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With Friends Like Sen. Sessions, Free Trade Is in Trouble
According to a story in Politico today, Senator Jeff Sessions of Alabama has been whipping his Republican colleagues to vote in favor of the China currency legislation that appears to be headed for passage in the Senate. (My Cato colleague Dan Ikenson has explained why raising tariffs on imports from China would be a mistake.)
The Politico story says that Sessions is “traditionally a proponent of free trade,” but his actual voting record indicates otherwise. According to the trade vote data base we maintain on the home page of the Herbert A. Stiefel Center for Trade Policy Studies at Cato, Sen. Sessions has voted in favor of lower trade barriers on a bare majority (26 out of 49) of the significant trade votes we’ve recorded.
Since 1997, Sen. Sessions has voted in favor of protectionist farm bills (2002, 2007, 2008), banning safety-certified Mexican trucks from U.S. roads (2007), country-of-origin labeling (2003), the WTO-illegal Byrd amendment (2003, 2005), the original Schumer-Graham bill to impose a 27.5 percent tariff against imports from China (2005), sugar import quotas (1999, 2000, 2001), and steel import quotas (1999)
Meanwhile, he’s voted against the Morocco free-trade agreement (2004), trade promotion authority (1998, 2002), and normal trade relations with Vietnam (2001) and China (1997, 1999).
And to top it all off, it was Sen. Sessions who single-handedly scuttled renewal last year of the Generalized System of Preferences, the long-standing program that had allowed certain imports from poor countries to enter the United States duty free. As my Cato colleague Sallie James has chronicled (here and here), the good senator refused to allow the program to be renewed because of a dispute affecting a small number of his constituents who are employed making sleeping bags.
Like too many of his fellow senators, Sen. Sessions supports our freedom to trade only as long as it does not affect any noisy special interests in his own state.
Finally, a Vote on the Three Trade Agreements
Almost a thousand days into his term, President Obama has at last submitted the trade agreements with South Korea, Colombia, and Panama for an up or down vote in Congress.
All three agreements appear to have majority support in both the House and the Senate. Organized labor is putting up its usual anti-free-trade fight against all three, with AFL-CIO boss Richard Trumka coming out swinging in a Politico op-ed this week. He makes the standard union argument that Colombia is an unworthy free-trade partner because of ongoing violence against union members in that country.
In a Free Trade Bulletin earlier this year, my Cato colleague Juan Carlos Hidalgo and I examined the commercial benefits of the agreement with Colombia as well as the hollowness of the union charge. In the past decade, Colombia has made tremendous progress against violence in general, and especially violence aimed at union members. In fact, as we write in the FTB:
The statistics on the number of killings against union members vary depending on the source, with the figure from the government’s Ministry of Social Protection being lower than that of the National Union School (ENS for its acronym in Spanish), a Colombian nongovernmental organization affiliated with the labor movement. However, both sources show a steep decline in the number of killings since 2001. Moreover, when compared with the total number of homicides in the country, killings of union members clearly have dropped at a faster rate than those of the general population (see Figure 1).
Critics of the FTA fail to recognize that violent crime affects all levels of Colombian society, not only trade unions. What is more, the statistics show that union members enjoy more security than the population at large.
Looking at the homicide rate as defined by the number of murders per 100,000 inhabitants, the rate for the total population in 2010 was 33.9 per 100,000, whereas the rate for union killings was 5.3 per 100,000 unionists that same year (using the statistics of the ENS). That means that the homicide rate for the overall population is 6 times higher than that for union members.
Having just returned from a speaking trip last week to Medellín, Colombia, I can vouch that, after a difficult period of battling Marxist guerrillas and drug cartels, Colombia has once again become a normal country with a growing economy. Medellín is a bustling, business-oriented city with the usual challenges of traffic congestion. The students I spoke with at EAFIT University seemed eager for closer ties with the United States, and they do not understand why it has taken almost five years since the signing of the agreement for Congress to schedule a vote on it.
As I explained in an interview with the city’s leading newspaper (conducted in English, but translated here in Spanish), the politicians in Washington have run out of excuses for not establishing free trade between our two countries.
[Our Cato colleague Doug Bandow made the case for a trade agreement with South Korea in a study we released last year.]
Post-9/11 Visa Delays Hurting U.S. Exports and Jobs
The terrorist attacks of a decade ago left their mark on U.S. trade, travel, and immigration policy, as I contemplated in my modest contribution to the flood of 9/11 retrospectives this week (see “9/11 tested America’s openness to trade and immigration,” posted over at The Daily Caller).
In the wake of the attacks, it was necessary to tighten U.S. visa policy in a way that made it far more difficult for a terrorist to ever enter our country again in the disguise of a tourist or student (as in shutting down the “Visa Express” program for young men from Saudi Arabia).
One unintended consequence of the tightening, however, is that we have also kept away millions of potential visitors who pose no threat whatsoever to the security of our homeland. As the Wall Street Journal reports today, long waits for visas have discouraged potential tourists to the United States from emerging markets such as China, Brazil, and India. As the Journal reports:
The backlog especially has deterred tourists from emerging-market countries with fast-growing pools of people looking to travel overseas, travel executives say. Waiting periods for a Brazilian to get an in-person interview for a visa to enter the U.S., for instance, can exceed four months.
Those delays have imposed a real cost on the American economy. Between 2000 and 2010, according to the story, the number of overseas arrivals to the United States barely budged, from 26 million to 26.4 million. During that same period, global long-haul arrivals grew from 152 million to 213 million—an increase of more than 60 million fueled largely by the growth of the middle class in those emerging economies. But that also means all those new travelers went elsewhere, reducing the U.S. share of long-haul visitors from 17 percent to 12 percent.
That loss of market share means the loss of tens of billions of dollars in tourism service exports, and fewer jobs for Americans in the domestic tourism industry. If President Obama and Congress are serious about promoting economic growth and employment, they should find a way to make America more hospitable for peaceable foreign tourists who only want to come here to enjoy the best our wonderful country has to offer.
For U.S. Multinationals, More Jobs Abroad Mean More Jobs at Home
We haven’t heard politicians complain much lately about “tax breaks for U.S. companies that ship jobs overseas,” perhaps because the next federal election is still more than a year away.
An article in the Financial Times today shows why that charge rings pretty hollow anytime in the election cycle. In an interview with CEO Doug Oberhelman of Caterpillar Inc., the FT notes that the Peoria, Ill.-based maker of earth-moving equipment has been thriving even though the domestic U.S. economy has been stuck in low gear.
Like many U.S. multinational companies, Caterpillar has been expanding its sales and profits by selling its products in rapidly growing emerging markets while spreading its production facilities around the world. Here’s the key passage for those politicians who complain about U.S. companies investing and hiring abroad:
In recent months, [Caterpillar] has announced plans for new factories in Singapore, Thailand, China and Brazil.
In the US, it is building a new distribution centre in Washington state while expanding its factories in North Dakota and Kansas.
Caterpillar has hired about 29,000 people worldwide in the past 20 months, some 13,000 of them in the US, with most of the rest in China, Brazil, Mexico and the UK.
The Caterpillar experience shows that job creation is not a zero-sum game, where jobs created abroad by U.S. companies must come at the expense of production and employment in the United States. In fact, as I show in my 2009 book Mad about Trade (pp. 100-104), the Caterpillar experience is not unusual. U.S. employment by parent companies will typically rise and fall in synch with employment at their affiliates abroad. For U.S. multinationals:
Foreign and domestic operations tend to complement each other and expand together. A successful company operating in a favorable business climate will tend to expand employment at both its domestic and overseas operations. More activity and sales abroad usually require more managers, accountants, lawyers, engineers, and production workers at the parent company.
As for those “tax breaks for shipping jobs overseas,” I explained why they are not a problem in an op-ed in the New York Post during the last election cycle. Keep it handy for when the demagoguery starts flying again next fall.
A Congressional Tutorial on the Benefits of Free Trade
A survey released this week found that almost 80 percent of members of Congress have no academic training in business or economics. Yet they debate and pass all kinds of legislation seeking to steer the economy, business and trade in one direction or another.
For those four out of five members, my column in the Washington Times this morning, “Free Trade 101 for members of Congress,” offers a crash course in the benefits of free trade and globalization for Americans. Here’s an excerpt from the lecture, er, column:
Protectionism is really a tax on the poor. Our highest remaining trade barriers unfairly tax products made and grown by poor people abroad and consumed disproportionately by poor families at home. We still impose unconscionably high tariffs on imported food, clothing, and shoes — the basics of a poor family’s budget. The $26 billion we collect each year from duties on imports represent the federal government’s most regressive tax. Free trade is a tax cut for the poor.
Trade is not about more jobs or fewer jobs; it’s about better jobs. Trade only accounts for 3 percent of job displacement. Technology and internal competition displace far more workers. Just ask folks laid off from Borders, Blockbuster or Kodak. (Bought any film lately?) Our high unemployment today has nothing to do with trade but with our “Made in the USA” housing bubble and failed stimulus.
Members of Congress who have any questions are welcome to visit with me during my normal office hours.
Deport Criminals, Not Students and Needed Workers
Tea Partiers, of all people, should understand this concept: The federal government’s resources are limited and should be focused on its core duties of administering justice and protecting basic rights. In that light, the Obama administration made a sensible decision this week to concentrate on deporting illegal immigrants who threaten the health and safety of Americans.
At the latest count, there are still 11 million people living in the United States without government authorization. The government would be incapable of deporting them all, and even if it could, it would cause tens of billions of dollars in damage to the American economy, as Cato research has demonstrated. Even the 300,000 illegal immigrants currently being processed through the deportation pipeline are clogging the system and drawing resources away from more important business.
In a letter to Senate leaders, Department of Homeland Security (DHS) Secretary Janet Napolitano said the administration would from now on concentrate on deporting those in the system who have committed serious crimes or who have any connections to crime or terrorism. As the secretary explained:
From a law enforcement and public safety perspective, DHS enforcement resources must continue to be focused on our highest priorities. Doing otherwise hinders our public safety mission—clogging immigration court dockets and diverting DHS enforcement resources away from individuals who pose a threat to public safety.
That sounds pretty reasonable. The flip side of the policy change is that hundreds of thousands of peaceable, otherwise normal immigrants who are working and studying in the United States without the right documentation will be allowed to stay and possibly even apply for legal status. Included in this group are undocumented spouses of U.S. military personnel, immigrants who were snared in the system when they actually reported crimes to police, and students who came to the United States as young children with their undocumented parents—students who would be eligible for legal status should Congress pass something like the DREAM Act.
Conservatives such as Rep. Lamar Smith (R-Texas) complain that the administration should be enforcing the law rather than ignoring it, but as I’ve argued for long time, the law as it is currently written is unenforceable and needs to be changed.
The Unhappy 40th Anniversary of Nixon’s Wage and Price Controls
Forty years ago today, President Richard Nixon shocked the country and the world, not with an escalation of the Vietnam War or a political scandal, but with an edict on the economy that reverberates to this day.
In a surprise televised speech on Sunday evening, August 15, 1971, the president announced that he would immediately impose wage and price controls, slap a 10 percent duty on imports, and suspend the international convertibility of the U.S. dollar into gold. All were to be temporary measures, of course, to promote jobs, dampen inflation, and combat “international money speculators” betting against the dollar. (You can read the entire speech here.)
What came to be known in the international finance world as the Nixon Shock is worth remembering four decades later as a warning against the abuse of executive power over the economy. Nixon’s intervention failed to boost the economy in a sustainable way while causing real damage that took years to correct.
The centerpiece of the Nixon Shock was its controls on prices. In a market economy, freely fluctuating prices are the nervous system that coordinates supply and demand. Yet in one of the more chilling statements delivered by a U.S. president, Nixon told the nation that evening,
I am today ordering a freeze on all prices and wages throughout the United States for a period of 90 days.
The price controls did tame inflation temporarily, but it came roaring back within three years to double-digit levels and persisted through the 1970s because of loose monetary policy. A tight lid on a boiling tea pot can only contain the steam for a time before it explodes.
The controls continued on gasoline, causing artificial shortages (as price controls usually do) symbolized by gas lines during the 1970s. Only when President Reagan finally lifted the controls on oil and gasoline in 1981 did the specter of short supplies finally disappear. (The 10 percent import surcharge did prove to be temporary, lasting only until the end of 1971.)
Closing the gold window was arguably inevitable given the lack of monetary discipline by the U.S. central bank. By 1976, the dollar and other major currencies were floating freely, which has turned out to work rather well, as Milton Friedman predicted it would. It also turned out that pressure on the dollar to depreciate was not driven by speculators after all but by the surplus of dollars that had been created to finance the Vietnam War and the Great Society.
One lesson of the Nixon shock is that if politicians are granted “emergency powers” they will tend to abuse them in situations that were never envisioned when the powers were originally granted. A second lesson is that “temporary” measures have a habit of becoming permanent. The big lesson is that the power of politicians over the economy should be limited. Any request for temporary emergency powers should be greeted with the deepest skepticism.
A Bit of Good Economic News: U.S. Still ‘On Track’ to Double Exports by 2014
This morning’s monthly trade report from the Commerce Department will likely only add to the growing pessimism about the U.S. economy. The trade deficit in June widened from the month before, which we are told endlessly (as in this morning’s AP dispatch) is a “subtraction” from GDP, even though my April Cato Trade Policy Analysis showed why that just isn’t so.
Exports did take a hit for the month, falling 2.3 percent from the month before. But here is a bit of good news to hold on to from the report: U.S. exports of goods and services are still on track to double from 2009 through 2014.
Doubling U.S. exports over those five years was the goal President Obama set when he unveiled his National Export Initiative in his State of the Union Address in January 2010. As the accompanying chart shows, even with the decline in June, total exports for the previous 12 months added up to almost $2 trillion. That still represents an annualized growth rate from the base year of 2009 that is slightly ahead of the rate needed to double exports by 2014.
Maintaining this rate of growth for the next three and a half years will be a daunting task, as I explained here. The administration and Congress should still take concrete, free-market steps to promote more exports and expand trade overall, such as keeping the U.S. market open for imports, avoiding a trade war with China, and enacting long-stalled trade agreements with South Korea and Colombia. (Note I did not include more funding for the Export-Import Bank on the list, with my Cato colleague Sallie James providing the reasons why in a recent study.)
Trade Helps Explain Texas-Sized Job Growth
As its governor, Rick Perry, weighs a run for the White House, Texas has drawn attention for its healthy job growth. Since the recession ended in June 2009, Texas has accounted for half of the net new jobs added to the U.S. economy, according to the lead story in this morning’s USA Today. That’s quite a record for one lone state.
We’ll leave it to others for now to argue over how much credit Gov. Perry can claim. Some credit surely goes to high oil prices, fueling job growth in a sector important to the Texas economy. Another reason for its relatively strong job growth is a friendly business climate, including no state income tax and relatively light regulations. And for those who scapegoat trade for the nation’s persistently high unemployment rate, consider that Texas is the nation’s number one trading state. As the USA Today story notes:
Overseas shipments by Texas’ strong computer, electronics, petrochemical and other industries rose 21% last year, compared with 15% for the nation, according to the Dallas Federal Reserve Bank. The state also benefits from its proximity to Latin American countries that are big importers of U.S. goods … The surge creates jobs for Texas manufacturers and ports.
As I can attest from recent speaking engagements in San Antonio and Laredo, Texans have embraced their state’s position as the nation’s leading gateway for trade with NAFTA-partner Mexico and the rest of Latin America.
While politicians and union bosses from other states grumble about allegedly unfair trade, the latest trade and job numbers show that the people of Texas are making the most of the opportunities created by our more open economy.
Federal Government Subsidizes and Penalizes Boeing Co.
When an entity is as mammoth and undisciplined as the $3.8 trillion U.S. federal government, it’s inevitable that its programs will be working at cross purposes. Just ask the civil aircraft manufacturer Boeing Company.
Politicians love Boeing because it not only makes valuable products but it also exports billions of dollars worth around the globe. To give a boost to those exports and supposedly create more jobs in the United States, the federal government’s Export-Import Bank offers preferential loans to foreign governments and airlines to help them buy more Boeing aircraft.
As my Cato colleague Sallie James documents in a new study, “Time to X Out the Ex-Im Bank,”
the number-one user of the Ex-Im Bank is the Boeing Company. Of the 35 aircraft sales supported by Ex-Im in FY2010, 28 were Boeing products, and the Congressional Research Service estimates that more than 60 percent of the value of Ex-Im Bank loan guarantees supported Boeing aircraft sales in that year.
No wonder critics refer to the Ex-Im as “Boeing’s Bank.”
Yet the same federal government is making it more difficult for Boeing to manufacture its airliners cost-effectively in the United States. Under the sway of organized labor, the National Labor Relations Board is seeking to prevent Boeing from expanding its production in South Carolina, a right-to-work state where the company’s employees are non-unionized.
In a column at Bloomberg.com today, Harvard economist Edward L. Glaeser rightly worries that the NLRB action is undermining one of the most important advantages enjoyed by American-based companies—the freedom of labor, capital, and goods to move freely within the United States. As Glaeser notes:
The profound role that mobility has played in our country, enabling repeated reinvention, causes me to be deeply worried about the possibility that a National Labor Relations Board complaint will prevent Boeing Co. from moving plane production from [unionized] Washington state to South Carolina.
In the spirit of compromise, Congress should eliminate the Ex-Im Bank, while telling the NLRB to back off and let U.S. companies deploy their productive resources in whatever locations within the United States that make the most competitive sense.
Zero Cheers for the Chinese Communist Party
The Chinese Communist Party celebrates its 90th birthday today. Pardon me if I do not attend the party.
It is undeniably true, as the authorities in Beijing are trumpeting, that the Chinese Mainland under one-party communist rule has enjoyed spectacular economic success during the past 30 years. China’s rapid growth was unleashed by the reforms of the late communist leader Deng Xiaoping that began in the late 1970s, but those reforms—private ownership of business, farms and housing, market pricing, foreign investment, and trade liberalization, among others—were hardly an extension of the Communist Party’s agenda. In fact, those reforms were a direct repudiation of everything the Chinese Communist Party and its co-founder Mao Tse-tung believed and practiced before and after the communist takeover of 1949.
Under Mao, tens of millions of Chinese starved in the Great Leap Forward of 1958-60. Millions suffered cruelly at the hands of the Red Guards during the Cultural Revolution of 1966-76. During the first 30 years of communist rule, the Chinese people enjoyed neither economic nor political and civil freedom. Even amid rising economic prosperity today, China’s one-party state continues to imprison, torture, and kill people who practice their faith or question the party. That is not much of a record to celebrate.
The Chinese people do not need communist rule to prosper. We can see that plainly enough 112 miles across the Taiwan Strait. Under the rule of the Nationalist Party, the 23 million people of Taiwan made the transition from military rule to a lively, multiparty democracy with freedom of speech, assembly, and religion. Behind liberal economic reforms dating back to the 1960s, the Taiwanese people have achieved a per capita gross domestic product (at purchasing power parity) that is four and a half times greater than on the mainland—$35,700 vs. $7,600.
It does not take much imagination to envision what Mainland China would be like today if it had followed the path of Taiwan rather than that of the 90-year-old Chinese Communist Party.
IBM as a Metaphor for Economic Success
International Business Machines Inc. is celebrating its 100th anniversary as a company today. In this time of economic worry and uncertainty, it’s worth taking a moment to consider a few policy lessons we might glean from its longevity.
Unlike government agencies and programs, private-sector companies competing in a free market come and go. In an essay posted on the IBM web site, company officials noted:
Of the top 25 industrial corporations in the United States in 1900, only two remained on that list at the start of the 1960s. And of the top 25 companies on the Fortune 500 in 1961, only six remain there today.
How did IBM not only survive but thrive during a century that took us from horses and buggies to FaceBook and iPhones? In a word, adaptability. IBM’s management has been willing to change to meet the evolving demands of a competitive and open marketplace.
When I was researching a speech last year to retired IBM employees, I was struck by how the company has transformed itself. As I shared with the audience, IBM stands as a metaphor for the positive changes under way in our more high-tech and globalized economy:
As you all know, [IBM] has re-engineered itself from a hardware company to a provider of software and services. Today, nearly 60 percent of the company’s revenue comes from services compared to 38 percent a decade ago. Revenue from hardware has been cut in half, to 17 percent.
IBM’s gone global in a big way, too. Almost two-thirds of its revenue now comes from outside the United States. That compares to an S&P average of 47 percent. Emerging markets now account for 50 percent of its revenue growth. IBM is the biggest IT services company in India. For $100 million, it’s helping the northeast China city of Shenyang—one of its most polluted—clean up its air and reduce carbon emissions.
Politicians nostalgic for an America where the dominant companies were unionized, heavy-industry behemoths producing mostly for the domestic market should take note. As I argued at length in my 2009 book Mad about Trade (see chapters 3 and 4) and more concisely in an essay for Barron’s Weekly, America has become a globalized, middle-class service economy. As the success of IBM demonstrates, this is not something we should fear, or try to resist with trade barriers and industrial policy.
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