Juan Carlos Hidalgo posted recently about Uruguay’s proposed law legalizing the production and sale of marijuana. He points out that production will come only from a state-owned monopoly. As a trade policy person, what I took from this is: No imports, and someday maybe a trade dispute. Of course, as of today, no one else has legalized production, so there won’t be any (legal) trade. But imagine that, say, the Netherlands legalizes marijuana production in the coming years, and is less restrictive about who can produce it. If their producers decide they would like to export to Uruguay, they may lobby for a trade complaint against the ban on imports. Now, there are various defenses that Uruguay can invoke, and success on the complaint is far from certain. Nevertheless, the GATT and WTO have a long history of complaints about “sin” products, such as tobacco and alcohol, and perhaps marijuana will join that distinguished list someday.
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Trade Policy
Is Romney Going to Defend ‘Shipping Jobs Overseas’? No Way
The lead story in today’s Washington Post accuses Mitt Romney, while at Bain Capital, of investing in firms “that specialized in relocating” American jobs overseas. This gave cause to Obama political adviser David Axelrod to accuse Romney of “breathtaking hypocrisy,” which prompted Roger Pilon to spell out some differences between economics and “Solyndranomics” for the administration. Roger’s correct. But Romney—for running away from that record and playing to that same politically fertile economic ignorance that tempts devastating economic policies—is also worthy of his scorn. Romney should have written Roger’s words.
President Obama set the tone earlier this year during his SOTU address by demonizing companies that get tax breaks for shipping jobs overseas. By “tax breaks,” the president means merely that their un-patriated profits aren’t subject to double taxation. “Shipping jobs overseas” is a metaphor you’ll hear more frequently in the coming months, and Romney is more likely to deny any association with it than to defend it. That’s just the way he rolls.
Outsourcing has been portrayed as a betrayal of American workers by companies that only care about the bottom-line. Well, yes, caring about the bottom line is what companies are supposed to do. Corporate officers have a fiduciary duty to their shareholders to maximize profits. It is not the responsibility of corporations to tend to the national employment situation. It is, however, the responsibility of Congress and the administration to have policies in place that encourage investing and hiring or that at least don’t discourage investing and hiring. But for the specific financial inducements that politicians offer firms to invest and hire in particular chosen industries—Solyndranomics—this administration (and the 110th-112th Congresses) has produced too many reasons to forgo domestic investment. Let’s not blame companies for following the incentives and disincentives created by policy.
There’s also the economics. Contrary to the assertions of some anti-trade, anti-globalization interests, countries with low wages or lax labor and environmental standards rarely draw U.S. investment. Total production costs—from product conception to consumption—are what matter and locations with low wages or lax standards tend to be less productive and thus less appealing places to produce.
The vast majority of U.S. direct investment abroad (what the president calls “shipping jobs overseas”) goes to other rich countries (European countries and Canada), where the rule of law is clear and abided, and where there is a market to serve. The primary reason for U.S. corporations establishing foreign affiliates is to serve demand in those markets—not as a platform for exporting back to the United States. In fact, according to this study by Matt Slaughter, over 93 percent of the sales of U.S. foreign affiliates are made in the host or other foreign countries. Only about 7 percent of the sales are to U.S. customers.
Furthermore, the companies that are investing abroad tend to be the same ones that are doing well and investing and hiring at home. Their operations abroad complement rather than supplant their U.S. operations.
During his unsuccessful 2004 presidential campaign, candidate John Kerry denigrated “Benedict Arnold companies” that outsourced production and service functions to places like India. Earlier this month, Senator Kerry introduced a bill in the Senate that effectively acknowledges that anti-investment, anti-business policies may be responsible for deterring foreign investment in the United States and for chasing some U.S. companies away. Maybe he should talk to the president—and Romney.
New Antidumping Rule Magnifies Trade Distortions
The Commerce Department always seems to have more tricks up its sleeve when it comes to increasing the protectionist impact of existing antidumping law. Yesterday, Commerce announced a new rule that will increase antidumping duties on imports from China and Vietnam if the goods were charged export taxes when they left their country of origin. The new policy is another example of Commerce cherry-picking how to recognize that these countries are no longer “nonmarket economies” in a way that ironically enables it to increase the discriminatory impact of the inaccurate label. Moreover, although the move increases pressure on China to decrease or eliminate market-distorting export duties, it does so by ignoring the economic rationale for opposing such duties in a way that highlights the incurable folly of the U.S. antidumping regime. Antidumping duties supposedly offset the detrimental impact of foreign trade distortion, but this new rule will actually magnify the distortions caused by export taxes.
When China and Vietnam negotiated their accessions to the WTO, they accepted that other members could ignore certain rules in the WTO Antidumping Agreement when using such measures against Chinese or Vietnamese imports and instead apply what is known as nonmarket economy methodology. The practice of treating nonmarket economies differently for antidumping purposes originated during the Cold War when some Soviet-bloc countries controlled all commodity prices within their territories. This frustrated both the traditional antidumping methodology as well as the countervailing duty regime designed to offset the benefits of foreign government subsidies. For decades, Commerce applied a highly subjective and discretionary methodology in antidumping investigations on imports from these countries while, for practical reasons, exempting them from anti-subsidy laws.
This balance was altered in 2007 when the United States decided that China’s economy was sufficiently market-driven so as to be subject to the anti-subsidy regime despite the fact that China was still exposed to use of the nonmarket economy methodology in antidumping investigations. Now Commerce has reasoned that if it can determine the level of a subsidy in China, then it can measure the level of a tax too. But because of how nonmarket economy methodology ignores actual domestic prices, taking an export tax into account will simply result in an increase in the duty without regard to the tax’s mitigating effect on the competitiveness of China-based manufacturers. The bizarre consequence is that both an export subsidy and an export tax can result in higher duties on Chinese imports.
By using the antidumping regime to impose a tax on goods based on the amount of tax they’ve already been charged upon export, the new policy reveals the absurdity of the entire antidumping law. The United States has been challenging China at the WTO over its export duties on certain rare earths and pointing out that these duties increase the cost of those minerals, making it more difficult for U.S. industries that rely on imports to compete with Chinese firms. If an increase in the price of imports due to Chinese export taxes is detrimental to U.S. competitiveness, then an increase in price due to U.S. import taxes via antidumping duties is equally detrimental. (See here and here for Dan Ikenson’s take on this dizzyingly obvious hypocrisy.) The new policy has the possible effect of making counterproductive import taxes even worse by doubling up the effect of the already harmful export tax. Rather than creating a “more level playing field,” the result will be an increase in market distortion caused by overlapping taxes, benefiting some inefficient, politically-connected industries at the expense of everyone else.
Could Trade Remedy Reform Be on the Horizon?
Traditionally, it has been the U.S. and EU who are the biggest users of anti-dumping and countervailing duties (the most important of the so-called “trade remedies”), which allow domestic industries to take action against what they call “unfair” trade, through the imposition of additional tariffs. In recent years, though, developing countries such as China and India began to catch on to how this kind of protection can be used, and have become active participants in this area. (Brink Lindsey and my new boss Dan Ikenson discussed this in a long ago trade policy analysis.) Thus, we now have the odd situation where China imposes these tariffs against U.S. industries on the basis of alleged subsidies and low pricing. The tables have been turned as China is now, in effect, accusing the U.S. of unfair trade!
An example can be seen in last Friday’s WTO panel report relating to China’s anti-dumping and countervailing duties on certain steel products. The U.S. complained to a WTO dispute settlement panel that China’s tariffs were not applied consistently with WTO rules, and the WTO panel agreed, finding a number of violations.
For those looking for a reason to be optimistic about the future of free trade, perhaps these developments can give us hope. While the spread of anti-dumping and countervailing duties is not good news, the U.S. challenge to these tariffs at the WTO perhaps indicates that the duties have caused significant financial pain and concern to the U.S. producers who were affected. Companies who have traditionally used the trade remedy system to keep out imports, such as the U.S. steel companies affected in this case, are taking notice that these laws can also be used against them. Maybe, just maybe, this could lead to some of trade remedies’ biggest supporters re-thinking the value of the current system, and could pave the way for real reform.
Sen. Marco Rubio on the U.S. Sugar Program
Here’s the response from Tea Party favorite Sen. Marco Rubio (R‑FL) on the Wall Street Journal’s unflattering comparison of Senator Rubio with Sen. Jim DeMint (R‑SC), appearing on CNBC:
Basically: we should get rid of our costly, distorting sugar support programs when other countries get rid of theirs.
(HT: my newest colleague, Simon Lester)
One Cheer for Obama’s New Immigration Policy
The new legalization non-deportation policy President Obama announced on Friday, which I’ll call “Executive DREAM,” is really interesting. A half-measure not worthy of unadorned praise or condemnation, Executive DREAM creates mixed feelings in those of us who want liberalized immigration laws — because immigrants are generally a good thing for a country — but want to see actual, you know, law-making get us there. Not executive initiatives, not prosecutorial discretion, not administrative-agency diktats, but honest-to-goodness passed-by-Congress-and-signed-by-the-President laws.
I thus join my colleague Alex Nowrasteh in calling this a “temporary, tepid” immigration fix. Alex notes that Executive DREAM, if its operation turns out to be similar to the proposed DREAM Act, “will shrink the informal economy, increase economic efficiency, and remove the fear and uncertainty of deportation from potentially millions of otherwise law-abiding people. It would be a good first step toward reforming immigration and a glimpse at what the Dream Act would do.”
Now, while the result of this little Executive DREAM is good, the manner in which it was promulgated ensures that it will be a short-lived stopgap that prevents real reform and undermines the rule of law. There’s no reason not to normalize the status of those who would have been eligible for legalization under the DREAM Act, but doing it by executive discretion after Congress had rejected the equivalent legislation shows contempt for a co-equal branch of government. That President Obama announced it in the midst of an election campaign, after not having spent any political capital on immigration during the first three-and-a-half years of his term, only adds to the corrosive cynicism surrounding the issue.
Our immigration system needs comprehensive reform that will only be achieved with buy-in from both parties. Executive DREAM feels good and is the least we can do for over a million law-abiding, productive young people, but makes the long-term goal that much harder to achieve. Indeed, Sen. Marco Rubio (R‑FL) has already indicated that the president’s actions have essentially sucked the oxygen from his nascent attempts at reform.
Doug Mataconis has a similar take. He concludes that “this action was made somewhat inevitable by Congress’s failure to act on immigration reform for at least the past six years. When there’s a power vacuum, someone will move in to occupy that space. Unfortunately, that’s what the President has done and, in the process, he’s done real damage to the Separation Of Powers.”
Handy Chart Shows How Farm Bill Money Is Spent
Following on from Chris’s post yesterday about the explosive cost of food stamps, Brad Plumer at the Washington Post’s Wonkblog yesterday posted this pie chart showing how the CBO has broken down the spending in the proposed Senate farm bill (costing almost $1 trillion over 10 years). Nutrition programs account for almost 80 percent of the spending. From Plumer:
The Congressional Budget Office has a handy breakdown (pdf) of many of the provisions of the bill, which I’ve redone in simplified pie-chart form:
I’ve blogged about food stamps before. For sure the program has problems, and moreover I think nutrition programs should be handled by the states if not even more locally (although I still place nutrition programs lower on my priority hit list than, say, the terribly distorting and costly federal sugar program). But at the very least we should separate out all of these parts of the farm bill and force members of Congress to vote on each of the programs on their merits, and not as some gigantic logrolling extravaganza.