This morning, as anticipated, the Trump administration broadened the scope of its punitive tariffs on imports from China. The list of products subject to 25 percent duties increased from 818 to 1,097 harmonized tariff schedule (HTS) subheadings. Last year, the value of these imports from China amounted to roughly $50 billion, so the tax incidence (ceteris paribus), for the sake of the argument, will be roughly $12.5 billion. 

As expected, Beijing retaliated in kind, assessing similar duties on a commensurate value of U.S. exports, which is certain to cause revenues to fall for U.S. producers of the industrial goods and agricultural products subject to those retaliatory tariffs. But let’s not forget the adverse impact of our own tariffs on our own manufacturers, farmers, construction firms, transportation providers, miners, wholesalers, retailers, and just about every other sector of the U.S. economy.

About half the value of U.S. imports consists of intermediate goods (raw materials, industrial inputs, machine parts, etc.) and capital equipment. These are the purchases of U.S. businesses, not households. The vast majority of the Chinese products on the tariff list fit this description. They are nearly all inputs to U.S. production. By hitting these products with tariffs at the border, the Trump administration is, in essence, imposing a tax on U.S. producers. Trump is raising the costs of production in the United States in sector after sector.

How significant is a roughly $12.5 billion tax in a $19 trillion economy? Well, not especially significant when put in that context. But that context masks the burdens directly imposed on the companies that rely on these inputs and indirectly imposed on their workers, vendors, suppliers, and downstream customers.

The Input-Output tables produced by the U.S. Bureau of Economic Analysis reveal—among other things—information about the relationships between industries in the United States. The “Use” tables map the output of all industries to their uses by other industries as inputs, as well as by end users.

The most recent “detailed” tables present the U.S. economy in 2007. The value of total commodity output at the time was $26.2 trillion, of which $14.5 trillion was consumed for end use and $11.7 trillion was consumed as intermediate inputs to further production. The $11.7 trillion dollar value of output from each of 389 industries (defined at the 6‑digit NAICS level) is mapped to the input of each of the other 388 industries. In other words, $11.7 trillion of commodity output from 389 industries is simultaneously depicted as $11.7 trillion of intermediate inputs to 389 industries. Although the values of that industry-specific output and input certainly have changed over 10 years, it is not unreasonable to assume a roughly similar composition of input use on a percentage basis. (Sure, production processes change and, consequently, the inputs demanded change too. But the 2007 table provides the best information available and it should produce some useful results.)

Trump’s tariffs apply to 1,097 products as defined by the Harmonized Tariff Schedule’s 8‑digit subheadings. Those 1,097 HTS numbers map to 102 (of 389) 6‑digit NAICS codes on the BEA’s Input-Output table. By aggregating the value of those 102 “tariffed” NAICS codes and taking that sum as a percentage of the total intermediate goods consumed, we can get a rough estimate of the burden of the tariffs on each of the 389 industries. (Note: In most cases, the estimate is likely to be higher because many NAICS‑6 codes include more HTS‑8 codes than are subject to the tariffs.)

Table 1 ($ millions)

As the first line in Table 1 shows, the total value of intermediate goods consumed (in 2007) was $11.7 trillion; the 2007 value of the 102 NAICS codes that include HTS numbers hit with Trump’s tariffs was $1.8 trillion; and the percentage of intermediate goods affected is 15.1%. That’s the average.

The subsequent lines in the table are presented in descending order of impact by sector (2‑digit NAICS). So, the transportation sector consumed $389 billion of intermediate goods in 2007 and $121 billion (or 31.1%) of that consumption is now subject to tariffs. The manufacturing sector consumed $3.5 trillion (almost 30% of the total) of intermediate goods in 2007 and $892 billion (or 25.7%) is now subject to tariffs.

Among those likely to be most burdened by Trump’s tariffs are industries within the manufacturing sector. In fact, every industry with more than 50 percent of their intermediate inputs subject to the tariffs is in the manufacturing sector. Table 2 shows the 25 most exposed industries (at the NAICS‑6 level)—those with the greatest percentage of intermediate inputs subject to the tariffs.

Table 2($ millions)

Although this analysis doesn’t attempt to get at the actual cost increases that many industries will have to endure, it reinforces and makes clear the fact that tariffs are always about politicians bestowing favors on the few at the expense of many other industries.

Rep. Duncan Hunter is not pleased with the Cato Institute’s efforts to repeal the Jones Act. Taking notice of a recent op-ed I penned criticizing the California congressman’s support of this costly law, Hunter took to the pages of the same newspaper last weekend to defend his stance. It’s worth reviewing the piece in full, as it recycles several arguments typically offered in support of the Jones Act—and exposes some glaring weaknesses.


Hunter begins his defense of the Jones Act by disputing accusations that the law negatively impacts Puerto Rico’s economy:

Like many opponents of the Jones Act, the CATO Institute attempts to conflate this 100-year old law with the struggles of Puerto Rico’s economy. They repeat the same tired argument that the Jones Act is responsible for high prices and economic instability, going so far as to make the ridiculous implication that the Jones Act adds $5 to the cost of a pint of ice cream.



A recent economic study disputed these price discrepancies but if concerns remain, it is important to recognize that Puerto Ricans have other options. Most of the ships that call on Puerto Rico are foreign flagged and current law allows them to deliver as many goods from foreign ports as Puerto Ricans can consume. A 2013 Government Accountability Office Study failed to conclude that removing the Jones Act would benefit Puerto Rico and, in fact, acknowledged that the regulation provides a number of advantages. Other studies have found that the Virgin Islands — approximately 100 miles from Puerto Rico — has no Jones Act requirement, but has higher shipping prices than Puerto Rico from the mainland.

There’s a lot to unpack here, but let’s begin by noting that the “recent economic study” Hunter refers to was funded by a pro-Jones Act special interest group with a questionable methodological approach. Pointing out that Puerto Ricans have options for obtaining needed goods that are not subject to the Jones Act, meanwhile, is essentially telling them to eat cake. The rest of the United States is, by far, Puerto Rico’s largest trading partner. Simply doing business with other countries instead of the world’s largest economy with which Puerto Rico shares deep political and cultural links is oftentimes not a feasible option.


But that doesn’t mean Puerto Ricans don’t try to hunt for cheaper alternatives. The 2013 GAO report cited by Hunter highlights numerous examples of this dynamic, including farmers who purchase feed from Canada instead of New Jersey due to lower shipping costs and the sourcing of jet fuel from Venezuela rather than domestically for the same reason. 

As for the fact that shipping rates are higher to the U.S. Virgin Islands than Puerto Rico, this is an apples to oranges comparison. The U.S. Virgin Islands have a population and economy roughly 30 times smaller than Puerto Rico. With its smaller size comes smaller trade flows, smaller economies of scale, and reduced efficiency in servicing this market that is reflected in higher transport costs.


Hunter then pivots from discounting the Jones Act’s economic cost to Puerto Rico to highlighting its alleged national security benefits:

In a time of war, without the Jones Act, quickly rebuilding our shipyard industrial base would be next to impossible and training the American merchant mariners to man ships would take precious time we will not have. Instead, we would have to rely on shipyards overseas to supply our ships and we would likely have to pay foreign mariners to operate those ships. Is this really a position in the best national security interest of our nation?



We can have the strongest military in the world, but without the ships and U.S. merchant mariners to bring supplies to service members overseas, our capabilities would be severely limited, a position acknowledged by Gen. Darren McDew, Commander of U.S. Transportation Command.

The reality is that the Jones Act has presided over the steady decline of the U.S. shipyard industrial base. Since the early 1980s the United States has lost more than 300 shipyards. It’s a statistic Hunter should be familiar with given that it was mentioned on several occasions during a 2013 congressional hearing that he chaired. Furthermore, claims that the United States would be forced to rely on foreign shipyards without the Jones Act overlooks the existing reliance on foreign components and know-how to produce the few and vastly overpriced commercial ships that emerge from American shipyards.


Dependence on foreigners to support the U.S. military, meanwhile, is a description of the status quo. When the United States found itself needing to quickly transport vast amounts of equipment and war matériel to Saudi Arabia following Iraq’s invasion of Kuwait, foreign-flagged and crewed ships played a key role. According to the U.S. Transportation Command’s official history of its role in that conflict, 26.6 percent of total unit cargo was carried by foreign-flagged vessels.


While Jones Act supporters claim that the law assures the United States of ready access to ships and merchant mariners in times of war, the Pentagon found its transport capabilities so strained during that conflict that it twice requested the use of a transport ship from the Soviet Union—and was rejected both times. On the mariner front, the United States was forced to press two octogenarians into service and one 92-year-old sailor. Turning to the present day, meanwhile, the U.S. Maritime Administration published a 2017 report which, in its own words, “documents a deficit of mariners with unlimited credentials to meet the national security and force projection needs.”


Hunter continues in a similar vein:

The Jones Act also improves our safety and security. Rather than having unvetted foreign workers sail ships on our inland waterways, the Jones Act mitigates safety risks by ensuring that vessels are operated by U.S. mariners only.

Pure demagoguery. Foreign mariners already operate in U.S. waters on a daily basis and present no established threat. As a 2011 GAO report noted, overwhelmingly foreign maritime crews already make millions of entries into U.S. ports each year and yet there has never been a reported terrorist attack involving one of these seafarers. What reason is there to think these same foreign mariners would suddenly become a menace if permitted to operate on inland waters?


Furthermore, Hunter is factually wrong. Foreign mariners are already allowed to work on Jones Act vessels, with the minimum number of American crew set at 75 percent, not 100. As for safety, let’s note that it was a Jones Act ship with an American captain, the Exxon Valdez, that is responsible for one of the worst environmental disasters in U.S. history.


Congressman Hunter concludes with some comments about the Jones Act’s economic impact:

The Jones Act also provides significant economic benefits, including here in Southern California. The thousands of Jones Act vessels support nearly 500,000 domestic jobs with nearly $100 billion in economic impact.



The fact is, there are cheaper places to build ships than the United States, and I am sure that there are plenty of Chinese shipyards with cheap Chinese steel eager to undercut ones here at home. I am also sure we could find cheaper foreign workers to operate the ships currently sailed by Americans.



If building the cheapest ship manned by the lowest paid workers is the end goal, then by all means, let’s get rid of the Jones Act. If you are like me, and you value good paying U.S. jobs in American Shipyards and the Americans who can man those ships in times of conflict, then the Jones Act is clearly worth protecting.

By acknowledging that Americans could buy ships at lower cost abroad—as much as eight times cheaper—Hunter essentially concedes that the law imposes a significant economic cost. Paying vastly more to obtain the same good is the path to impoverishment, not prosperity. The secret to economic growth and an improved standard of living lies in increased efficiency and doing more with less. By blocking Americans from lower-cost alternatives, the Jones Act does the opposite.


The national security advantages we allegedly receive in exchange for the Jones Act’s price tab, meanwhile, are a figment of the imagination. If anything, the law makes us less secure, not more.


The Jones Act isn’t working. Its promised benefits have failed to materialize while the law imposes significant burdens on the U.S. economy. The time for its repeal is long past due.

As part of a yearly summer tradition, the Heritage Foundation and Cato Institute co-host a debate in which interns at both think tanks debate whether conservatism or libertarianism is a better ideology. Following this year’s debate, the Cato Institute conducted a post-debate survey of attendees to ask who they thought won the debate and what they believe about a variety of public policy and philosophical issues. The post-debate survey offers a unique opportunity to examine how young leaders in the conservative and libertarian movements approach deep philosophical questions that may be inaccessible to a general audience.

Despite agreement on domestic economic issues and free trade, the survey finds striking differences between conservative and libertarian attitudes about Donald Trump, immigration, transgender pronouns, government’s response to opioid addiction, police, defense spending and national security, domestic surveillance, and religion. The survey also went further than just asking about policy and used Jordan Peterson’s 12 principles for a 21^st century conservatism to examine the underlying philosophical differences between libertarian and conservative millennials. 

Full LvCDebate Attendee Survey results found here

Trump and Partisan Loyalties 

Libertarian and Conservative attendees have starkly different views of President Donald Trump. While 91% of conservative attendees approve of Trump’s job performance, 69% of libertarian attendees disapprove of Trump. 

Eighty-four percent (84%) of young conservative attendees identify as Republicans and that number increases to 99% once independent-leaning Republicans are included. Libertarian millennial attendees are far less partisan: only 19% initially identify as Republicans while 76% don’t believe either the Republican or Democratic parties represent them. However, if libertarian independents had to pick, 60% would lean Republican. Thus, both groups are more aligned with the Republican rather than Democratic Party, but libertarians are far less committed partisans. 

Young Libertarians and Conservatives Have Different Policy Priorities 

When asked to select the top three issues most important to them personally, libertarians and conservatives have different issue priorities. Conservatives are about 30 points more likely than libertarians to place greater weight on abortion (41% vs. 11%) and family values (31% vs. 4%) and are about 20 points more likely to emphasize national security (35% vs. 18%) and civil society (23% vs. 5%). 

Libertarian attendees on the other hand are about 20 points more likely than conservatives to prioritize criminal justice issues (24% vs. 2%), regulation (28% vs. 8%), government spending (37% vs. 22%), and free speech (47% vs. 34%). 

Both libertarians and conservatives agree that taxes (25% vs. 24%), welfare state issues (14% vs. 16%), and immigration (24% vs. 20%) are top priorities. Similarly, both groups say policy related to housing, transportation, the environment, unions, and paid leave are not their top priorities (<5%).

Conservatives Say Political Life Should be Based on Judeo-Christian Principles 

Nearly 9 in 10 conservative attendees (87%) believe that “political life in this country should be based on Judeo-Christian principles,” while 13% believe it should not. Conversely, 70% of libertarian attendees believe that these religious principles should not be the basis of American political life, 30% believe it should be. 

Part of the reason for this may be that conservatives are far more likely to attend church regularly (59% vs. 16%) and to believe people need to be raised with religion to learn good values (84% vs. 41%). Furthermore, conservatives also believe government has a role to play in promoting traditional values (83% vs. 9%). While libertarians are more likely to see value in religious teaching for children they do not extend such a role to government. 

Libertarians Want More Immigration, Conservatives Want to Keep It the Same or Decrease It 

Young libertarian attendees have a more open and permissive view of immigration while conservatives take a more restrictive approach—from the border wall, citizenship for illegal immigrants, sanctuary cities, legal immigration procedures, and the Muslims travel ban. 

Strong majorities of conservatives favor building a large wall along the U.S.-Mexican border (74%), oppose sanctuary cities (94%), and support deportation of illegal immigrants (55%). 

In the opposite direction, strong majorities of libertarians oppose a border wall (86%), support sanctuary cities (58%), and favor citizenship for unauthorized immigrants (59%).

Even when it comes to legal immigration processes, 74% of libertarians want to increase the number of immigrants legally allowed to enter the US, compared to 28% of conservatives. Instead a plurality of conservatives (43%) would rather keep legal immigration flows the same and nearly a third (29%) would decrease it. 

Both libertarian and conservative attendees oppose a temporary travel ban on Muslims entering the United States; however, libertarians are nearly 40 points more opposed (89% vs. 51%). 

Given the divide between young libertarians’ and conservatives’ views of immigration, it’s perhaps unsurprising that conservatives are nearly twice as likely (80% vs. 44%) as libertarians to agree that “Western civilization is at risk of losing its identity.” 

Libertarians Say U.S. Foreign Policy Causes Instability and Chaos 

Young libertarians and conservatives have dramatically different evaluations of the impact of U.S. foreign policy. Nearly 9 in 10 (86%) libertarians believe American foreign policy “does more to promote instability and chaos.” In stark contrast, 82% of conservatives believe American foreign policy “does more to promote peace and stability” in the world. Few questions polarize libertarians and conservatives more than the impact of U.S. foreign policy. 

This might explain why 60% of libertarians think the U.S. should leave Afghanistan “now,” and 93% say at least within the next five years. In contrast, a plurality (40%) of conservatives say the U.S. should stay in Afghanistan for “as long as it takes,” while 31% say the U.S. should leave in the next five years, and only 25% think we ought to withdraw troops immediately. 

What Pronouns Do You Prefer? 

Libertarians and conservatives are also diametrically opposed on the use of transgender pronouns. While three-fourths (75%) of libertarians use a transgender person’s preferred gender pronouns, three-fourths (73%) of conservatives say they use the pronouns corresponding with the transgender person’s biological sex. 

These results are consistent with the fact that a majority (52%) of conservatives do not think society should “do more ensure LGBT people feel fully accepted in society,” 20% have no opinion, and 27% think society does have this obligation. Instead, a majority (55%) of libertarians think society does need to do more to ensure LGBT people feel accepted, while 24% have no opinion, and 22% disagree. 

Conservatives Want Government To Do Something about Opioids 

Nearly three fourths (71%) of conservatives agree that government needs to “do more” to combat prescription painkiller addiction, while 14% think it should not. However, nearly 6 in 10 (59%) of libertarians think government should not do more to address opioid addiction, while 25% think it should. 

Conservatives and Libertarians Disagree About Police Misconduct 

Conservatives and libertarians are divided in their perceptions of police misconduct with conservatives more apt to defend and libertarians more skeptical of police. Eight in ten (80%) young conservative attendees believe that that police only use lethal force when necessary. Conversely, 77% of libertarians instead think that the police are too quick to use lethal force.

Conservatives Support Domestic Surveillance, Libertarians Overwhelmingly Opposed 

A slim majority (54%) of conservative millennials approve of the government’s collection of telephone and internet data as part of anti-terrorism efforts while 46% oppose. However, libertarian attendees are overwhelmingly opposed with 93% who disapprove including 75% who strongly disapprove. Only 7% support such a program. 

Young Conservatives and Libertarians Agree About Economics and Free Trade 

Despite the many aforementioned differences, the young conservative and libertarian attendees agree that smaller government is better, that we shouldn’t tax the wealthy more than we already are to raise revenue for more social programs, and that the costs of free trade to some domestic industries is outweighed by the benefits to consumers. 

Furthermore, nearly 100% of both groups say they prefer a smaller government providing fewer services with low taxes over a larger government with more services and high taxes (96% vs. 97%). Similarly, overwhelming majorities of young libertarians (91%) and conservatives (88%) oppose raising taxes on households earning more than $250,000 a year. 

Despite President Trump’s persistent criticism of free trade deals, strong majorities of conservatives (75%) and libertarians (94%) agree “free trade must be allowed, even if domestic industries are hurt by foreign competition.” A quarter (25%) of conservatives and 6% of libertarian attendees think “trade restrictions should be used to protect domestic industries.” 

Young Libertarians and Conservatives Tolerant of Free Speech and Political Expression 

Another area in which young libertarians and conservatives largely agree is that people should be allowed to express their political opinions publicly. Majorities of both libertarian (91%) and conservative attendees (58%) also believe that NFL players who refuse to stand for the national anthem should not be fired. Even still, libertarians are more than 30 points more likely to say the athletes shouldn’t be fired. Similarly, majorities of both libertarians (95%) and conservatives (58%) oppose a law banning flag burning, even still, libertarians are nearly 40 points more opposed.

Understanding the Differences between Conservatives and Libertarians 

Why do libertarians and conservatives agree on economics but disagree so vehemently on matters of immigration, national security, police, drugs, and LGBT issues? To explore the underlying philosophical differences between conservatives and libertarians, we asked attendees to evaluate a series of statements about tradition, order, change, social conformity, responsibility, and loyalty. Several of these statements come from University of Toronto professor Jordan Peterson’s 12 proposed principles for a 21^st century conservatism, several others were written by the survey author.[i] 

Libertarians and conservatives think about change and the importance of social order differently. Fully 88% of conservatives agree that “radical change should be viewed with suspicion, particularly in a time of radical change.” About half that—43%—of libertarian attendees agree with that statement while nearly as many (42%) disagree. Instead, nearly two-thirds (65%) of libertarians agree that “social change and disruption, even if they’re chaotic, are necessary to improve human happiness.” Only a quarter (24%) of conservative attendees agree that sometimes disruption and chaos are necessary for human flourishing.

Libertarians are more likely than conservatives to reject the “wisdom of the ages” idea that longstanding social norms are more likely to be correct. Conservatives are more likely to believe that social institutions and norms that have withstood the test of time have revealed truth given their longevity. A strong majority of conservative attendees (69%) agree that “we should judge our political system in comparison to other actual political systems and not to a hypothetical ideal.” Instead a plurality (45%) of libertarians disagree with this statement while 38% agree with it. 

Those who judge our system relative to a hypothetical ideal would be more comfortable with changing our political institutions to conform with a hypothetical—and thus untested—idea of a better future. However, those more cautious of change would be skeptical of transforming deeply rooted longstanding political institutions, that they view have withstood the test of time, into something untested.

In a similar vein, 67% of libertarian attendees disagree that “it is better to do what everyone has always done unless you have an extraordinarily valid reason not to,” while only 13% agree. Instead, a plurality (42%) of conservatives agree with this statement, 32% neither agree nor disagree and 25% disagree. 

In a consistent pattern, nearly 9 in 10 (89%) of conservatives agree that “intact heterosexual two-parent families constitute the necessary bedrock for a stable polity,” including 73% who strongly agree with this statement. Libertarian attendees are split on this idea with 47% who agree and 40% who disagree. 

Conservatives are more likely to emphasize social conformity as a useful and necessary tool for a properly functioning society. Libertarians tend to be skeptical. Nearly 9 in 10 (86%) of conservative attendees agree that it is “just and right to demand some sacrifice of individual impulse and idiosyncrasy so that society can function properly.” Libertarians are about 50 points less likely to agree (37%). Instead half (49%) disagree that people ought to curtail their own idiosyncrasies to get along in society and 14% have mixed feelings.

One reason why conservatives may expect greater social conformity from others is that they are far more likely to believe there is a “right way” to do things. If one believes there is a hierarchy of proper and effective behaviors it’s clear why one would expect others to get with the program. Nearly 8 in 10 conservative attendees (78%) agree “there is always a right way to do things.” In contrast, a slim majority (51%) of libertarian attendees disagree that there is always a right way to do things. Ostensibly, libertarians tend to believe there could be several or even many equally effective ways of doing things.

Libertarians may de-prioritize social conformity because they tend to believe that flexible social norms are necessary to allow people to discover better ways of doing things. Even if they believe there is one right way, perhaps society hasn’t yet figured out what that right way is. Thus, 86% of libertarian millennial attendees agree that “we should keep social norms and laws flexible to allow people to discover better ways of doing things.” Only 33% of conservative attendees agree; instead a plurality disagree (44%) with that sentiment. 

Conservative attendees largely agree that “it is more noble to teach young people about responsibilities than about rights.” This is a hard statement to evaluate because many would say both are equally important. Nevertheless, when asked to choose, two-thirds (66%) of conservatives emphasize teaching young people about their responsibilities over informing people of their rights. Libertarians are divided with a plurality (45%) who disagree that teaching responsibilities should come before teaching about rights and 38% who agree.

Do young people love America? If they do, do they love it because it’s home, because of its history, because of the ideals it aspires to embody? What if America ceased living up to those ideals, would they still want to live here? Nearly two-thirds (61%) of young libertarians say no, “if another country better embodied the ideals of America” they would “want to move to that country” instead. Conversely, a majority (55%) of conservatives disagree, they would stay in America anyway. 

Instead, conservatives place greater emphasis on community, which may be one reason they wouldn’t want to leave the country if another country better embodied American ideals. Even though both conservatives (100%) and libertarians (89%) agree that “it’s important for people to have community,” 82% of conservatives “strongly agree” with this statement compared to 51% of libertarians—a 31-point difference. 

Despite these divisions, young libertarians supported several principles Peterson articulated for conservatives—on matters of liberty and just deserts. In fact, libertarians were far more likely to agree that “the government, local and distant, should leave people to their own devices as much as possible.” Although overwhelming majorities of young conservatives (83%) and libertarians (98%) agree, libertarians are 53 points more likely to “strongly agree” (83% vs. 30%) than conservatives. 

Both libertarian and conservative attendees also overwhelmingly endorse the idea of proportional justice that people should reap the benefits of their hard work. Over 9 in 10 libertarians and conservatives agree that “citizens have the inalienable right to benefit from the result of their own honest labor.” 

Who Won the Intern Debate? 

Who won the intern debate depends on whom you ask. Among conservative attendees: 94% said the conservative team won and 6% said the libertarian team won. Among libertarian millennial attendees, 54% said the libertarians won while 46% said the conservatives won. Among the moderates, liberals, and progressives in the audience, 58% felt the conservative team won and 42% thought the libertarians won. 

Summary 

Many observers have assumed that libertarians and conservatives come from essentially the same branch of the political tree, or that one is simply a more stringent version of the other. However, the survey finds striking differences between the two groups in policy beliefs undergirded by different assumptions and philosophical worldviews. This survey of politically engaged young conservatives and libertarians highlights the commonalities as well as conflicts between the two groups and portends the political conflicts of the future.

Full LvCDebate Attendee Survey results found here

Late last month that rarest of commodities, a new U.S.-built commercial transport ship, completed its maiden voyage by entering the harbor of San Juan, Puerto Rico to deliver its cargo. Called El Coquí, the vessel is among the world’s first hybrid roll-on/roll-off container vessels—a “ConRo” in industry parlance—that is powered by liquefied natural gas. Supporters of the Jones Act, a protectionist law which mandates that ships transporting goods between U.S. ports be U.S.-owned, crewed, flagged, and built, have pointed to El Coquí as a symbol of the measure’s success. The President of the Shipbuilder’s Council of America cited “American skill and ingenuity, as well as critical laws like the Jones Act” in his remarks praising the new ship. A senior official with Crowley Maritime, which owns the ship, added that investments such as El Coquí “would not have been possible without the [Jones] Act.” What El Coquí truly represents is the outdated thinking behind this law. According to its supporters, the Jones Act helps ensure U.S. expertise in shipbuilding and a domestic capability that can be relied upon in times of war. But as El Coquí demonstrates, it’s unclear how much expertise the U.S. shipbuilding industry possesses or how purely American this capability really is. The vessel’s very DNA, for example, is more foreign than American, with design work largely performed by Finnish company Wärtsilä using a team mainly located in Poland and Norway. In addition, testing for a model of the ship took place at a facility in the Netherlands. That’s not all. Its celebrated LNG propulsion system features engines from a German company, MAN Diesel & Turbo, that were produced in Japan. The actual LNG tanks were supplied by another German firm, TGE Marine Gas Engineering. No doubt a thorough inventory of the various components used to build the ship would reveal numerous other examples of sourcing from abroad. The only parts of El Coquí guaranteed to be truly U.S.-built are the hull and superstructure, which is how compliance with the Jones Act’s domestic build requirement is assessed. This demand, however, brings with it a fearsome price tag. To take delivery of El Coquí as well as a sister ship, Crowley Maritime is estimated to have paid $350 million, or $175 million per vessel. For perspective, the largest containership in the world, the G‑Class, features a price tag of $950 million for six ships, or $158 million per vessel. That’s a $17 million discount for a ship with a vastly larger cargo capacity. And despite its bigger size, the first G‑Class ship was delivered in a mere 18 months. El Coquí required 45 months. That’s about as much time as it took the United States to secure victory in World War II. The key difference between El Coquí and the G‑Class is that the latter is built by Samsung Heavy Industries in South Korea. While the number of large oceangoing commercial vessels built in the United States per year typically numbers in the single digits, Samsung says that its Geoje shipyard alone churns out 30 ships. With vastly greater numbers of ships under construction the South Korea shipyard is able to realize larger economies of scale than its U.S. counterparts, producing at significantly lower cost and in less time. Because of the Jones Act these cheaper ships are effectively forbidden fruit. Instead, carriers engaged in domestic transport must purchase their vessels from U.S. shipyards at vastly higher prices. These high prices, in turn, deter competition and raise costs to consumers. The law’s alleged national security upside, meanwhile, rings hollow given the industry’s deep international exposure and reliance on foreign know-how. Jones Act-compliant ships may be officially labeled as U.S.-built, but—as is the case with all manner of manufactured products—the production process spans the globe. The Jones Act brings with it considerable disadvantages in exchange for benefits that, upon closer examination, are almost entirely mythical. It’s time to rid ourselves of this nonsensical and counterproductive law.

After a brief hiatus during the run up to the recent Mexican elections, negotiations on the North American Free Trade Agreement (NAFTA) are in the news again, with hints of an agreement by the end of August. We have heard talk of an imminent agreement before and the chances of an agreement within the month may not be very high, and even if it does happen it may be more of an “agreement in principle” with many details still to be worked out. Nevertheless, with the renewed interest, we thought it was worth breaking down some of the key remaining issues (there are a lot of them, which helps illustrate the amount of work still left to do!).

Rules of Origin (RoO) for Autos

This is the focus of the current talks taking place between the U.S. and Mexico (Canada does not appear to be actively involved, perhaps because it does not have strong feelings about some of the outcomes here). In essence, the Trump administration wants to tighten the requirements for having trade in autos benefit from zero tariffs. In this regard, the U.S. wants to increase the percentage of content that must be from North American sources (currently the figure is 62.5%; the U.S. proposed raising it to 85%, and press reports suggest that 75% is the figure being discussed now). It also wants a percentage of the autos to be made by workers who make above a certain hourly wage (reports suggest that the current U.S. proposal is that 40% of light-duty vehicles and 45% of pick-up trucks are to be made by workers that make as least $16 an hour).

The Trump administration’s goal here is to provide an incentive to do more production in higher wage Canada and the U.S., although the actual impact will depend on the percentage required and the wage specified, so the effect of this policy is unclear. If the Trump administration gets what it wants, it is likely that free trade in autos in the North American market will be scaled back. If the requirements are too burdensome to meet, automakers will simply opt for paying the 2.5% MFN tariff instead and just raise the cost of cars for consumers to compensate; and if they do meet the requirements, their costs will go up as a result of doing so. Either way, it will be bad for the industry and for consumers.

Government Procurement

In October, Secretary of Commerce Wilbur Ross suggested that government procurement rules should be made more “reciprocal” by establishing dollar-for-dollar access to each country’s procurement market. This idea prompted some cheekiness from Mexican negotiators who proposed that the U.S. should receive the same level of government procurement contracts in Mexico as Mexico receives in the United States (about $1.1 million dollars, a very small portion of the overall American procurement market). As with auto rules of origin, the Trump administration seems to be looking to take some of the free trade out of NAFTA.

Canadian Agriculture Restrictions.

The U.S. has had its sights on dismantling Canada’s agriculture barriers for quite some time. The 2017 National Trade Estimate Report on Foreign Trade Barriers highlights concerns with Canada’s supply management for dairy, and also for the chicken, turkey and egg industries. Another bone of contention has been Canada’s Special Milk Class Permit Program that gives domestic processors milk components for discounted prices. Canada has opposed any changes to its supply management system “on principle” and argued that the U.S. also maintains agricultural protections, such as on sugar. Canada may ultimately give a little bit here, but it is likely to want something in exchange.

Seasonal Growers

There was some talk early on that the U.S. would push for rules that would make it easier for seasonal growers to bring anti-dumping and countervailing duty cases. Current trade remedy laws require domestic producers to account for at least half of domestic industry to access AD/CVD proceedings. This has been a hotly contested issue even within the U.S., as it has pitted produce growers from different states against each other.

Chapter 11: Investor-State Dispute Settlement (ISDS)

The Trump administration wants to opt-out of the investor-state dispute settlement mechanism for investment protection, based on their own concerns about sovereignty, and also to make the agreement more palatable to various critics of trade agreements. The precise scope of the opt-out is unclear, but it seems likely that some form of it will end up in any new NAFTA.

Chapter 20: State-to-State Dispute Settlement

The Trump administration has said it wants to “soften” dispute settlement, by making the outcomes of dispute settlement “non-binding.” It would be hard to see Congress or Canada and Mexico going along with this.

Chapter 19: Binational Panels on Anti-dumping/Countervailing Duty Disputes

Chapter 19 allows special binational panels, rather than domestic courts, to review domestic anti-dumping and countervailing duty decisions involving the NAFTA parties. Though a similar mechanism appeared in the predecessor to NAFTA, the Canada‑U.S. Free Trade Agreement (CUSFTA), it has not appeared in any other U.S. trade agreement. There has also been a question of whether Chapter 19 is constitutional. In the first round of negotiations, the U.S. put forward a proposal to completely eliminate Chapter 19. Canada and Mexico want to keep it. Nothing has been said about this issue in recent months.

Sunset Clause/​Performance Review

The Trump administration has been pushing for a provision under which NAFTA automatically expires after 5 years unless all three governments affirmatively decide to stay in. Congress, Canada, and Mexico are unlikely to accept this, but there is some possibility that Canada and Mexico would agree to a periodic performance review, so long as it didn’t trigger a lapse in the agreement.

Currency Manipulation

The November 2017 update of USTR’s NAFTA negotiating objectives stated that it would aim to “ensure that the NAFTA countries avoid manipulating exchange rates in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage” through “an appropriate mechanism.” In the recently renegotiated Korea‑U.S. Free Trade Agreement (KORUS), the currency side-deal was said to be “historic” even though the provisions are non-binding. The big question in NAFTA is whether there would be a binding and enforceable chapter on currency manipulation.

Intellectual Property

Intellectual property protection has some powerful industries behind it, and some strong advocates in Congress. In the TPP, the United States pushed hard for stronger protections on “biologic” drugs and achieved some but not all of it what it wanted. And the United States has long complained of insufficient Canadian protections for copyrights and patents. There has been little reporting on these issues during the NAFTA renegotiation, but the outcomes are going to be important for generating Congressional support.

Telecommunications

Telecom reform has been a longstanding issue in North America. USTR’s 2017 National Trade Estimate Report on Foreign Trade Barriers noted that “Canada maintains a 46.7 percent limit on foreign ownership of certain suppliers of facilities-based telecommunication services” and that Mexico’s “barriers included limitations on foreign investment in telecommunications and broadcasting, a weak regulatory agency, and an uncompetitive market dominated by a near-monopolistic player.” There seemed to be some progress on this issue in the second round of negotiations, but very little has been heard of it since then.

E‑Commerce

This is a key component of the “modernizing” elements of a new NAFTA. It was widely suggested that the e‑commerce provisions in the TPP would be the starting point for negotiations on this chapter, and would cover issues such as digital trade and data localization.

De Minimis Threshold

The U.S. has been pushing for Canada and Mexico to increase their de minimis threshold for duty-free treatment of express shipments to the higher U.S. standard of $800. Currently, Canada and Mexico have a $20 and $50 threshold, respectively. Christine McDaniel of the Mercatus Center has noted the value to small businesses from raising this limit.

Regulatory Cooperation

Inu talked in detail about the possibility of a regulatory cooperation chapter in the new NAFTA after a proposal was tabled in the second round of negotiations. In March, it was reported that a chapter on Good Regulatory Practices was closed, but it was unclear as to what it would include. Will this go beyond the TPP? How much of the current bilateral regulatory cooperation initiatives would be incorporated? In June 2018, a memorandum of understanding was signed between the U.S. and Canada reaffirming their commitment to the Regulatory Cooperation Council. This could be a signal that this process will remain outside of NAFTA.

State-Owned Enterprises

In the TPP, the United States and others pushed for the most detailed provisions on SOE behavior in any trade agreement. This issue has flown under the radar in the NAFTA talks, but the TPP provisions are likely to be carried over to the new NAFTA.

Labor and Environment

The labor and environment side-letters were brought into the original NAFTA by President Clinton to increase Democratic support. Over the years, many groups have argued that the lack of enforceability has made these chapters little more than symbolic gestures. All parties seemed to be on board to include them as individual chapters in the agreement, but the revised content remains unclear. Will there be, as Canada proposed, some sort of provision on combating climate change? Will Mexico concede in addressing concerns over unions and the minimum wage? Will there be updates to the standard labor chapter language in response to the Dominican Republic-Central America Free Trade Agreement (CAFTA-DR) panel ruling related to Guatemalan labor practices? And finally, what will happen to the NAFTA institutions that were created to monitor the labor and environment side letters?

Trudeau’s “Progressive Trade Agenda”

Canadian Prime Minister Justin Trudeau has made his “progressive trade agenda” a central marketing pitch in his government’s trade policy. What this means in practice, however, has been rather vague. In NAFTA, Canada has pushed for the inclusion of a chapter on trade and gender, as well as on indigenous rights. Questions that remain are: (1) whether the U.S. and Mexico would agree to an indigenous rights chapter at all, and (2) to what extent would a trade and gender chapter be any more than just opening up a dialogue, as it is in the Canada-Chile FTA?

What’s Next?

Given the deadlines set out by Trade Promotion Authority (TPA), it is clear that the current Congress will not vote on a new NAFTA, even if it is completed this month. However, it is possible that the deal can be voted on in Mexico ahead of the presidential transition, as President-Elect Lopez Obrador will assume office in December. His domestic agenda will be ambitious, and it is possible that NAFTA would not get the high-level attention it has received up until this point. What we do know is that we are down to the final grind, and no deal this year may lead to this being dragged out for quite a while. The Trump administration says it wants to sign many new trade deals, but it is hard to see how they can do anything new if they struggle to update an existing agreement with our closest neighbors.

In a new op-ed I take issue Rep. Duncan Hunter (R‑CA) for his unstinting support of maritime special interests and the Jones Act at the expense of average Americans. Particularly egregious is Hunter’s promotion of a recent report funded by a special interest group, the American Maritime Partnership, which makes the incredible claim that the Jones Act imposes no cost to consumers in Puerto Rico. Indeed, Hunter actually presided over a gathering of the House Subcommittee on Maritime Transportation meant to highlight its dubious findings.


While Hunter’s support for the AMP and the unseemly nexus between legislators and maritime special interests is the op-ed’s focus, the shortcomings of the AMP-funded report are worth exploring in greater detail.


From simply a theoretical perspective, the notion that the Jones Act would leave consumers in Puerto Rico unscathed is highly implausible. The Jones Act, which among other provisions prohibits foreign-flagged ships from transporting cargo between domestic ports and Puerto Rico, is a protectionist law. Keeping out competition is the entire point. It violates our understanding of economics to believe this is consequence-free for either costs or prices. Further note that competition among Jones Act carriers that provide service to Puerto Rico is sufficiently restrained that several of them were found guilty of price fixing.


Even if we were to believe that a perfectly competitive market exists in Puerto Rico despite the Jones Act’s restrictions, let us also remember that the law raises costs to those providing cargo transport by mandating the use of ships built in the United States. These ships are wildly more expensive than those constructed overseas, with a purchase price up to eight times higher. If consumers aren’t feeling the impact of these higher costs, then who is? Are we to believe that profit-maximizing companies that transport the cargo or the retailers who sell the goods in Puerto Rico happily absorb the costs of these expensive vessels?


If the theoretical underpinnings of the AMP’s claim are questionable, the methodology used to support it is doubly so. The finding that the Jones Act has no impact on consumers in Puerto Rico is in large part based on a price comparison, conducted via Walmart’s website, for 10 grocery items and three durable goods at the retailer’s locations in Jacksonville, Florida and San Juan, Puerto Rico. For these 13 items the price of each was found to be either the same or less in San Juan.

The defects of this approach are numerous. For starters, no explanation is provided for how the basket of goods was selected. Walmart sells thousands of items—why were these chosen? This is significant as it isn’t difficult to find items for sale at both locations that tell a rather different story. A 48 oz container of Breyers ice cream, for example, is priced at $2.98 in Jacksonville but $8.12 in San Juan. Numerous other price discrepancies indicating a premium paid by consumers in San Juan are easily found.

Beyond questions over how the limited basket of goods was selected, one must also wonder why Walmart should be considered representative of Puerto Rico’s retail sector and the impact that the Jones Act has on the territory’s consumers. Walmart is an extraordinarily efficient firm famous for its ability to squeeze margins from suppliers, likely including those it depends on for transportation. Do other retailers in Puerto Rico enjoy Walmart’s cost structure, or share in any discounts on ocean transport it is able to negotiate? 


Furthermore, why should retail prices be regarded as a proxy for transportation costs or evidence of their burden? As Crowley Maritime, a member of AMP and the largest carrier that provides service to Puerto Rico states, “There are many factors affecting prices on the island – energy, taxes, trucking, warehousing, rent, market size and more.” Indeed. Unless all other costs are controlled for, the impact of transportation alone is unknowable.


One retailer. Thirteen items. No explanation for how the goods are selected. No controls to isolate the cost of transportation. And yet on this basis we are offered a rather sweeping conclusion.


A conclusion, it should be added, that is at odds with respected resources on cost of living differences in the United States. According to the Instituto de Estadísticas de Puerto Rico, grocery items in the territory are the 13^th most expensive out of 297 locations in the United States. The group also shows food items, contra the AMP report, as 18.4 percent higher in Puerto Rico than in Jacksonville.


Other aspects of the report’s approach are similarly questionable. To bolster its case that the Jones Act does not impose higher costs on Puerto Rico the report offers up a chart (based, it appears, on confidential data from the carriers that is unverifiable) which shows revenue per container for ships traveling between the continental United States and other ports in the northern Caribbean:

At first glance this appears to show that Puerto Ricans are getting a relative deal compared to a number of neighboring islands, but are they really? St. Croix, for example, has a smaller container port than San Juan, and likely operates with less efficiency due to its reduced scale. The fact that Puerto Rico has vastly greater trade volumes with the rest of the United States—nearly four times that of other Caribbean countries combined per a 2002 report—also likely unlocks efficiencies unavailable to other Caribbean ports.


To the extent higher revenue per container reflects the higher prices necessary to cover the higher costs of providing service on less efficient routes, this tells us nothing about the Jones Act’s impact or what freight rates between Puerto Rico and the continental United States might look like in a post-Jones Act environment. In short, it is not apparent that this is an apples-to-apples comparison or that such figures provide much in the way of relevant information.


The remainder of the report in large part consists of claims about the high level of service provided by Jones Act carriers to Puerto Rico. It cites, for example, that the use of “vessels and intermodal equipment that are uniquely designed to closely integrate the commonwealth with the advanced logistics systems of the mainland provides cargo owners with major economic and service advantages.”


But the alleged advantages and cost-effectiveness of the Jones Act carriers raises the question of why the law is then needed. If the Jones Act carriers already provide a high-quality service at a competitive price, then why should they fear a change to the status quo? If they are as competitive as they claim to be, why not open the market for sea transport with other parts of the United States to foreign competition?


The evident fear of such competition and employment of dubious analytical methods are instructive. Equally so is that pro-Jones Act politicians such as Duncan Hunter eagerly seize on this special interest-funded report despite its obvious flaws. It’s time to give the residents of Puerto Rico, and the rest of the United States, a break from this costly and outdated law.

The World Trade Organization is facing an existential crisis because of bullying by President Trump. That crisis can only be resolved if the United States and the 163 other members of the World Trade Organization negotiate a solution to what is most motivating these actions: American angst over the global rules for imposing anti-dumping and other trade remedies against unfair trade practices.

Central to Trump’s assault on the longstanding liberal international order in trade is his threat to grind the settlement of international trade disputes to a halt in the WTO. He is doing this by blocking the appointment and reappointment of the WTO judges whose rulings help resolve the trade disputes. U.S. intransigence may soon reduce the WTO Appellate Body from its full roster of seven judges down to the minimum of three needed to decide an appeal.

If the U.S. continues this strategy, the appellate court will be left with only three judges in September, and only one judge by December 2019—not enough to hear an appeal. Already slowed by the current shortage of judges, the rule-based dispute settlement system that has resolved more than 500 international trade disputes since its creation in 1995, and that has prevented an untold number of additional disputes, could come then to a standstill. 

The impasse over judicial appointments in the WTO is ostensibly about what U.S. officials see as the supposed straying of WTO appellate judges from the strict bounds of their instructions into forbidden legal terrain in some of their rulings. Overlooked in the U.S. is the inconvenient fact that there are 163 other WTO members that have not professed to observe a pattern of judicial “over-reaching.”

Actually, the blockade is driven by the decades-long frustration of some within the U.S. with their failure to negotiate WTO rules that would assure the U.S. virtually unlimited latitude in imposing anti-dumping duties and other trade remedies on imported goods, and that would mandate that WTO judges largely defer in their rulings on such remedies to U.S. decisionmakers. 

Trump and his trade collaborators see America as possessing the sovereign right to impose anti-dumping tariffs and other remedies to alleged unfair trade practices with a domestic discretion akin to international legal impunity. This is not a new view—American industries challenged by foreign competitors and American protectionists representing those industries in the trade bar have long abused U.S. trade remedies to keep foreign competition out of the domestic market. Now they also hold power in the Trump Administration.

But other countries hold a different view. For decades, other countries, like American consumers and many American producers reliant on imports, have been repeatedly victimized by U.S. administrative agencies under the sway of protectionist interests. These agencies tend to rig U.S. domestic trade rules against foreign producers and then apply those rules in ways that discriminate against foreign goods under the legal pretense of fighting trade unfairness. This has happened for decades already with steel imports.

These protectionists forget that there is just one set of WTO trade remedy rules for all WTO members – not one set of rules for Americans and another set of rules for everyone else. Given this, do we want other countries to be able to use their own trade remedies laws to treat our exports the same way we treat theirs? And why should other countries eliminate their own trade abuses if we refuse to eliminate ours?

Since the establishment of the WTO in 1995, the main constraint on the unchecked use by the U.S. of trade remedies has been the WTO rules the U.S. helped negotiate and place in the WTO treaty – rules that have been consistently upheld by the Appellate Body. While the U.S. has (despite what Trump tells us) won about 86 percent of the cases it has brought against other countries before the WTO, it has lost about 75 percent of the cases other countries have brought against the U.S. (which is better than the global average of 84 percent).

Most of these losses have been in politically sensitive disputes over U.S. anti-dumping and other trade remedies. And many of them have been over repeated challenges to the same US trade actions because the U.S. has either refused to comply fully with adverse WTO rulings or has only pretended to comply.

In dumping in particular, the U.S. prefers to retain practices that find dumping where it does not exist and magnify the extent of dumping – and thus maximize the amount of anti-dumping duties – where dumping does exist. (In trade jargon, this is called “zeroing.” The U.S. has lost a long series of “zeroing” disputes.)

Fueling the U.S. foot-dragging is the belief that it has not gotten the extent of legal deference from WTO judges it thought it had secured in the WTO rules for applying anti-dumping duties. Americans who favor the unfettered use of anti-dumping measures feel they have been cheated.

Their legal problem is this:

A sentence the U.S. succeeded in putting in the WTO anti-dumping rules provides that if one of those rules “admits of more than one permissible interpretation,” then WTO judges must defer to the domestic decision “if it rests upon one of those permissible interpretations.” But the previous sentence, on which the U.S. also agreed, instructs the WTO judges to interpret the anti-dumping rules “in accordance with customary rules of interpretation of public international law.” And the use of those interpretative rules always results in a judicial finding of one ordinary meaning for international rules – never two.

Thus, the Appellate Body, in doing its job by following the rules of treaty interpretation it has been instructed by the WTO members to use in the WTO treaty, has never found that an anti-dumping rule “admits of more than one permissible interpretation,” and so it has never given the U.S. the extent of deference that it desires and still believes—wrongly—it negotiated.

Other WTO members are uncertain about how best to react to President Trump’s bullying on judicial appointments. In response, they must not yield to his intimidation by curtailing the jurisdiction of WTO judges by, in effect, allowing the U.S. to be the judge and the jury in its own cases. Instead, they should embrace a proposal that has already been made by the European Union. In exchange for an end to the U.S. blockade of WTO judicial appointments and U.S. agreement to WTO reforms that reinforce the indispensable independence and impartiality of WTO judges while also strengthening the whole WTO dispute settlement system, the 163 other WTO members should agree to negotiate anew on the true core of U.S. concern – the rules on dumping.

This does not mean acquiescing to the arrogant American ambition of having the international legal discretion to do whatever it chooses in applying trade remedies, while expecting other countries to do exactly as the U.S. wishes. It does mean resuming anti-dumping negotiations on the degree of deference owed to domestic authorities – and this time reaching an agreed solution in more precise wording of the anti-dumping rules in the WTO treaty – wording that has consistency and clarity.