To paraphrase Ronald Reagan, the problem with Rep. John Garamendi (D‑CA) isn’t so much that he is uninformed, it’s just that he knows so many things that aren’t so. That, at least, is the impression one is left with after reading the California congressman’s latest op-ed in defense of the Jones Act which is replete with errors, half-truths, and contradictions. Disturbingly, the Chairman of the House Armed Services Committee’s Readiness Subcommittee fudges even basic facts. In the op-ed’s fourth paragraph, for example, Rep. Garamendi claims there are only 81 U.S.-flag oceangoing vessels. The latest data from the U.S. Maritime Administration, however, shows 180 such ships. Rep. Garamendi later warns about the dangers of employing foreign-flag ships to transport supplies and equipment for the U.S. military, claiming that during the 1991 Gulf War “The foreign crews on thirteen vessels mutinied, forcing those ships to abandon their military mission.” But that’s not true. The United States Transportation Command’s official history of its performance in Operations Desert Shield and Desert Storm makes no mention of mutinies or mutineers and says that only two ships, the Trident Dusk and the Banglar Mamata, failed to deliver their cargo. Eleven other ships expressed some hesitation but did, in fact, fulfill their missions, and the Transportation Command says crews on foreign flag ships “on the whole proved dependable” and were “overall, reliable.” Furthermore, Rep. Garamendi’s invocation of these foreign flag bulkers is curious, as the Jones Act is commonly presented as avoiding this very kind of foreign dependence. Plainly it is not accomplishing this goal. Indeed, another item mentioned by the Transportation Command’s report is that the United States was desperately short of ships that it twice asked the Soviet Union to borrow one of theirs. The op-ed also suffers from other curious leaps of logic and seeming contradictions. Rep. Garamendi, for example, hits back at criticisms the Jones Act is outdated and harmful by noting that “Ninety-one U.N. member states comprising 80 percent of the world’s coastlines have cabotage laws protecting domestic maritime trade.” But this observation does nothing to refute the law’s critics or prove that the Jones Act is somehow useful. Notably, countries that have moved to loosen their cabotage laws such as the Philippines and New Zealand (see page 6) have experienced positive results.
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In the USMCA Ratification Battle, A Big Tariff Fight Is Brewing
For those of us who support the North American Free Trade Agreement (NAFTA), the renegotiation process had us at the edge of our seats each day. Would the three parties be able to reach agreement? If not, would the Trump administration try to withdraw from NAFTA? And if so, would Congress act to stop the withdrawal? When the newly minted U.S.-Mexico-Canada Agreement (USMCA) was signed last November, there was a brief reprieve from the stressful, high-stakes negotiations.
That break is now over. The U.S. International Trade Commission (USITC) released its independent assessment of the economic impact of the USMCA, a procedural step that clears the way for Congress to take up debate on ratification of the deal. That debate looks like it will be acrimonious, as leaders of both parties have been pushing the Trump administration with specific demands in exchange for supporting USMCA.
Democrats have already aired a number of concerns over the new agreement, particularly with regard to labor enforcement, but their specific demands are a bit vague, and vary a bit depending on which Democrat you talk to.
But now the Republicans are weighing in, and the biggest battle over the ratification of USMCA may come from the president’s own party. And in terms of trade liberalization, it is a particularly important one, because it involves removing tariffs (the USMCA itself does not have much impact on tariffs, as NAFTA has removed virtually all of them on trade between the three parties). Writing in the Wall Street Journal, Senator Chuck Grassley (R‑IA) called on President Trump to lift the Section 232 steel and aluminum tariffs on Canada and Mexico, declaring, “If these tariffs aren’t lifted, USMCA is dead. There is no appetite in Congress to debate USMCA with these tariffs in place.” In essence, Grassley is making his support for USMCA conditional on the removal of these tariffs. Grassley’s threat should be taken seriously, not least because he serves as Chairman of the Senate Finance Committee, which gives him the power to indefinitely delay putting USMCA up for a vote in the Senate.
Beyond the politics, his proposal just makes a lot of sense. A report from the Peterson Institute describes the impact of steel tariffs in this way:
Calculations show that Trump’s tariffs raise the price of steel products by nearly 9 percent. Higher steel prices will raise the pre-tax earnings of steel firms by $2.4 billion in 2018. But they will also push up costs for steel users by $5.6 billion. Yes, these actions create 8,700 jobs in the US steel industry. Yet for each new job, steel firms will earn $270,000 of additional pre-tax profits. And steel users will pay an extra $650,000 for each job created.
Essentially, while a few steel producers have benefitted from the tariffs, the tab is being picked up by everybody else who has to buy steel. A part of that cost is ultimately paid by the consumer. As a result, the overall impact of the tariffs on the U.S. economy is negative.
Furthermore, it makes little sense that these tariffs are being maintained on our closest trading partners, especially after they negotiated in good faith to address many U.S. concerns with NAFTA. During the NAFTA negotiations, the issue of steel and aluminum tariffs lingered like a dark cloud overhead. Both the Canadian and Mexican delegations were under the impression that the 232 tariffs would be lifted once the agreement was signed. That, however, did not end up being the case. These tariffs are still in place, and as a result, Canada and Mexico have placed retaliatory tariffs on the United States. These retaliatory tariffs have resulted in a decrease in U.S. exports to Canada by 25% and to Mexico by 10% since they have been in effect. Lifting the 232 tariffs on Canada and Mexico will minimize any further harm on both sides of our borders.
One important point to keep in mind, however, is that tariffs could be replaced by quotas, as was the case for the Section 232 tariffs on South Korea and a couple of other countries. Quotas can actually be worse than tariffs in terms of their impact. Thus, Senator Grassley and his colleagues should demand that the removal of the Section 232 import restrictions be complete and total: No tariffs, no quotas, no nothin’.
The ball is now in President Trump’s court. In the past, he has called himself a “Tariff Man,” but the negative impact of the tariffs imposed so far should illuminate the benefits of open markets. By firing this shot in the USMCA ratification battle, Grassley has made the choice before Trump abundantly clear: support the passage of the deal by delivering on his promise of being a great dealmaker, or stay the Tariff Man. The path he chooses will be an important signal for ongoing and future trade negotiations the administration undertakes. Most importantly, it will provide clarity as to whether the administration simply sees tariffs as a tool to negotiate better deals, or whether tariffs are an end in themselves. We await the response.
President Trump Considering a Jones Act Waiver
New reports suggest that President Trump is considering granting a Jones Act waiver to allow non‑U.S.-flagged ships to transport natural gas from energy-rich parts of the United States to the Northeast and Puerto Rico. He should do so without delay. Granting this waiver would mark not just a triumph of common sense, but also help fulfill President Trump’s campaign promise to take on the Washington special interests who profit from laws such as the Jones Act at the expense of American consumers and businesses.
To learn more about this issue both the public and media alike are invited to attend an April 30 event at the Cato Institute that will examine the Jones Act’s impact on Puerto Rico. Featuring Puerto Rico’s Secretary of State, the president of the Puerto Rico Economic Development Bank, and other experts, the event will include a discussion of the island’s attempt to obtain a Jones Act waiver for the purpose of transporting U.S. natural gas. For further information about both the Jones Act and the Cato Institute’s effort to raise awareness about this burdensome and outdated law please visit cato.org/jonesact.
ITC Report on Economics of USMCA Out; Next Up, Politics
The U.S. International Trade Commission (ITC) released its report on the likely impact on the U.S. economy and specific industry sectors from the U.S.-Canada-Mexico Agreement (USMCA). The main finding is unsurprising: “if fully implemented and enforced, USMCA would have a positive impact on U.S. real GDP and employment.” Since the North American Free Trade Agreement (NAFTA) was already beneficial to Canada, Mexico and the United States, the changes were not expected to be on net negative.
However, the topline figure which “estimates that USMCA would raise real U.S. GDP by $68.2 billion (0.35 percent) and U.S. employment by 176,000 jobs (0.12 percent)” is slightly higher than expected, but still small in terms of its overall impact on the U.S. economy.
Both exports and imports will increase as a result of the deal, though many of the gains remain small or modest, such as in textiles and apparel, chemicals and pharmaceuticals, electronic products, energy products and services. The reason why smaller gains are expected here is because NAFTA already liberalized most trade in these sectors, so any additional reductions would be minor.
There are two notable outcomes worth highlighting. First, the largest gains are expected to come from new rules on international data transfers and e‑commerce, which were not part of the original NAFTA. Locking in existing commitments on the free cross-border flow of information is likely to deter future barriers to data transfers, such as data localization. The reduction of policy uncertainty in these areas is a key factor in the higher than projected gains. In addition, the higher de minimis thresholds on e‑commerce exports is also net liberalizing, and likely to increase exports to Canada by $332 million and $91 million to Mexico.
The biggest harm, and largest impact of the USMCA, comes from an area that was expected—the restrictive rules of origin (ROO) on the automotive sector. The report states that these new requirements “would strengthen and add complexity to the rules of origin requirements in the automotive sector” and are “estimated to increase U.S. production of automotive parts and employment in the sector, but also lead to a small increase in the prices and a small decrease in the consumption of vehicles in the United States.” Essentially, cars will become more expensive (0.37 percent for pick-up trucks and 1.61 percent for small cars) and total consumption will decline by 140,000 vehicles. These production costs will be the result of, as footnote 7 states, “the shifting sourcing of core parts to the United States, even though the non-preferential tariff rates they would face (for many vehicle types) if they did not comply with the new automotive ROOs would be small.” Basically, the economic analysis assumes that companies will be willing to pay non-preferential tariffs instead of complying with the stricter auto ROO.
Furthermore, footnote 66 of the report states:
“Commissioner Kearns notes that, as described above, the model appears to suggest that the trade restrictiveness of ROO is inversely related to its positive impact on the U.S. economy. Carried to its logical conclusion, this would appear to suggest that the best ROO is a very weak or nonexistent ROO.”
This essentially means that one of the biggest trumpeted gains, the new auto rules, are actually the worst part of the new agreement.
There are a number of other small increases expected, such as in agriculture, particularly due to the fact that Canada increased its tariff rate quotas on dairy products, poultry, meat, eggs, and also wheat and alcoholic beverages. The gains, however, are still modest, projected to increase U.S. agricultural and food exports by 1.1 percent.
The main takeaway is that since NAFTA removed almost all tariff barriers, the gains from USMCA are modest and largely come from reductions in the remaining non-tariff barriers. While the gains are higher than expected, this is likely due to the change in methodology by ITC to incorporate the impact of the gains from reducing these non-tariff barriers. At the end of the day, the final number is still modest, and is unlikely to sway anyone in Congress from changing their already strongly held opinions on the agreement. If anything, the release of the ITC report clears the way for implementing legislation to come forward and the real battle for the passage of USMCA to begin.
“Closing the Border” Is a Terrible Idea
President Trump reiterated his threat Saturday to “close the border” or “large sections of it” next week. To put it mildly, “closing the border” is a terrible idea. The president cannot close the border to illegal immigration. What he can do—and is already doing—is slow the flow of legal crossings.
- Mexico is America’s 2nd largest export market and 3rd largest total trading partner.
- U.S. border crossings with Mexico handle a half a trillion dollars in trade each year. Nearly half enters through Texas where two thirds of illegal border crossings have occurred this year.
- Each year, U.S.-Mexico border crossings permit the entry of more than 190 million people and 6.3 million commercial trucks.
- Nearly 5 million American jobs depend on U.S.-Mexico trade.
- Mexico exports to the United States $26 billion in intermediate goods (components of final products), meaning that closing the border would be like building a wall in the middle of a factory floor.
Even a temporary slowdown would have significant effects:
- The temporary closure of the San Ysidro port in California last year—in order to tear gas migrants trying to cross—cost businesses $5.3 million.
- During that shutdown, traffic diverted to the Otay Mesa port resulting in 5 hour waits there.
- Normal lengthy waits to cross into the U.S. resulted in lost output of $6 billion in 2009 in California alone.
Other presidents have intentionally slowed traffic at ports of entry, but none since the implementation of NAFTA in the 1990s. Even then, the economic costs were significant. As the Boston Globe described President Nixon’s insane drug control strategy in 1969:
Cars and trucks were all checked for illegal contraband, and, as the day wore on, drivers who’d waited for hours without air conditioning or water were strip-searched. Over the next two weeks, as tens of millions of dollars evaporated from the economies of the border towns, Nixon came under enormous political pressure to back off. La Prensa — San Antonio’s bilingual newspaper — headlined one of its front pages “Humiliating Mexicans,” and Diaz accused Nixon, in terms that would be particularly ironic nearly 50 years later, of creating a “wall of suspicion” between the two countries. Almost no marijuana was seized.
Allan Golombek’s description in Real Clear Politics of the results of the GM Canada strike may also be revealing:
The three-week long GM Canada strike in 1996 serves as a good example of what actually happens when imports stop flowing into the United States. The strike by the Canadian auto plant didn’t just idle four assembly plants and numerous other facilities in Canada. Because GM operations were tightly integrated even then, the interruption of the flow of parts and vehicles had a swift domino effect, almost immediately prompting the company to close plants and lay off close to 2,000 workers in Michigan and upstate New York. Many other GM plants in the United States were subsequently slowed and stopped. Auto analysts estimated the automaker was a day or two away from having to shut down most of its North American operations when the strike ended after three weeks.
President Trump’s strategy is to scare the Mexican government into stopping Central Americans from coming North. But the Mexican government is already desperately trying to do just that based mainly on its own internal political considerations. Last week, even before these threats, it stopped issuing humanitarian visas to Central Americans and deployed its military to create an inland checkpoint line across the Isthmus of Tehuantepec—the narrowest point of Mexico.
Mexico’s prior attempts to control the flow have only achieved temporary results as it only forces smuggling networks to adjust their strategies. Ultimately it will take changes to U.S. visa policy to provide an alternative to traveling through Mexico to permanently reduce the flow.
Doubling Down on Failed Maritime Protectionism
What to do when confronted with the failures of U.S. maritime protectionism? Call for more protectionism, of course. That, at least, is the apparent attitude of some members of Congress.
A notable aspect of the Jones Act debate is that the law’s supporters often admit, albeit tacitly, that it isn’t working very well. Rep. John Garamendi (D‑CA) is a case in point. Participating in a recent panel discussion at the Brookings Institution, Rep. Garamendi readily conceded the enervated state of U.S. shipbuilding. “What remain of the American shipyards”—approximately 300 shipyards have closed since 1983—consist of “mostly small shipyards,” according to the California Congressman, as well as a few large ones which are “producing ships for the Jones Act but not for the international trade.”
Rep. Garamendi also freely acknowledged that, beyond the decline in shipyards, the United States also suffers from a lack of merchant mariners. Should the federal government call upon U.S. merchant mariners to crew the ships needed to deploy and sustain U.S. forces in time of war, Rep. Garamendi said that current projections show it falling 2,800 short (A 2017 government report found the deficit to be 1,839. This, however, was a best-case scenario assuming every mariner would be available and willing to sail).
This lack of mariners is no surprise given the steep decline in Jones Act-eligible ships, which have fallen from 326 in 1982 to just 99 today. In sum, fewer shipyards are building fewer ships which in turn employ fewer merchant mariners. Everything is trending in the wrong direction.
But if you were expecting Rep. Garamendi to reconsider his support for maritime protectionism in the wake of such failings, think again. Not only does he remain an ardent defender of the Jones Act, Rep. Garamendi believes that the maritime industry’s salvation is to be found in extending similar provisions to other areas of maritime commerce.
Citing the example of similar laws in Russia, India, and China—those noted paragons of wise economic policy—Rep. Garamendi used his Brookings appearance to highlight a bill called the Energizing American Shipbuilding Act. This legislation, which he vowed to re-introduce in a recent letter both he and Sen. Roger Wicker (R‑MS) sent to senior Trump administration officials, would mandate that 15 percent of liquefied natural gas (LNG) exports and 10 percent of oil exports be carried aboard ships that are U.S.-flagged, U.S.-crewed, and U.S.-built.
This bill, if passed, would be a disaster.
Elizabeth Warren’s Economic Nationalism
Economic nationalism and pandering to farmers are two classic parts of presidential campaigning. In this post by Senator Elizabeth Warren, she does both at the same time:
Advancing the Interests of American Farmers
Washington has also bowed to powerful foreign interests instead of standing up for American farmers. Congress repealed mandatory country-of-origin labeling for beef and pork in 2015 after a series of World Trade Organization challenges from Canada and Mexico, and it hasn’t established a new rule to protect American farmers. The result is that beef and pork can be given a US origin label if it is processed in the United States — even if the animals are not born and raised here. This misleads consumers looking for American-grown meat and undermines American beef and pork producers.
That’s why I will push hard for new country-of-origin rules for beef and pork — and use the trade tools available to me as President to push Canada and Mexico to accept them. These new rules will not only be good for consumers because they promote transparency, but good for independent American farmers, who are otherwise undercut by global agribusinesses passing off foreign beef and pork as American.
We also must stop foreign governments and companies from buying up American farmland. Foreign companies and countries like China and Saudi Arabia already own 25 million acres of American farmland. That’s about the size of Virginia. And one in four American hogs has a Chinese owner. That jeopardizes our food security, which threatens our national security too.
Iowa has the right idea. It passed a law prohibiting foreign individuals or entities from purchasing farmland for the purpose of farming. I support a national version of that law, and as President, will use all available tools to restrict foreign ownership of American agriculture companies and farmland. And I’m committed to stronger beneficial ownership laws so that foreign purchasers can’t set up fake American buyers to get around these restrictions.
Her argument about country of origin labelling and the World Trade Organization channels Donald Trump (“Washington has … bowed to powerful foreign interests”), but misunderstands the nature of the legislation/regulation at issue. Country of origin labelling requirements are not per se prohibited under WTO rules, but the rules do say that you can’t use them as a disguised means of protectionism, as was the case with the U.S. legislation/regulation at issue. My colleague Inu Manak wrote about the COOL legislation/regulation here, and she and I did a case study of the issue for this book. We explained that the trade problem was not the labelling requirement itself, but rather the structure of the particular legislation/regulation at issue, which created an incentive for meat processors to use domestic rather than foreign beef and pork. We also found a good deal of evidence in the legislative history indicating that protectionism, rather than consumer information, was the real purpose.
As for Warren’s reference to “countries like China and Saudi Arabia” buying up 25 millions acres of American farmland, that is a very creative use of the actual data. If you follow her links, you get to this explanation by the USDA:
Canadian investors own the largest amount of reported foreign held agricultural and non-agricultural land, with 28 percent, or 7,250,834 acres (report 1B). Foreign persons from an additional four countries, the Netherlands with 19 percent, Germany with 7 percent, the United Kingdom with 6 percent, and Portugal with 5 percent collectively hold 9,511,437 acres or 36 percent of the foreign held acres in the United States. The remaining 9,577,982 acres, or 36 percent of all reported foreign held agricultural and non-agricultural land, is held by various other countries.
But wait, where is Saudi Arabia in all of this? Her inclusion of a reference to that country seems designed to get people thinking about terrorism or human rights abuses, but here’s what is actually going on and it’s not all that scary: “Saudi Arabia and the UAE alone have acquired more than 15,000 acres in Arizona and Southern California to grow fodder for dairy cattle.”
Warren’s attempt to appeal to economic nationalism is not surprising. But given recent polling showing that Democrats are more supportive of free trade these days, it might be smart if other Democrats took a different approach.