With this blog post, I’m taking a quick break from trying to figure out President Trump’s trade policies. (Is this going to be the most protectionist presidency ever? Or will it end up looking not too different from a typical presidency? The conflicting signals are making my head spin!) Instead, I want to talk about an issue that Dean Baker keeps raising: Whether U.S. trade policymakers are hypocritical because they have liberalized a lot of trade in manufactured products such as steel, but not very much trade in professional services such as medical care. (See here, here, here, here, here, here, and here for examples of his references to this. I think there are more–he talks about this a lot!–but those links are a start). Here is his latest:

We have largely left in place the protectionist barriers that keep doctors and dentists from other countries from competing with our own doctors. (Doctors have to complete a U.S. residency program before they can practice in the United States and dentists must graduate from a U.S. dental school. The lone exception is for Canadian doctors and dentists, although even here we have left unnecessary barriers in place.)

As a result of this protectionism, average pay for doctors is over $250,000 a year and more than $200,000 a year for dentists, putting the vast majority of both groups in the top 2.0 percent of wage earners. Their pay is roughly twice the average received by their counterparts in other wealthy countries, adding close to $100 billion a year ($700 per family per year) to our medical bill.

While trade negotiators may feel this protectionism is justified, since these professionals lack the skills to compete in the global economy, it is nonetheless protectionism, not free trade.

I agree with Dean that we should have more free trade in medical services, but the question is, why has this not happened? Is it because, as he says, “trade negotiators may feel this protectionism is justified”? As with many things, the answer is complex and has a number of components, but the short answer is that trade negotiators are not saying that protectionism is justified here. To understand the actual hurdles to liberalization in this area, you need to know how trade liberalization happens as part of a trade negotiation. If trade negotiations were run by pure free traders, they would be quick and easy. Both sides would just show up and explain that they were liberalizing all of their goods and services trade. That would be the end of it. In reality, though, there is a mercantilist logic to trade agreements. One side demands that the other open up its market in particular sectors, and the other side demands similar market opening in sectors of interest to it. In response to these demands, each side may resist opening up its own market to some extent, but it will nevertheless make what are referred to as market opening “concessions” in its domestic market in order to get the other side to open its market. It’s not pretty, and it’s not ideal, but this approach has had a good amount of success in liberalizing trade over the past few decades.

The importance of this process to Dean’s point is that U.S. trade negotiators generally don’t go into a trade negotiation offering up market opening. Rather, they respond to demands from the other side.

With this in mind, turning to the medical sector, the question is, are foreign governments demanding that the U.S. government liberalize its process for allowing foreign doctors to work here, and are U.S. trade negotiators resisting? 

I have never heard that this is happening, but if Dean has evidence otherwise, I would love to hear it. And I can imagine a reason why it is not happening. Would foreign governments really want to press for something that would lead to their doctors leaving their country? For this reason, I suspect most of them are not pushing this as an area of liberalization (and more generally, the large role of many governments in the health care sector probably makes them reluctant to put these services on the negotiating table). Overall, then, I’m skeptical that his story of U.S. trade negotiators resisting liberalization in medical services is accurate.

My challenge to Dean, then, if he really wants to see the U.S. medical services market liberalized (he may just be using this as an excuse to criticize trade liberalizaton in other sectors), is to sort through the various domestic reasons–at the federal and state level — why the U.S. market is still somewhat closed in this area. Then, he would have to figure out the key actors involved who would need to be convinced to change the existing system, and talk to them directly. It would be a lot of work, and much of it will be at the state level. But it’s a task worth doing (and I’m happy to help him on it!). The solution would likely involve some form of mutual recognition agreements between governments allowing doctors to practice across borders. 

By contrast, his criticism of trade negotiators misunderstands the hurdles to liberalization here, and is not likely to help solve the problem.

It has been widely reported that President Trump may impose high tariffs on steel imports on national security grounds. Scott Sumner has a good summary on why this rationale is not particularly convincing. But even if President Trump is not persuaded by Sumner on national security, perhaps he will be interested to hear how protectionism will affect the other manufacturing industries he purports to want to flourish.

Last year, a paper by economist Bruce Blonigen explored the impact of industrial policies in steel on downstream industries, i.e. those where steel is an input to the production process. Unsurprisingly, less openness to foreign competition through direct protection or state support or privileges raises the price of steel within a country. This in turn raises costs for downstream industries such as fabricated metals and machinery manufacturers.

More pertinently given Trump’s obsession with trade deficits, Blonigen’s work suggests the effect of this cost increase is to significantly reduce exports from these industries. The headline result is that a one standard deviation increase in industrial policies associated with steel leads to a 1.2 percent decline in the export competitiveness of the average manufacturing sector in the years immediately after implementation. For those that use steel intensively, the decline is as large as 6 percent.

If President Trump really wants an export-led manufacturing jobs boom then, his steel policies are utterly self-defeating.

Rep. Ted Yoho (R‑FL) and 11 co-sponsors recently introduced House Concurrent Resolution 40. It expresses the perfectly laudable “sense of Congress that all direct and indirect subsidies that benefit the production or export of sugar by all major sugar producing and consuming countries should be eliminated.” Things go downhill from there.

The resolution conveniently lists the trade-distorting sugar policies of Brazil, India, Thailand, the European Union, and Mexico, while neglecting to mention U.S. tariff-rate quotas (TRQs) and domestic price supports. The president is encouraged to “seek elimination of all direct and indirect subsidies benefiting the production or export of sugar” in foreign countries. Once the president has accomplished this objective and submits a report to Congress detailing how other countries have eliminated their trade-distorting measures, then he “should propose to Congress legislation to implement United States sugar policy reforms.” 

In essence this means, “Once other countries have given up all policies that favor their sugar growers, let us know and we’ll think about whether we should change ours.” Not exactly demonstrating robust U.S. leadership on trade, is it? 

The American Sugar Alliance (ASA), which represents domestic sugar growers and processors, is a strong supporter of the policy status quo. It serves their interests reasonably well. Or, at least it accomplishes the transfer of a lot of money from U.S. consumers to U.S. sugar producers. Not surprisingly, ASA likes Rep. Yoho’s approach to “reform.” ASA can express full support for this version of zero-for-zero knowing full well that it will never happen. 

An ASA statement praising the resolution laments that “Sugar producers … are also struggling with U.S. sugar prices that are currently as low as they were in the 1980s.” That statement may be technically correct because in the early 1980s sugar prices peaked much higher than today’s levels. What it doesn’t say, though, is that U.S. sugar prices have been in a long-term uptrend since 2013 and now are in the neighborhood of 30 cents per pound for raw cane sugar – well above the U.S. loan rate (support price) of 18.75 cents. 

The statement goes on to say, “Jack Pettus, ASA’s chairman, said new technology and strong business practices have made U.S. producers among the world’s most efficient. They are ready to compete on a level international playing field that is subsidy free.” If Pettus had stopped before adding the words, “that is subsidy free,” he and I would be in complete agreement. As I wrote two years ago in the paper, “Toward Free Trade in Sugar,” the U.S. industry is among the world’s most efficient. Based on an analysis published in the May 15, 2014, edition (pages 17–33) of the USDA/ERS publication, Sugar and Sweeteners Outlook, U.S. sugar producers could compete effectively even without the current system of import restrictions and domestic price supports. 

The Sugar and Sweeteners Outlook article addresses relative costs of production across the world’s major sugar-producing regions. If that study doesn’t by itself persuade that the U.S. industry no longer needs protection from imports, consider this additional evidence: Canadian farmers grow sugar beets solely on the basis of earnings from the marketplace. The Canadian government provides no import restrictions or other forms of income assistance. If Canada can produce sugar without subsidies, why can’t the United States?

Instead of pussyfooting around and giving lip service to sugar policy liberalization, the United States should show genuine leadership. The best way to do so would be to end U.S. import restrictions and domestic supports unilaterally. That would not only create quite a constructive stir in the global sugar community, it also would give the United States a great deal of moral authority to request similar actions by other countries. 

Unilateral reform would serve the best interests of the United States. The economic welfare of a country always rises when trade restrictions are reduced or eliminated–gains to consumers exceed any losses to producers. The sugar program’s rigid market-control mechanisms prevent free movement of sugar prices in response to supply and demand. That rigidity causes resources to be used inefficiently and inflicts large deadweight losses on the U.S. economy.

After cleaning up its own policy mess, the United States would be in a strong position to encourage reform overseas. There’s nothing like walking the walk to build negotiating credibility. 

Instead of offering zero policy reforms and getting zero back, it’s time for the United States to demonstrate leadership by ending its sugar market distortions unilaterally. That’s the best way to encourage other countries to do the same. 

Amid increasing tensions between Washington and Beijing over economic and security matters, Chinese President Xi Jinping is in Florida today and tomorrow for meetings with President Trump. Although economic frictions between the world’s two largest economies are nothing new, the safeguards that have helped prevent those frictions from sparking an explosion and plunging the relationship into the protectionist abyss may no longer be reliable.

As I noted in this recent Cato Free Trade Bulletin: 

Never have the U.S. and Chinese economies been more interdependent than they are today. Never has the value of the bilateral trade and investment relationship been greater. Never has the precarious state of the global economy required comity between the United States and China more than it does now. Yet, with Donald J. Trump ascending to power on a platform of nationalism and protectionism, never have the stars been so perfectly aligned for the relationship to descend into a devastating trade war.

What are those safeguards and why might they no longer be reliable?

First, U.S. multinational business interests that used to favor treading lightly with China, and provided a policy counterweight to U.S. import-competing industries advocating protectionism, have grown disillusioned by the persistence of policies that continue to impede their success in Chinese markets. Many think a more aggressive posture from Washington, even if that makes matters worse for them in the short run, is overdue.

Second, the pro-China-trade lobbies in Washington have grown sheepish in their advocacy on account of an economic study that went viral last year, ascribing massive U.S. jobs losses to trade with China, and because many fear political retribution from challenging Trump’s assumptions. Full-throated support for the relationship has become conditional support.

Third, now more than ever before, U.S. policymakers, media, and the public are less inclined to look at the bilateral economic relationship in isolation from the strategic and geopolitical aspects of the relationship. Segregating the issues in the past allowed us to focus on the win-win elements of trade, where there was broad enough agreement that mutual benefits could be derived, without being distracted by the issues where the United States and China are less likely to agree. Today, our economic frictions are viewed through the prism of our geopolitical differences – and that makes trade disputes more difficult to manage.

Fourth, probably more so than at any time since 1989, there is political “appetite” for a trade war. By that I mean that both Trump and Xi could extract some domestic political capital from the initiation of trade hostilities. Trump’s base and plenty of business and other interest groups believe China has it coming and—after all—as Trump suggests, China has much more to lose from a trade war given its $350 billion trade surplus with the United States. Meanwhile, Xi’s difficulties righting the Chinese economy, which has been suffering its slowest growth in 25 years, threaten him and the party with a crisis of legitimacy. Being able to blame domestic economic woes on protectionist or otherwise aggressive foreign policies would enable Xi to tap into a vast reservoir of Chinese nationalism, and would reduce the burdens of reform that confront him today. But make no mistake: a trade war between the United States and China would have profoundly adverse consequences in both countries and—depending on its course—could devastate the global economy. So there’s that.

Fifth, there are a number of legitimate gripes about Chinese AND U.S. trade policies that can no longer go unresolved. Beijing and Washington have been tightening the vices on one another’s companies in a number of different ways, and in some cases violating established rules. The focus of Trump’s criticism of China has been its currency policy, which has been a non-issue for nearly a decade. As is often the case, the politics lags the economics, but Chinese suppression of the value of its currency is simply irrelevant (as an economic matter). In fact, over the past two years, China has burned through $1 trillion of foreign reserves, purchasing Chinese renminbi on currency markets to prevent its value from depreciating further.

Among the list of potentially legitimate gripes made about Chinese policies are:

• Massive subsidization of industries
• Relatively high tariffs on goods imports and barriers to the provision of services by foreigners
• Widespread restrictions on foreign investment in a multitude of Chinese industries
• Forced transfer of technology imposed on foreign companies seeking to establish presence in China
• Indigenous innovation policies that grant preferences to companies that develop and register intellectual property in China
• Insufficient enforcement of intellectual property rights
• Barriers to digital trade, including web filtering and blocking, and restrictions on data flows and cloud computing
• The continued prominence of state-owned enterprises, which don’t face the same market constraints that private companies face
• Discriminatory application of China’s Anti-Monopoly law
• Scope for discriminatory application of China’s new Cybersecurity Law and National Security Law

Among the list of potentially legitimate gripes made about U.S. policies are:

• Continued discriminatory, non-market economy treatment of Chinese companies in U.S. antidumping cases
• Discriminatory application of the U.S. countervailing duty law, which punishes Chinese exporter (and U.S. importers) twice for the same alleged infraction
• Opaque and possibly discriminatory procedures at the U.S. Committee on Foreign Investment in the United States (CFIUS), which reviews and can block proposed acquisitions of U.S. companies by foreigners on grounds of threats to national security
• Proposed expansion of CFIUS’s remit to include an economic security element, a food security element, and to extend covered transactions beyond acquisitions to include green field investments
• The unofficial, but commercially consequential blacklisting of acquisitions by and products made by certain Chinese information and communication technology companies

Many of the complaints about Chinese policies could have been addressed through the Trans-Pacific Partnership had President Trump not withdrawn the United States from that agreement. In fact, the TPP offered the clearest path to compelling favorable changes in China’s economic policies because China would have seen most of its major trade partners join the TPP, and would have had no better alternative than to join itself. That’s where the leverage (in the form of a carrot, not a stick) to compel China to play by the rules resided. And, for now at least, that leverage is squandered.

So, absent any obvious remaining carrots, some in Washington and around the country are encouraging a more strident tack with China. In today’s Washington Post, Rob Atkinson from the Information Technology and Innovation Foundation, calls for what looks like some form of international sanctions against China. It seems a sure path to trade war.

A better idea, as articulated by my colleagues Simon Lester and Huan Zhu in this new paper, would be to launch bilateral trade negotiations to accomplish resolution of some or all of these issues in a very direct manner. Simon and Huan argue:

If the United States wants to promote the liberalization of Chinese trade and investment policy, it needs to engage with China in a more positive way. To this end, it should sit down with China and negotiate a new economic relationship, one that goes beyond the terms of the WTO. In particular, the United States should initiate formal negotiations on a trade agreement with China. Negotiations of this kind will be a challenge, especially with a president who has been so critical of China. However, negotiations offer the best hope for addressing concerns about China’s economic policies and practices.

Of course, like all trade negotiations, this one would be politically difficult. But considered against the alternatives, a bilateral trade deal is well worth serious consideration.

The meetings today and tomorrow between President Trump and President Xi in Florida are unlikely to delve deeply into substantive policy issues. Rather, the focus will be on establishing a good relationship between the two leaders, in order to lay the foundation for future cooperation. Trade and security tensions between the two countries will be discussed, but probably only in broad terms.

But difficult talks on the substance of these issues are inevitable. The question is how to approach the disagreements most productively.

On trade, there have been long-standing concerns from U.S. industry about a number of Chinese trade practices (including allegations of intellectual property theft, high tariffs, discriminatory regulations, non-commercial behavior by state-owned companies, and overcapacity in the production of steel and other goods). To date, the U.S. government approach to addressing these concerns has consisted largely of litigation at the WTO, trade remedy cases (mainly anti-dumping and countervailing duties), and high-level dialogues between the two governments, but these actions have failed to resolve most of the concerns. Litigation at the WTO can be helpful, but only in those areas where the WTO has rules, and there are many gaps in those rules; trade remedy cases impose tariffs that harm Americans, and do little to resolve the underlying problems with Chinese trade practices; and the dialogues tend to be broad, vague, and unenforceable.

The Trump administration has hinted at adding new unilateral trade restrictions into the mix (beyond trade remedy cases), but such measures are likely to lead to retaliation by China, which could escalate the current tensions into a tit-for-tat trade war. If that happens, the big losers will be ordinary Americans and Chinese who would feel the brunt of any tariff increases.

In a Free Trade Bulletin published yesterday, my colleague Huan Zhu and I argue that a better approach to these issues would be to sit down with China and negotiate a formal trade agreement to deal with as many of these issues as possible. For example, with regard to existing tariff levels, the two countries could agree to an across the board lowering of tariffs, a standard feature of trade agreements.

There will be a number of political obstacles to such a negotiation, and don’t expect any big announcement about it at the Trump-Xi meeting. But as the U.S. government develops its trade policy over the coming months, it may begin to realize the limitations of the alternative approaches to addressing concerns about China. Trump administration officials have emphasized that the trade deals it negotiates will be bilateral, rather than multilateral. Why not try to negotiate a bilateral agreement with China, one of our biggest trading partners, and the one that is the source of so many trade concerns?

The Wall Street Journal reports: “Mr. Trump’s nominee for U.S. Trade Representative singled out Mexico and South Korea during his Senate confirmation hearing as sparking American trade deficits. ‘In some cases, the rules don’t seem to be working as well as others,’ Robert Lighthizer said. Critics say the deal has led to a flood of South Korean cars, auto parts, memory chips, motors and pumps into the U.S., weighing on American competitors and jobs. A U.S. Trade Representative report this month said the pact… doubled the U.S. trade deficit in goods with South Korea.”

National Trade Council boss Peter Navarro has likewise claimed “We lost 100,000 jobs because of that South Korean deal. Our trade deficit has doubled, and, more importantly, 75 percent of the damage that has been caused by that deal has been to the auto industry itself, which, of course, is based in Michigan.”

Navarro, Lighthizer and the Journal’s unnamed critics are entirely wrong about the March 15, 2012 Korea/U.S. Free Trade Agreement (KORUS). 

KORUS could not possibly have “led to a flood of South Korean… memory chips, motors and pumps into the U.S.” because memory chips were already duty-free before that FTA, and so were motors (HS code 8501) and pumps (8413).

KORUS could not possibly explain the post-recession 2010–2015 rise in U.S. imports from South Korea because most U.S. tariffs were scheduled to be reduced from 2016 to 2021 – not from 2010 to 2015. 

KORUS had precisely zero effect on U.S. imports of Hyundai and Kia vehicles before 2016 because the U.S. tariff on Korean cars (HS code 8703) was 2.5% before KORUS and remained at 2.5% through 2015. Ironically, when U.S. tariffs on autos and other products finally did come down in 2016, total U.S. imports from South Korea fell 2.6% (by $1.9 billion).

 The Korean tariff on imports of U.S. cars was cut from 8% in 2012 to 4% in 2015 and zero in 2016 and a 10% Korean tariff on U.S. trucks was eliminated. Even before Korea cut its tariff on U.S. cars to zero in 2016, U.S. exports of cars to So. Korea tripled from $418 million in 2011 to $1.3 billion in 2015, according to the USTR. Incidentally the USTR also notes that “Korea is currently our fifth-largest market for agricultural exports thanks to KORUS,” with farm exports up 208% from 2011 to 2015.

What has been most changed about the auto industry since KORUS is that South Korea exported a sizable share of its auto industry to the United States, displacing previous Korean imports and adding to U.S. auto exports. More than half the Hyundais sold in the U.S. are now assembled in Alabama, and more than 40% of Kias in Georgia (contrary to Peter Navarro, 82.5% of U.S. auto industry jobs are not in Michigan). The Hyundai Santa Fe and Kia Sorento have 67% domestic content. Hyundai has invested $2.8 billion in the U.S. and plans to add $3.1 billion more. 

As the Graph shows, U.S. routinely ran sizable trade deficits with South Korea long before the FTA (and the U.S. routinely runs surpluses with other FTA countries, Australia and Singapore). The U.S. trade deficit with South Korea and other countries came way down in 2009–2011 because deep recessions always slash U.S. imports, particularly industrial imports.

The graph includes services which, like farm products, were an important part of the deal. The U.S. trade surplus in services with Korea rose from $6.9 billion in 2011 to $10.7 billion in 2016. With services included, U.S. imports from South Korea did not rise at all from 2014 to 2016 ($81.4 billion in both years), and goods imports fell in 2016.

South Korea’s imports of goods from the U.S. rose from $29.7 billion in 2009 to $46.3 billion by 2014 before falling 8.4%to $42.4 billion in 2016. Even with services included, South Korea’s imports from the U.S. fell from $66.5 billion to $63.9 billion since 2014.

KORUS could not possibly have had anything to do with the 2014–2016 drop in Korean imports from the U.S. because that agreement lowered rather than raised Korean tariffs.

South Korea’s demand for imports weakened because annual growth of industrial GDP fell to 2.5% from 2012 to 2015 – down sharply from a 6% pace from 2000 to 2011. One reason for Korea’s post-2014 import slump is that China’s imports from South Korea fell from more than $20 billion in October 2014 to $10–12 billion recently. 

The Trump Administration’s top trade advisers are entirely wrong about what happened when with respect to trade between the U.S. and South Korea. KORUS had no effect at all on U.S. imports of auto, chips, motors or pumps between 2009 and 2015, because the U.S. auto tariff was unchanged until 2016 (when overall U.S. imports fell) and most other industrial products were already tariff-free before KORUS.

The Korea‑U.S. trade deficit in goods did not rise from 2011 to 2015 (or fall in 2016) because of U.S. auto tariff cuts in 2016, but because the U.S. economy strengthened after 2010 and the Korean economy weakened after 2014. 

The NAFTA renegotiation Donald Trump promised during his campaign may finally be getting started. The specialty trade publication Inside US Trade (subscribers only) has a draft of the administration’s notice to Congress “that the President intends to initiate negotiations related to the North American Free Trade Agreement (NAFTA) and its architecture,” in which the administration sets out “specific objectives for negotiation.” 

At first glance, the administration’s plan looks like more than just a tweak to NAFTA, but will not come close to blowing up the system (as it sometimes sounded like during the campaign). Things may change before the final notice is sent out, but for now a lot of what’s in there seems like an attempt to upgrade NAFTA to reflect provisions that have been developed in U.S. trade agreements over the last 15 years, including in the TPP. In a sense, this NAFTA renegotiation is an attempt to make NAFTA more like the TPP. Some examples are: 

• adding rules on digital trade and cross-border data flows
• adding enforceable provisions on labor, the environment, and state-owned enterprises
• revising the provisions on investor-state dispute settlement
• strengthening intellectual property rights

To the extent that the NAFTA renegotiation just incorporates TPP provisions, it is not too worrying. That’s not to say that we in Cato’s trade policy center like all of the TPP provisions, but it would indicate that the Trump administration is not looking to do anything too radical on trade.

On the other hand, there are some proposals that could take NAFTA in a more protectionist direction. Some examples of that are proposals to:

• Eliminate a special procedure to have an international panel review U.S. anti-dumping/countervailing duties
• Address the perceived unfairness of foreign border adjustment taxes (“level the playing field on tax treatment”)
• Make sure NAFTA allows Buy America provisions (“establish rules that require government procurement to be conducted in a manner that is consistent with U.S. law and the Administration’s policy on domestic procurement preferences”)
• Tighten up rules of origin, that is, restrict who can benefit from low NAFTA tariffs
• Add new procedures that allow special tariffs when there are increased imports (“a safeguard mechanism to allow a temporary revocation of tariff preferences, if increased imports from NAFTA countries are a substantial cause of serious injury or threat of serious injury to the domestic industry”)

Keep in mind that this is just the draft, so the objectives stated here may change a bit. Also, note that this is simply what the U.S. will ask for, and not necessarily what it will get after sitting down with Canada and Mexico.

All in all, it is somewhat of a relief to see that the proposed changes do not completely undermine NAFTA. However, there will be some aspects of these proposals that we will be pushing back on, once the specifics of the proposals become more clear.