“Designed by Apple in California; Assembled in China” are the words engraved on the back of Apple’s ubiquitous iPods, iPads, and iPhones. Might that soon change? 

Foxconn, the Taiwan-headquartered company that does Apple’s assembling in China, announced last week that it will invest up to $10 billion in production facilities in Wisconsin. That sounds like something to cheer. After all, investment is essential to economic growth and foreign direct investment tends to nourish the domestic commercial eco-system by bringing in companies with new ideas and better ways of doing things.

But Foxconn is in the business of contract manufacturing—producing, but mostly assembling, electronics products branded and owned by other companies. It’s not a high value-added operation requiring high-skilled workers. It’s the kind of supply chain operation better suited to economies with an abundance of low-skilled workers willing to work for much lower wages than Wisconsin’s work force expects to earn. Then again, economic considerations aren’t the only determinants of investment decisions.

Back in 2011 at a dinner in Silicon Valley, President Barack Obama asked Apple’s founder and CEO Steve Jobs why all of the production and assembly of the company’s products couldn’t be done in the United States. Jobs was a bit dismissive, responding that those kinds of jobs weren’t coming back. 

But the message wasn’t lost on other business executives, including GE’s Jeff Immelt, who was quick to announce repatriation of some operations that had recently been outsourced to China. The president was in a political jam and his reelection efforts might benefit if he were to show that U.S. companies were reshoring and bringing those manufacturing jobs back stateside.

Foxconn’s investment in Wisconsin is the commitment Obama was seeking from Steve Jobs, who knew that assembling iPhones in the United States would be, if not cost prohibitive, irrational from a commercial perspective. But sometimes investment location decisions are driven more by political considerations than economics. Fear of political retribution and ingratiation to key policymakers are just as relevant as the regulatory environment, taxes, infrastructure, and skills of the workforce when deciding upon where to locate production. The rapid and virtually uninterrupted growth of Washington, DC over the past decade, while the rest of the country stagnated and limped along, attests to those unfortunate facts. The dividends from political investment are often greater, and more reliable, than growing a business the old-fashioned way.

With plans to build a facility in the United States that it estimates will employ thousands of workers, Foxconn has succeeded in winning Trump’s affections. That the plant will be built smack dab in the middle of the House Speaker’s district makes the deal all the more laudable from a politically strategic perspective. But, most importantly, Foxconn’s investment in the United States is savvy because it will provide some insulation for Apple products – and many other U.S. and western branded electronics – from the worst effects of an increasingly likely U.S.-China trade war.

The heat is being turned up on a low-grade, high-tech trade war that has been simmering and sometimes churning over the past decade, with the U.S. Trade Representative’s Office announcing it will initiate an investigation into China’s forced technology transfer policies, which could lead to the imposition of trade restrictions. 

Compelling China to change course with respect to these kinds of market access barriers is long overdue, but U.S. missteps (such as imposing restrictions unilaterally through channels not sanctioned by the World Trade Organization) could initiate a much larger and more deleterious sequence of protectionist measures. The prospect of that happening is what Foxconn is hedging against with its investment inside the U.S. tariff wall.

Depending on how things turn out, you may soon find engraved on the back of your smart phones the words: “Designed by Xiaomi in Shenzhen; Assembled in Wisconsin.”

There is likely to be confusion over many issues in the upcoming NAFTA renegotiation, but one particular area where I already see some misunderstandings is the NAFTA dispute process. To illustrate this, here’s a recent statement by Canadian Prime Minister Justin Trudeau:

as our ambassador said just last week to the Americans, a fair dispute resolution system is essential for any trade deal that Canada signs on to and we expect that to continue to be the case in any renegotiated NAFTA.

In context, it is clear he was talking about a particular type of NAFTA dispute, rather than the more general proposition that there must be a dispute system in place. But there are actually several dispute provisions in NAFTA, and I’ve seen a number of people get them mixed up. As a result, I thought it was worth explaining the key distinctions in a blog post, which I can then link to whenever the issue comes up in the future.

There are three main types of NAFTA disputes, set out in separate chapters: Chapter 11 (litigation over the treatment of foreign investment), Chapter 19 (appeals of anti-dumping/countervailing duty decisions), and Chapter 20 (government complaints about compliance with NAFTA obligations).

Chapter 11 is part of the investor state dispute settlement (ISDS) debate. Under Chapter 11, a foreign investor of one NAFTA party can sue the government of another party (e.g., a Canadian company who has invested in the U.S. can sue the U.S. government) on the basis that it has been treated worse than its American competitors, or that it has been treated badly in general (e.g., it did not receive treatment that was “fair and equitable”). I have questioned the value of such procedures, but they are strongly supported by business groups. As far as I know, the Canadian and Mexican governments favor their inclusion in NAFTA, and the Trump administration’s NAFTA negotiating objectives seem to envision including them (although I can imagine some members of the Trump administration who worry about sovereignty will be pushing to take them out).

Next up is Chapter 19, which sets out a special appeals process related to the imposition of anti-dumping and countervailing duties. This is the dispute procedure Trudeau had in mind. Anti-dumping and countervailing duties are imposed on the basis of decisions by domestic agencies (in the U.S., it is the Department of Commerce and the International Trade Commission), and the decisions of these agencies can be appealed to domestic courts (in the U.S., appeals go to the Court of International Trade, then the Court of Appeals for the Federal Circuit, and then the Supreme Court). NAFTA Chapter 19, however, sets up a special appeals process which allows Canadian and Mexican respondents in U.S. proceedings to appeal the agency decision to an ad hoc NAFTA panel (i.e., private lawyers who act as judges in a particular case) instead of to domestic courts. (The process is also available in relation to Mexican and Canadian anti-dumping and countervailing duty cases, taking appeals out of their domestic courts). When reviewing U.S. agency decisions, a NAFTA Chapter 19 panel acts like the Court of International Trade, in the sense of reviewing the agency’s interpretation and application of U.S. law, and remanding to the agency if necessary. Unlike the Court of International Trade, NAFTA Chapter 19 panel rulings cannot be appealed.

It’s not clear to me that this process is constitutional (a law review article discussing the predecessor provision in the Canada‑U.S. FTA is here), and I’m not sure at this point how different the results are as between U.S. courts and the NAFTA process (this is something I plan to look into further). The Canadians insist they want to keep Chapter 19, while the Trump administration says it wants to take it out, which means this could be a major hurdle in the negotiations.

Finally, there is NAFTA Chapter 20. This is the core state-to-state NAFTA dispute process, where one government can allege that another is not complying with its obligations. Chapter 20 has not worked that well in practice, in part due to problems with getting panelists in place. I am working on an article that proposes some fixes.

My hope is that these basic explanations can cut through some of the confusion. All of these provisions set out NAFTA dispute procedures, but the policy implications and the politics of each are very different.

As part of the 100 Day Action Plan on economic issues that the U.S. and China negotiated back in May, there was agreement by both sides to liberalize trade in a few areas. It was a relatively minor set of issues, but nonetheless there was some real progress. The Trump administration likes to tout exports, not imports, so in their remarks about the agreement, they tended to focus on areas of interest to U.S. exporters. To provide some balance, I’m going to take it upon myself to tell everyone about some import liberalization the U.S. carried out as part of this agreement. 

In the agreement, the U.S. said it would start to allow imports of certain Chinese chicken products:

The United States and China are to resolve outstanding issues for the import of China origin cooked poultry to the United States as soon as possible, and after reaching consensus, the United States is to publish a proposed rule by July 16, 2017, at the latest, with the United States realizing China poultry exports as soon as possible.

This past week-end, a Washington Post story indicated that these imports are now underway:

The first known shipment of cooked chicken from China reached the United States last week, following a much-touted trade deal between the Trump administration and the Chinese government.

The Post article has a lot of fearmongering in it. The online title is “The dark side of Trump’s much-hyped China trade deal: It could literally make you sick.” And the article says, “consumer groups and former food-safety officials are warning that the chicken could pose a public health risk, arguing that China has made only minor progress in overhauling a food safety regime that produced melamine-laced infant formula and deadly dog biscuits.”

But before anyone panics, there is also this from the article:

Because cooking kills bacteria and viruses, including the one that causes bird flu, processed poultry is considered “tremendously safer” than raw chicken, said Richard Raymond, who served as undersecretary of agriculture for food safety from 2005 to 2008.

Anyway, the Chinese exporters will have a pretty big incentive to ensure the safety of the products: If there are health and safety problems, consumers won’t buy them (and the U.S. government might restore the ban). 

It remains to be seen what is coming from the Trump administration on trade policy more generally. But it’s nice to see a bit of import liberalization, especially given the protectionist rhetoric we keep hearing.

The situation is grim. Dangerous foreigners are streaming into the United States, killing and abducting innocent Americans. They depress the wages of American workers and hurt American businesses. Something must be done about these invaders!

Is this another warning from Donald Trump? Another column by Sean Hannity? The conclusion of another paper from the Center for Immigration Studies?

Nope, it’s a paraphrase of warnings from politicians, unions, and major newspapers from a century ago, about the dangers of Chinese immigrants and other “Asiatics,” as well as the businesses they opened, especially “chop suey houses.” These warnings would be comical if they weren’t so abhorrent.

Consider this, from the Chicago Tribune:

More than 300 Chicago white girls have sacrificed themselves to the influence of the chop suey “joints” during the last year, according to police statistics. … Vanity and the desire for showy clothes led to their downfall, it is declared. It was accomplished only after they smoked and drank in the chop suey restaurants and permitted themselves to be hypnotized by the dreamy, seductive music that is always on tap.

Or this, from the Mixer and Server, a publication of the Cooks’ and Waiters’ Union, an ancestor of today’s UNITE HERE:

View this matter from every angle, without heat or racial prejudice, and the fact stares us in the face that there is a conflict between the American wage-earner and the workers or employers from the Orient. Our Government has been compelled to close its doors to Asiatics in recognition of this fact.

Or this resolution from one of the forerunners of the AFL-CIO:

WHEREAS the evils arising from the employment of white women and girls in establishments owned or controlled by Chinese and Japanese constitute, both morally and economically, a serious menace to society; therefore be it

RESOLVED, That the American Federation of Labor be requested to pledge its best endeavors to secure the passage of a law prohibiting the employment of white women or girls in all such establishments.

Those quotations are from “The ‘War’ Against Chinese Restaurants,” a paper by UC-Davis law professor Gabriel J. “Jack” Chin and attorney John Ormonde that is the cover story of the summer issue of Cato’s Regulation. (A longer version of the paper is forthcoming in the Duke Law Journal.) The article is filled with other shocking warnings, as well as inspiring responses from that era’s defenders of mobility and economic freedom.

The Chinese Restaurant War was driven by nationalism and bigotry. That war echoes today, of course, as Chin and Ormonde note in their conclusion:

Back in 2015, Steve Bannon, now a top White House official, had a special guest on his radio program: Donald J. Trump. Trump spoke of his concern about immigration but added, “You know, we have to keep our talented people in this country.” Bannon disagreed, saying: “When two-thirds or three-quarters of the CEOs in Silicon Valley are from South Asia or from Asia, I think.… A country is more than an economy. We’re a civic society.” In saying this, Bannon wildly overestimated the percentage of Silicon Valley professionals of Asian descent. More importantly, he repeated an old belief: that only white citizens should be a part of this nation’s civic society.

The negotiations on the UK exiting the EU start today. Here’s the BBC:

Brexit Secretary David Davis will call for “a deal like no other in history” as he heads into talks with the EU.

Subjects for the negotiations, which officially start in Brussels later, include the status of expats, the UK’s “divorce bill” and the Northern Ireland border.

Mr Davis said there was a “long road ahead” but predicted a “deep and special partnership”.

The UK is set to leave the EU by the end of March 2019.

Day one of the negotiations will start at about 11:00 BST at European Commission buildings in Brussels.

Mr Davis and the EU’s chief negotiator Michel Barnier, a former French foreign minister and EU commissioner, will give a joint press conference at the end of the day. 

I’ve sensed some growing concerns about how well these talks might go, and the recent UK general election only made things worse. It’s not clear to me that the politicians who are in charge here can make this a success. Time will tell.

If you are looking for something positive related to Brexit, however, once the UK does leave the EU the personnel situation on the technical side of things is looking good. On Friday, the UK Department of International Trade announced that it had hired Crawford Falconer as the Chief Trade Negotiation Advisor. From the announcement: 

Together with his team Crawford will:

• develop and negotiate free trade agreements and market access deals with non-EU countries
• negotiate plurilateral trade deals on specific sectors or products
• make the department a ‘centre of excellence’ for negotiation and British trade
• support the UK’s membership of the World Trade Organization (WTO).

Falconer is not a household name, but he is someone that I am very familiar with. I had just been reading his latest co-authored work. He was one of the judges (technically, a “panelist”) on a WTO dispute panel that ruled earlier this month on whether the U.S. has complied with a previous ruling related to the subsidies it provides to Boeing. He has also acted as a judge in 14 other GATT/WTO decisions.

Now, you may say, international adjudication is all well and good, but how about trade negotiations? Does he have any experience there? In fact, he does. He is a dual UK/​New Zealand citizen and has been negotiating for New Zealand for many years. He was New Zealand’s Ambassador to the WTO in Geneva from 2005–2008 (and during that time, in his personal capacity, he chaired the Doha Round negotiations on agriculture and cotton). His LinkedIn page has more on his professional background.

There is still a long way to go before we get to the point of the UK negotiating free trade deals of its own. But once we do get there, its trade policy team is in pretty good hands.

Since President Trump announced the U.S. withdrawal from the Paris Accord there has been talk of other countries imposing “carbon tariffs” in response. The politics of this are hard to predict. I think (and hope) that such tariffs are unlikely, although if the United States starts imposing tariffs for “national security” reasons, the chances of other countries imposing carbon tariffs on us may go up.

But there is also an international legal question here: Wouldn’t carbon tariffs violate international trade obligations under the World Trade Organization or other trade agreements? There is some dense legal analysis of this question out there already (back when it was people in the U.S. talking about imposing these measures on others, Cato’s Sallie James published a good Policy Analysis of the issue). What I’m going to offer here is a short, non-legalistic explanation, which basically amounts to: It depends on how exactly the other countries go about formulating these “tariffs.”

At one extreme, you can imagine some government somewhere being so angry with the U.S. withdrawal that it imposes an across-the-board import tariff on all U.S. imported products as a response. This blunt approach would almost certainly violate trade agreement rules.

At the other extreme, you can also imagine a more measured approach, under which a government comes up with objective criteria to assess each country’s climate policies and carbon emissions. Carbon taxes would then be imposed on products, both domestic and foreign, in a way that corresponds to these measurable criteria. This non-discriminatory approach might not violate trade rules, especially if its focus is on environmental impact, rather than “competitiveness.”

The actual approach is likely to be somewhere in between, and is hard to assess in the abstract. But in general terms, here is my view: In theory, some form of “carbon tariff” could be done consistently with trade rules. However, in practice such a measure is likely to violate, as governments generally aren’t very good at being precise, objective, and non-discriminatory in their laws and regulations. But hopefully everyone will decide not to impose such measures, and the subject will remain an obscure academic one.

We will never achieve a good tax reform by trusting bad revenue estimates.

According to Wall Street Journal reporter Richard Rubin, “Each percentage-point reduction in the 35% corporate tax rate cuts federal revenue by about $100 billion over a decade, and independent analyses show economic growth can’t cover all the costs of rate cuts.”

Economic growth does not have to “cover all the cost” to make that $100 billion-per-point rule of thumb almost all wrong. If extra growth covered only 70% the cost of a lower rate, the static estimates would be 70% wrong. Yet the other 30% would be wrong too, because it ignores reduced tax avoidance. Mr. Rubin’s bookkeepers’’ rule-of-thumb implicitly assumes zero “elasticity” of reported taxable profits. Corporations supposedly make no more effort to avoid a 35% tax than to avoid a 25% tax.

Acceptance of this simplistic thumb rule – which imagines a 35% corporate rate could raise $1 trillion more over a decade than a 25% rate – explains why Ways and Means Committee Chairman Kevin Brady still insists a big new import tax is needed to “pay for” a lower corporate tax rate. 

In this view, a border adjustment tax (BAT) is depicted as a tax increase for some companies to offset a tax cut for others. No wonder the idea has been ruinously divisive – with major exporters lobbying hard for a BAT and major retailers, refiners and automakers vehemently opposed. Mr. Rubin declares the BAT “dead or on political life support,” while nevertheless accepting that it would and should raise an extra $1 trillion over a decade – assuming no harm to the economy and no effect on trade deficits.

Like Mr. Rubin, Reuters claims “Trump could have trouble getting the rate much below 30 percent without border adjustability.” That is false even on its own terms because the Ryan-Brady plan would eliminate deductibility of interest expense, which is enough to “pay for” cutting the rate to 25% on a static basis. Adding a BAT appears to cut the rate further to 20%, but the effective Ryan-Brady rate is really closer to 25% because the import tax and lost interest deduction are not a free lunch.

In any case, the entire premise is wrong. There is no need to “pay for” cutting a 35% corporate “much below 30 percent” because nearly every major country has already done that and ended up with far more corporate tax revenue than the U.S. collects with its 35% tax. 

The average OECD corporate tax rate has been near 25% since 2008, and revenue from that tax averaged 2.9% of GDP. The U.S. federal tax rate is 35% and revenue averaged just 1.9% of GDP. Ireland’s 12.5% corporate rate, by contrast, brought in 2.4% of GDP from 2008 to 2015.

Sweden cut the corporate tax rate from 28% to 22% since 2013 and corporate tax revenues rose from 2.6% of GDP in 2012 to 3% in 2015 according to the OECD. Britain’s new 20% corporate tax in 2015 brought in 2.5% of GDP according the same source, unchanged from 2013 when the rate was 23%. 

Many countries have deeply reduced corporate tax rates including Germany, Russia, Israel, Indonesia, Taiwan, Thailand, Mauritius, Vietnam and more. And they didn’t raise VAT or other taxes to “pay for” lower corporate rates, because corporate revenues didn’t fall. Canada cut the corporate rate from 36.5% to 26.5% since 2006 while also cutting VAT from 7% to 5%. 

AEI Economist Alex Brill surveyed several studies that used experience of other countries to estimate what U.S. corporate tax rate would bring in the most revenue over time. Among recent studies, the revenue-maximizing tax rate was found to range from 23.2% to 29.1%. Contrary to The Wall Street Journal, each percentage point cut in the 35% rate raises revenue up to a point. To cut the rate below 25%, simply cap interest deductions. Expensing ends up raising more revenue after 20 years, so Congress could extend the window if they want expensing.

So, the first way to pay for a tax rate below 30% is to lower the rate. And that has nothing to do with whether or not a lower corporate tax rate raises economic growth, thought it would. 

The “Laffer Curve” revenue gains from cutting a 35% corporate tax rate are not due to faster economic growth, but reduced tax avoidance. Revenue gains from cutting the 35% rate to about 25% (23–29%) are not about macroeconomics but microeconomics.

The Joint Tax Committee makes this distinction: “A conventional [‘static’] JCT estimate incorporates behavioral responses in projecting tax revenues, but assumes that these tax and behavioral changes do not change the size of the US economy.” 

Less-conventional “dynamic” estimates from The Tax Foundation do allow behavioral changes to change the size of the US economy, but do not usually incorporate “microeconomic” behavioral responses that the JCT includes. By combining the macroeconomic responses of the Tax Foundation with the microeconomic details of the JCT we could get closer to the truth. 

When the tax rate goes up, corporations find ways to report less taxable income. They do that by moving profitable activities other countries, by booking expenses in the U.S. and revenues abroad, by diverting profitable activities to pass-through entities, and by taking-on more tax-deductible debt and maximizing other deductible expenses such as travel and entertainment.

Economists have begun to estimate the “elasticity of taxable income” (ETI) for corporate marginal tax rates, as they have for individual tax rates on salaries and capital gains. A joint paper by the Congressional Budget Office and Joint Committee on Taxation, for example, found the elasticity of realized capital gains to be arguably high enough for a lower tax rate to generate more revenue. That is not because a lower capital gains rate raises GDP growth (though it does), but because it tax raises the volume and frequency of asset sales.

Similarly, a lower tax rate on corporate income can increase the amount of reported taxable income by reducing accounting gimmicks, corporate relocation, partial or complete conversion to unincorporated status, and superfluous deductions (e.g., interest expense on Apple’s needless borrowing).

Elena Patel and Matt Smith from the Treasury Department’s Office of Tax Analysis wrote a 2014 study about the Elasticity of Corporate Income. They include only taxable domestic income and focus on 2 million smaller C‑corporations (83% of the total). This study’s “baseline estimate of the corporate elasticity is 0.5, suggesting the corporate income tax distorts behavior and may cause substantial deadweight loss.” 

Such high elasticity of reported corporate earnings is quite consistent with Brill’s estimates of a revenue-maximizing tax rate.

If we also take account of faster growth of investment and GDP, of course, the case for lower tax rates becomes even stronger.

Phil Gramm and Michael Solon noted that even if lower marginal tax rates on labor and capital “closed only half the gap between the current [CBO projection of a ]1.8% GDP growth rate and the 3.4% GDP growth rate that the economy averaged for the previous 64 years, that alone would deliver $2.3 trillion in new revenues due to higher growth over the next 10 years.” That sum is twice as large as those doubtful back-of-the-envelope estimates of a 10-year $1 trillion revenue windfall from a BAT, which blithely assume nothing bad happens – such as mass layoffs among afflicted retailers, automakers and refiners.