (and all other leaked texts) is bracketed, thus indicating no agreement among the TiSA parties on those provisions. Indeed, many of the bracketed proposals are explicitly opposed by other TiSA parties. Thus, it’s literally impossible to determine from the Annex what its final text will look like. And, as already noted, it’s far from clear when final agreement will be achieved.
• Finished/​agreed provisions establish there is no requirement to liberalize immigration. Any such liberalization would be at a party’s discretion as set forth in its Schedule (which we haven’t seen). The most obvious provisions are on the Annex’s first page:
  
  • Article 1, Paragraph 2 states: “The Agreement shall not apply to measures affecting natural persons seeking access to the employment market of a Party, nor shall it apply to measures regarding citizenship, residence or employment on a permanent basis.” Some countries have proposed (bracketed) language in para. 3 on specific commitments (liberalization) on these measures; the United States is not one of them.
  • Article 1, Paragraph 4 states: “The Agreement shall not prevent a Party from applying measures to regulate the entry of natural persons into, or their temporary stay in, its territory, including those measures necessary to protect the integrity of, and to ensure the orderly movement of natural persons across, its borders, provided that such measures are not applied in such a manner as to nullify or impair the benefits accruing to any Party under [the Agreement].”
• Small scope. Finally, other provisions make clear that any Mode 4 disciplines would relate to only temporary workers (e.g., one year or less) – they would not apply to residency, naturalization, citizenship or border security.

In conclusion, it’s impossible to change the minds of TPA skeptics who are convinced that President Obama and the GOP-controlled Congress are secretly working together, against the will of the American people and contrary to decades of precedent, to change US immigration or other laws through TPA and the trade agreements it’s intended to cover. However, the above facts, history and law hopefully will help everyone else feel more confident that the leaked TiSA Annex, empowered by TPA, is not a “smoking gun” that proves the US government’s intention to substantially change and liberalize domestic immigration law. I, and many others here at Cato, would welcome a more modern and open US immigration system (done in an orderly and lawful fashion, of course), but there’s simply no credible evidence that it’s happening here.

A very unexpected outcome during a series of votes on trade policy in the House of Representatives has managed to confuse pretty much everyone today. 

The most important and controversial bill in the package was Trade Promotion Authority, which narrowly passed the House 219–211 with 28 Democrats in favor and 54 Republicans opposed. Trade Promotion Authority (TPA) will enable the President to conclude the Trans-Pacific Partnership (and other) trade negotiations and submit a final agreement to Congress for an up-or-down vote. 

But in order for TPA to go to the President’s desk, the House must also pass Trade Adjustment Assistance. That’s because TAA was included together with TPA in the bill the Senate passed last month. 

Normally, Democrats support TAA, which is an entitlement program for people whose jobs are displaced due to import competition. Many Republicans oppose TAA as a useless, big-government entitlement program. House leadership chose to hold two separate votes on TAA and TPA to prevent Republicans from voting no on the package out of opposition to TAA. 

That strategy may have backfired. Because advancing TPA required passage of TAA, Democrats were able to scuttle the whole thing by voting no on TAA.

But it’s not over yet. Republican leadership is planning a do-over on the TAA vote in order to salvage TPA. So there’s likely going to be another vote on TAA early next week. In the meantime, Republican leadership and President Obama will be madly lobbying their respective party members to muster enough support.

For practical purposes, this result means that Congress has kicked the can down the road for a few more days. Today’s vote was definitely not a win for the President or GOP leadership, but they haven’t been defeated either. They can still pull out a victory if they can win enough votes next week to pass TAA—a bill that was defeated today by a solid 126–302.

An outbreak of bird flu has prompted the untimely demise of 35 million hens, seriously disrupting the supply of eggs in the United States. Now we get to watch the relationship between supply disruption and price changes play out, which is fun (if you’re into that sort of thing). There have already been reports of rationing by retailers and of significant price hikes. 

With eggs costing up to 3 times their normal price, a lot of retailers and restaurants are “rationing” eggs. The goal of the rationing is most likely to avoid raising prices. For example, Whataburger chose to stop offering late night breakfast rather than raise prices. And some grocery stores are limiting the number of eggs shoppers can purchase in an effort to keep prices low for regular customers without attracting hordes of commercial users.

High prices are also pushing consumers toward premium egg products. The Guardian reports:

The higher prices have driven some consumers to buy specialty eggs including cage-free and organic, which typically cost more but haven’t seen a similar increase because specialty-egg chicken houses haven’t been hit as hard, Urner Barry egg industry analyst Brian Moscogiuri said. He noted that specialty-egg prices are closer to regular eggs, leading some consumers to justify the purchase.

With a large portion of America’s egg production capacity suddenly wiped out, the only way to get prices back down quickly is to find new sources of supply. Thankfully, the U.S. Department of Agriculture has a way to do that. According to the Associated Press:

The bird flu outbreak has caused the U.S. Department of Agriculture to approve importing egg products from the Netherlands to be used for baking and in processed foods.

…

The USDA said last week the Netherlands should begin shipping egg products within days.

It’s the first time in more than a decade the U.S. has bought eggs from a European nation.

In recent years, only Canada held certification to sell liquid, dried and frozen egg products to U.S. companies.

Allowing more imports is a great idea. Local supply shocks like the bird flu outbreak have much less impact on prices and availability when there is a diverse array of sources available. There are still costs associated with shifting supply chains, but basic commodity prices are much more stable and less prone to shocks in a global market.

It’s good that the USDA has responded rationally to alleviate this problem by permitting egg imports from the Netherlands, but the move raises an important question: Why was it not okay to import eggs from the Netherlands before? Were Dutch eggs unsafe? Are they safer now?

The USDA is supposed to allow egg imports from countries with equivalent safety standards. It seems pretty clear that the way the system is currently being managed results in an overly protected U.S. egg market. It’s more than a little silly to think that Canada and the United States are the only places with sufficient regulatory oversight to ensure the production of safe egg products.

In 2013, Sallie James and I wrote a paper explaining how regulatory protectionism is often disguised as safety standards. If U.S. authorities are willing to allow certification to prevent price surges, have they been denying certification based on price control considerations? That would be an abuse of sanitary and phytosanitary measures for protectionist purposes in violation of international trade rules. 

While it’s great that the USDA is working to find new sources of supply now, the bird flu outbreak wouldn’t have caused as much disruption for consumers if the U.S. market had been more open to begin with.

Senator Ron Wyden wants the government to track imports of e‑cigarettes more closely. Specifically, he has asked the U.S. International Trade Commission to create a specific reporting category for e‑cigarette imports, which are not currently tracked as a distinct category from other small electronic devices. But why does it matter where the e‑cigarettes come from?

Senator Wyden never really answers that question in his letter to the ITC. 

The e‑cigarette market in the U.S. is already a multi-billion dollar market and growing. Unlike the traditional U.S. market for tobacco products where less than 6% of products are imported, it appears that most e‑cigarettes are imported, as are the nicotine-containing liquids used in them. Although the health risks of these products are not fully known, the FDA and [CDC] have warned of their use. In 2014, the [FDA] proposed to deem e‑cigarettes to be tobacco products under the [Tobacco Control Act]. Currently, because they are not a traditional tobacco product, e‑cigarettes and liquids can be sold without restriction to vulnerable segments of the population. CDC recently reported that use among middle and high school students tripled in just the past year from 4.5% of students in 2013 to 13.4% in 2014. Nonetheless, at this point, these products are not subject to health-based regulation, unlike traditional tobacco products imported into the U.S. Similarly, these products are not subject to unique import tariffs or federal excise taxes.

…

Because of the large and growing size of the e‑cigarette market and because of the potential revenue, public health and economic impacts of e‑cigarette and related imports, I respectfully request that the interagency 484(f) committee adopt statistical reporting numbers for e‑cigarette devices, e‑cigarette parts, and e‑cigarette liquids and cartridges respectively.

He notes that e‑cigarettes are increasingly popular, that their health risks are unknown, that the government wants to regulate them, and that they are being imported. But that doesn’t explain how the product’s foreign origin could possibly impact whether and how the government should regulate the product’s use. How will it help health regulators to know how many of the products are made abroad and in what countries?

I suppose import statistics could be relevant if the government wanted to impose a tariff on e‑cigarette imports. But tariffs are by their nature discriminatory taxes—they exist to protect the domestic industry from foreign competition. If you wanted to impose sin taxes on e‑cigarettes, tariffs would be a silly way to do that.

The foreign origin of e‑cigarettes may not legitimately impact the justification for regulation, but it could certainly impact the political calculus driving regulatory efforts. As Wyden noted, the vast majority of tobacco products sold in the United States are made in the United States, while “most e‑cigarettes are imported with upwards of 90% coming from China.” As bootleggers and Baptists push for regulation, the fact that these tobacco alternatives are made by foreigners and competing against domestic products virtually guarantees that regulations will benefit the tobacco industry at the expense of e‑cigarette users.

Recently, the U.S. Trade Representative’s office has begun pushing lower tariffs as a crucial part of the Trans Pacific Partnership (TPP). For me, this is a welcome development, because I worry that the focus on some of the other aspects of the TPP could obscure the positive impact of eliminating or reducing tariffs. In a press release related to a report issued last week, USTR put it like this:

The United States has one of the most open economies in the world, with an average applied tariff of 1.4%. In fact, nearly 70% of the products we import do not face any tariffs at all. However, when our exporters work to sell Made-in-America goods to other countries, they’re burdened with tariffs over twice as high on average. American manufactured goods face tariffs of up to 100% on certain goods in TPP markets, and American agriculture exports face tariffs over 700% on some products.

That’s all sort of true, but there’s more to the story. To get a better sense of tariff levels for the TPP countries, I went to a publication from the World Trade Organization called World Tariff Profiles. Tariffs are a little complicated, because there are individual tariffs for thousands of products, and they are lower for some countries than for others due to various free trade agreements. But a good general measure is the average applied tariff. Here is that tariff rate for all of the TPP parties except Brunei (for which there was no data) for 2013, sorted from lowest to highest, as well as the two general product categories where tariff levels were the highest: 

Note that even where average tariffs are low, there remain some categories of products for which tariffs are fairly high.

The United States does OK in this comparison, although it is not right at the top (I’m not sure why the USTR average applied tariff figure differs from the World Tariff Profiles figure). Chile deserves some special praise, because while its tariff is not the lowest, it charges the same tariff for virtually all products, which reduces the burden on customs officials of classifying imports. 

The lesson I draw from all this is that there are still plenty of tariffs out there, imposed by the U.S. and others, and it would be great if trade agreements could do something about it.