Not to get him in trouble with his boss, but U.S. Trade Representative Ron Kirk has been sounding like a free trader lately. I’m beginning to think Ambassador Kirk consumes the analyses we produce over here at the Cato Institute’s Herbert A. Stiefel Center for Trade Policy Studies. Well, let me rephrase: that he consumes the meat of our analyses, but still hides the vegetables under the picked-over potatoes.

Still, that’s pretty commendable for a Washington policymaker.

Just the other day, Ambassador Kirk lamented how policymakers do a poor job selling trade agreements to a skeptical public. Inside U.S. Trade [$] paraphrased Kirk as saying:

[P]oliticians must ‘talk about trade differently’ and demonstrate how trade policy is directly responsible for sustaining economic growth and creating jobs. If the focus is only on how trade deals will improve supply chains for businesses, for instance, that is not enough to build the base for support for trade deals.

That is a sound criticism. The typical, mercantilist arguments that tout the benefits of exports and rationalize imports as necessary evils are foolish and self-defeating—particularly in a country that will run trade deficits into the distant future as its economy continues to grow and attract greater amounts of foreign investment. The freedom to engage in commerce with whom and how one chooses, and the impact of import competition are the real benefits of freer trade.

Like some others in town, we at Cato advocate free trade. But unlike most, we advocate free trade here in the United States—not just over there in foreign countries. Free trade requires more than getting other governments to eliminate their barriers to U.S. exports; it requires getting the U.S. government to eliminate its barriers to U.S. imports from abroad. The latter is the real objective of free trade advocacy and the well-spring of most of its benefits.

But the economic benefits of imports rarely make the Washington “free trade advocate’s” Top-10 list of talking points, nor do they officially register in the minds of trade negotiators, whose chief aims are to secure for their exporters the greatest possible access to foreign markets, while simultaneously conceding to foreigners as little access as possible to the domestic market. “Import” is a four-letter word in the Washington trade policy community.

That’s why Ambassador Kirk’s recent comments have me thinking: epiphany?

In a statement responding to the WTO Appellate Body ruling last week that China’s export restrictions on nine raw materials were not in conformity with that country’s WTO commitments, Ambassador Kirk made the point that U.S. firms that use those raw materials will be better able to compete once those restrictions are lifted.

Today’s decision ensures that core manufacturing industries in this country can get the materials they need to produce and compete on a level playing field.

The USTR had previously made the following point:

These raw material inputs are used to make many processed products in a number of primary manufacturing industries, including steel, aluminum and various chemical industries. These products, in turn become essential components in even more numerous downstream products.

Technically, Ambassador Kirk is not engaging in profanity—he doesn’t use the word import. But his argument against Chinese export restrictions is just as applicable to U.S. import restrictions. Removing restrictions—whether the export variety imposed by foreign governments or the import variety imposed by our own—reduces input prices, lowers domestic production costs, enables more competitive final-goods pricing and, thus, greater profits for U.S.-based producers.

So let’s take Ambassador Kirk’s sound logic and see if it might apply elsewhere in the realm of U.S. trade policy. If the U.S. government thought it worthwhile to take China to the WTO over the restrictions it imposes on raw material exports because those restrictions hurt U.S. producers, then why does the same U.S. government impose its own restrictions on imports of some of the very same raw materials? That’s right. The United States maintains antidumping duties on magnesium, silicon metal, and coke (all raw materials subject to Chinese export restrictions).

If Ambassador Kirk ate the vegetables as well as the meat of Cato’s trade policy analyses, he would recognize that his logic provides a compelling case for antidumping reforms, such as one requiring the administering authorities to consider the economic impact of antidumping measures on producers in downstream industries, such as magnesium-cast automobile parts producers, manufacturers of silicones used in solar panels, and even steel producers, who require coke for their blast furnaces.

We will know that the ambassador has eaten his free-trade vegetables when he starts sounding like former USTR Robert Zoellick who once hoped for the Doha Round of trade negotiations that it would “[T]urn every corner store in America into a duty-free shop.”

• A very good editorial on Bloomberg​.com on farm subsidies, and why the “let’s swap direct payments for crop insurance” proposal is a bad deal for taxpayers.
• American Farm Bureau Federation President Bob Stallman isn’t exactly a poster child for the farm program reform movement, but here he writes something I didn’t think would ever flow from his pen: “Not only would [“shallow loss”] programs be a nightmare for local Farm Service Agency offices to administer, but farmers would have the ability to cherry-pick which program works best for them. Because of distortions in price, we’d have a system of farmers deciding what to produce based on government payments rather than market signals.” [emphasis added] Uh, ok, but doesn’t that happen already, Mr Stallman?
• I’m not quite sure the LA Times gets the concept of federalism.
• United States Trade Representative Ron Kirk complains that “countries need to do a better job of explaining the benefits of trade in order to help sell ambitious trade deals to a skeptical public” [$]. I must have missed the part when Obama gave a detailed, principled endorsement of free trade in his SOTU address last week. Or, you know, ever.

Newt Gingrich defeated communism, someone hacked Anthony Weiner’s Twitter account, and President Obama saved the U.S. automobile industry. Grandiosity, denial, and revisionism are all noted indulgences of the political breed. That’s why we should always be skeptical of their words and pity the partisan lemmings who mindlessly parrot their rhetoric.

In his SOTU speech last night, the president claimed credit for rescuing the auto industry:

On the day I took office, our auto industry was on the verge of collapse. Some even said we should let it die. With a million jobs at stake, I refused to let that happen. In exchange for help, we demanded responsibility. We got workers and automakers to settle their differences. We got the industry to retool and restructure. Today, General Motors is back on top as the world’s number one automaker. Chrysler has grown faster in the U.S. than any major car company. Ford is investing billions in U.S. plants and factories. And together, the entire industry added nearly 160,000 jobs.

We bet on American workers. We bet on American ingenuity. And tonight, the American auto industry is back.

This is a claim that is likely to be repeated as the president campaigns across the country this year, so it may be worthwhile to examine its merits. (Who knows, maybe an effective debate moderator or Sunday news show host might find his way to asking the right questions of the president or members of his administration.)

Closer analysis reveals that President Obama (enabled by President Bush’s complicity) bailed out specific stakeholders at two auto companies at great cost to U.S. taxpayers and at great expense to important U.S. institutions. 

The assertion – or implication – that he saved the auto industry is bogus. The auto industry was never on the verge of collapse. GM and Chrysler were in deep trouble, but Ford, Honda, Toyota, Nissan, Mazda, Kia, Hyundai, BMW and Mercedes Benz (to name some U.S. producers) were fine. Yes, in 2008–2009 the economy was in recession and automobile demand had tanked. The companies that had been the most profligate, the most reckless, and the least disciplined were exposed, but talk of industry collapse was the product of a Detroit public relations campaign that featured the claim that 2 to 3 million jobs could be lost if the government didn’t funnel huge sums of cash to the Big Three. (Details here.)

I have shouted from the rooftops about this issue for over three years. So rather than present all the facts and reconstruct all the arguments, let me economize with reference to this congressional testimony, given seven month ago. It pretty well sums up everything that’s wrong or misleading about the president’s narrative.

As I wrote last year:

The objection to the auto bailout was not that the federal government wouldn’t be able to marshal adequate resources to help GM. The most serious concerns were about the consequences of that intervention — the undermining of the rule of law, the property confiscations, the politically driven decisions and the distortion of market signals.

Any verdict on the auto bailouts must take into account, among other things, the illegal diversion of TARP funds, the forced transfer of assets from shareholders and debt-holders to pensioners and their union; the higher-risk premiums consequently built into U.S. corporate debt; the costs of denying Ford and the other more worthy automakers the spoils of competition; the costs of insulating irresponsible actors, such as the autoworkers’ union, from the outcomes of an apolitical bankruptcy proceeding; the diminution of U.S. moral authority to counsel foreign governments against market interventions; and the lingering uncertainty about policy that pervades the business environment to this day.

GM’s recent profits speak only to the fact that politicians committed more than $50 billion to the task of rescuing those companies and the United Auto Workers. With debts expunged, cash infused, inefficiencies severed, ownership reconstituted, sales rebates underwritten and political obstacles steamrolled — all in the midst of a recovery in U.S. auto demand — only the most incompetent operations could fail to make profits.

But taxpayers are still short at least $10 billion to $20 billion (depending on the price that the government’s 500 million shares of GM will fetch), and there is still significant overcapacity in the auto industry.

The administration should divest as soon as possible, without regard to the stock price. Keeping the government’s tentacles around a large firm in an important industry will keep the door open wider to industrial policy and will deter market-driven decision-making throughout the industry, possibly keeping the brakes on the recovery. Yes, there will be a significant loss to taxpayers. But the right lesson to learn from this chapter in history is that government interventions carry real economic costs — only some of which are readily measurable.

President Obama’s State of the Union address last night was, in my opinion, pretty awful (although James Pethokoukis at the American Enterprise Institute thinks it could have been worse). I know SOTUs are political theater at its worst, and I watch them always with something not unlike disgust, but I found almost nothing to like in the substance last night. The electioneering, partisan, self-aggrandizing tone didn’t help.

Let me turn specifically to trade policy, which was more thoroughly covered last night than in recent SOTUs. In an election year, and from a president who is ambivalent (at best) on trade, a trade-heavy speech is not always a good thing: trade policy can get caught up in broader political arguments about inequality, unemployment and economic growth. And rarely does that combination work well for those of us who want and promote free trade between people regardless of the political borders behind which those people happen to live.

But first, the Good news from last night’s speech. President Obama did make a passing and veiled reference to the need for Congress to extend Permanent Normal Trade Relations to Russia, necessary for the United States to treat Russia as any other member of the World Trade Organization when it joins the body later this year (i.e., allowing Americans to access Russian goods and services more readily). And at least he painted the recent passage of the trade agreements with Colombia, South Korea and Panama as a positive development, albeit on mercantilist grounds (more on this later).

The Bad? The president said precisely nothing about the Trans Pacific Partnership negotiations currently underway with nine other Asia-Pacific countries (with Canada, Mexico and Japan interested in joining in the future). The TPP is supposedly the crowning achievement of his administration’s trade efforts and a deal that he was itching to complete in 2012. What does it say about his priorities that it warrants not a mention in his main speech of the year? Maybe his political supporters in organized labor aren’t buying this “21st century trade agreement” stuff any more than I am and he sees merit in keeping it quiet. But that then raises worrying questions about the ability of the negotiations to be completed on schedule if they don’t have full-throated political support at the highest level. The president made no mention of the World Trade Organization or its struggling Doha round of trade liberalization negotiations, either, although maybe there he is simply showing acceptance of the round’s (near) death, an assessment he would share with most trade watchers.

And the Ugly? Once again the president displays no appreciation for the true benefits of free trade – the benefits from specialization and exchange. They include the economic benefits that come from increased competition, and from access to cheaper and more variable goods and services for Americans. From his silly (and, I suspect, futile) goal to “double exports in five years” to his rhetoric about how America can “win” if the playing field is level (what does “winning” mean in that context anyway?), the speech was peppered with nationalistic, misguided and quite frankly inflammatory rhetoric that will not help trade relations – let alone lead to enhanced trading opportunities for Americans – one bit. Creating yet another government agency, this time to “investigat[e] unfair trade practices in countries like China”, will just add to tensions. Claiming the tires debacle as a model of trade enforcement success is yet another example of how the concept of unintended consequences is apparently lost on this president.

Matthew Yglesias has some excellent things to say on the mercantilist nonsense in Obama’s message, and the ill-conceived manufacturing fetish he conveyed. And Obama managed to combine both economic illiterate concepts when wailing about the unfairness of having to compete with “foreign manufacturers [who] have a leg up on ours only because they’re heavily subsidized.” (He then, inevitably, went on to include all sorts of subsidies or tax breaks that he would like to extend to certain American firms/​industries – Chris Edwards has amply covered the tax stuff here). Overall, I give this speech a “D” on trade. Must try harder.

When China joined the WTO in December 2001, one of the many terms it agreed to was to allow the United States to continue to treat it as a “non-market economy” under U.S. antidumping law for a period of 15 years. China has regretted that concession ever since, and there are precious few gestures that would win more goodwill from the Chinese government than a decision by President Obama to graduate China to market economy status now.

A ruling last month from the U.S. Court of Appeals for the Federal Circuit making it illegal to apply the U.S. Countervailing Duty Law (anti-subsidy law) to imports from non-market economies gives the president the perfect opening to make the change now. From the perspective of a free trader, that solution is far from ideal: it preserves domestic industries’ access to the antidumping law and countervailing duty laws, both of which produce egregiously punitive duties on imports and are ripe for serious reform or outright repeal.

But the benefit of granting market economy status to China now is that it will help slow, and likely reverse the deterioration in bilateral economic relations. And that would be an important benefit for all of us.

At the very beginning of the Obama administration, Scott Lincicome and I urged the new president to consider more than just the litany of gripes so often heard at home and to recognize that China has its own justifiable concerns about U.S. policy:

The time has come to seriously consider carrots and not just sticks—particularly since the pain from the sticks is not limited to its intended targets, but is felt in the United States and in other countries, given the transnational nature of supply chains. President Obama would invigorate the relationship if he were to grant China “market economy” treatment in anti-dumping cases. While such a reform would take very little out of petitioning industries’ hides, the gesture would win vast sums of goodwill from the

Chinese—goodwill needed to resolve more important issues going forward. Indeed, repeal of the non-market economy (NME) designation presents a “win-win” scenario for several reasons.

First, graduation from NME status is one of the Chinese government’s top international

trade priorities. China wants to be treated like all other major economies, and accordingly, the Chinese government is likely willing to make important concessions in other contested areas of trade policy to achieve market economy status. But the longer we wait to grant market economy status to China, the less valuable that concession becomes. Under the rules governing China’s accession to the WTO, the United States must repeal China’s NME designation by 2016. Thus, the value of that “concession”

will be greater in 2009—seven years early—than it will be in 2010 or 2012. Much beyond

2012, and the concession looks a bit like Confederate money.

Second, China’s NME designation has drawn intense criticism from domestic consuming industries, trade policy experts, and U.S. trade partners because of its incongruous application (for example, Russia was deemed a “market economy” in 2002, yet still is not a WTO member, while China became a WTO member in 2001) and the latitude for abuse of administrative discretion it affords. Also, the relatively recent change in policy that opened the door to countervailing duty cases against China has sparked controversy about whether NME treatment in anti-dumping cases should still be permissible.

U.S. revocation of China’s NME status would alleviate many of those domestic concerns at virtually no cost to domestic petitioning industries, but petitioners value NME because of the trade-suppressing uncertainty the process engenders. It is important that President Obama understand that our trade relationship with China has been mutually beneficial, that the rhetoric about the impact of unfair Chinese practices has been highly exaggerated, and that unnecessary provocation could open a Pandora’s Box of economic problems.

(Read the whole analysis here.)

Well, Lincicome (in a thorough analysis) and I (in a fairly technical one) continue to make the case for market economy designation, and welcome the retorts of those who are opposed.

One of the most famous documents in the history of free-trade literature is Bastiat’s famous “Candlemakers’ Petition.” In that parody, the French economist and parliamentarian imagined the makers of candles and street lamps petitioning the French Chamber of Deputies for protection from a most dastardly foreign competitor:

You are on the right track. You reject abstract theories and have little regard for abundance and low prices. You concern yourselves mainly with the fate of the producer. You wish to free him from foreign competition, that is, to reserve the domestic market for domestic industry.

We come to offer you a wonderful opportunity.…

We are suffering from the ruinous competition of a rival who apparently works under conditions so far superior to our own for the production of light that he is flooding the domestic market with it at an incredibly low price; for the moment he appears, our sales cease, all the consumers turn to him, and a branch of French industry whose ramifications are innumerable is all at once reduced to complete stagnation. This rival … is none other than the sun.

For after all, Bastiat’s petitioners noted, how can the makers of candles and lanterns compete with a light source that is totally free?

Thank goodness we wouldn’t fall for such nonsense today. Or would we?

We may be about to find out. Makers of solar panels have petitioned the U.S. Department of Commerce and the International Trade Commission to slap tariffs on imported Chinese panels. Christopher Joyce of NPR reports that Gordon Brinser, CEO of Solar World, complains that U.S. manufacturers can’t compete with cheaper Chinese imports. The Chinese panels aren’t free; but just as Bastiat’s candlemakers complained, the competition is hard to counter.

Perhaps the comparison is unfair. After all, the Coalition for American Solar Manufacturing isn’t asking for protection from the sun, only from Chinese panel producers who are allegedly “dumping” panels into the American market “at artificially low prices.”

What’s the difference, though? Any source that supplies solar panels to American consumers and businesses is a competitor of the American industry. And any source that can deliver any product cheaper than American companies is a tough competitor. Domestic producers will no doubt gain by imposing a tariff on their Chinese competitors. But companies that install solar power will lose, by having to pay higher prices for panels.

Businesses would always prefer a world without competitors. If they can’t outcompete their rivals in the marketplace, they may be tempted to ask the government for protection. And our “antidumping” laws actually invite such complaints. But economists agree that consumers, and the businesses that use imported products, lose more on net than producers gain. Protectionism is a bad deal for the American economy. Let’s hope the uncompetitive solar panel manufacturers get told to go build a better mousetrap.

More on “antidumping” laws here.

Remember the story of that once-great nation that sacrificed its well-paying manufacturing jobs for low-wage, burger-flipping jobs at the altar of free trade? At one time, that story was a popular rejoinder of manufacturing unions and their apologists to the inconvenient facts that, despite manufacturing employment attrition, the economy was producing an average of 1.84 million net new jobs per year every year between 1983 and 2007, a quarter century during which the real value of U.S. trade increased five-fold and real GDP more than doubled.

The claim that service-sector jobs are uniformly inferior to manufacturing jobs lost credibility, as average wages in the two broad sectors converged in 2005 and have been consistently higher in services ever since. In 2011, the average service sector wage stood at $19.18 per hour, as compared to $18.94 in manufacturing. (But I don’t recall buying any $25-$30 hamburgers last year.)

One reason for U.S. manufacturing wages being higher than services wages in the past is that manufacturing labor unions “succeeded” at winning concessions from management that turned out to be unsustainable. The value of manufacturing labor didn’t justify its exorbitant costs, which encouraged producers to substitute other inputs for labor and to adopt more efficient techniques and technologies.

With the superiority-of-manufacturing-wages argument discredited, new arguments have emerged attempting to make the case that there is something special – even sacred – about the manufacturing sector that should afford it special policy consideration. Many of those arguments, however, conflate the meanings of manufacturing sector employment and manufacturing sector health or they rely on statistics that don’t support their arguments or they become irrelevant by losing sight of the fact that resources are scarce and must be used efficiently. And too often the prescriptions offered would place the economy on the slippery slope that descends into industrial policy.

I recently submitted this rebuttal to this essay by an environmental sciences professor by the name of Vaclav Smil, who commits those errors. (Judging from the tone of his mostly evasive response to my rebuttal, Smil doesn’t seem to have much tolerance for views that differ from his own.) Perhaps most noteworthy among Smil’s slew of questionable arguments is his claim that manufacturing companies, like Boeing, valued at $50 billion, are better for the economy than service companies like Facebook, which is also valued at $50 billion because

[i]n terms of job creation there is no comparison… Boeing employs some 160,000 people, whereas Facebook only employs 2,000.

Granted, Boeing’s operations support more jobs. But is that better for the economy than a company that provides the same value using 1/​80th the amount of labor resources? Of course not. We need economic growth in the United States to create wealth and increase living standards. Economic growth and employment are not one and the same thing. In fact, the essence of growth is creating more value with fewer inputs (or at lower input cost). Creating jobs is easy. Instead of bulldozers, mandate shovels; instead of shovels, require spoons. Inefficient production techniques can create more jobs than efficient ones, but they don’t create value, which is the economic goal.

With 2,000 workers producing the same value as 160,000 – one producing the same value as 80 – Facebook is 80 times more productive than Boeing, freeing up 158,000 workers for other more productive endeavors (perhaps 79 more Facebook-type operations). If those companies were individual countries, the per capita GDP in Facebookland would be $25 million, but only $3.125 million in Boeingia. Where would you rather live?

Smil calls my assessment a cruel joke, presumably for its failure to empathize with unemployed and underemployed Americans, by considering value before job creation. But policies designed to encourage more Boeing’s, as Smil supports (or, in fairness, any businesses that employ at least X number of people or meet this requirement or that) would likely retard the establishment of firms, like Facebook, that produce the goods and services that people want to consume. The provision of goods and services that people want to buy – rather than those that policymakers in Washington think people want to buy (or are happy to force them to buy) – is the essence of value creation.

Thus, policies should incentivize (or, at least not discourage) the kind of innovation and entrepreneurship needed to create more Facebooks? This kind of business formation occurs in environments where the rule of law is clear and abided; where there is greater certainty to the business and political climate; where the specter of asset expropriation is negligible; where physical and administrative infrastructure is in good shape; where the local work force is productive; where skilled foreigners aren’t chased back to their own shores; where there are limited physical, political, and administrative frictions; and so on. In other words, restraining the role of government to its proper functions and nothing more would create the environment most likely to produce more Facebooks in both the manufacturing and services sectors.