Archive for the ‘International Economics and Development’ Category
The Real Scandal of ‘Tariff Suspensions’
Two weeks ago (yes, I know, an eternity in blog time, but I’ll explain in a moment), the Washington Post published a gotcha front-page expose on a long-established if little noted congressional practice of suspending miscellaneous tariff duties. The article, headlined “A Quiet Break for Corporations” (September 20, 2006), supposedly uncovered yet another pork-barrel scandal. The real scandal of the story, however, is not that U.S.-based producers seek relief from damaging tariffs, but that those tariffs exist in the first place.
For years, Congress has voted regularly on miscellaneous tariff bills that suspend a hodgepodge of duties on obscure products that often are not even made by companies in the United States. In those cases, the tariffs don’t even perform the dubious duty of “protecting” domestic producers. They only make it more expensive if not impossible for consumers and producers to import certain products.
The Post article emphasized the potential revenue lost to the government by suspension of the duties, while downplaying the costs to consumers and importing producers from the artificially higher prices imposed by the tariffs. Economics 101 teaches that with almost any tariff, the damage to the economy from higher prices and less efficient production will outweigh the duties collected by the government.
The story implied a scandal in the fact that some American companies would actually be hurt by suspension of tariffs on their foreign competition. But since when is it the duty of the government to protect certain producers against their competition? Should the same government that harasses U.S. companies with anti-trust laws be shielding other U.S. companies from the same competitive forces that anti-trust laws supposedly promote? If Americans can buy dog collars more cheaply from a foreign producer, the federal government should keep its nose out of the deal.
One example in the story involves the proposed suspension of duties on basketballs and volleyballs imported by the sporting-goods company Spalding. Again, the real scandal is why the government imposes any duties at all on such goods. The federal government should not be raising revenue with a special “basketball tax,” in the process making basketballs more expensive for American kids while hurting the sales of an American company.
Supposedly adding to the scandal is that fact that many of the “beneficiaries” of the suspended duties would be foreign-owned affiliates located in the United States, especially German and Swiss chemical companies. That fact does not make the special duties any less damaging to the U.S. economy. Foreign-owned affiliates in the United States employ nearly six million Americans (one out of eight manufacturing workers), pay domestic taxes, and serve American customers.
The story tried to clinch the scandal thesis by citing campaign donations and lobbying expenses by the companies seeking removal of the damaging tariffs. Again, the real scandal is not that these companies are trying to change laws that damage them, but that they need to seek specific relief in the first place.
Import duties invite corruption by giving the government power over a range of otherwise innocent and private transactions. A policy of free trade, without arbitrary duties aimed at punishing foreign producers and protecting domestic ones, would eliminate any need to lobby the government over the imposition or suspension of duties. The latest Economic Freedom of the World report shows that nations with relatively free and open economies are generally less corrupt than those with closed and government-dominated economies. (Check out the chart on page 26.)
By repealing targeted tariffs that damage our economy and that should never have been imposed in the first place, the proposed miscellaneous tariff bill would make our system a bit less corrupt, not more so.
P.S. So why am I blogging about all this two weeks after the fact? I did not want to jeopardize the chances of the Washington Post actually publishing an edited version of this critique in its letters to the editor section. My patience was rewarded this morning with publication of an edited version of my letter.
Wanted: An Excuse to Stop Hurting the Economy
From the Washington Post online: a synopsis of the speech given yesterday by U.S. Trade representative Susan Schwab. In that speech, which I heard, Ambassador Schwab made it clear that the U.S. was not going to offer any more cuts to agricultural subsidies as part of the Doha round of trade negotiations under the auspicies of the WTO. According to her, a “bold” offer on subsidies didn’t elicit the desired response (i.e., an offer from the European Union of further cuts to agricultural tariffs) when it was tried last October. So we shouldn’t expect anything from the U.S. soon, and certainly not before the mid-terms.
To her credit, and this was not reported in the Post article, Ambassador Schwab did admit that unilateral liberalization of trade barriers and subsidies is in America’s best interests, but she went on to say that the administration needed “an excuse” for taking that step. Apparently the significant burden on taxpayers and consumers from the current trade policy is not a large enough reason to liberalize trade.
The negotiation-via-press-release approach is not working, and Ambassador Schwab referred to the “quiet conversations” that were going on among trade ministers to try to revive the round. She gave absolutely no clue on how the talks went with EU trade commissioner Peter Mandelson when he visited Washington DC last week, except to say that the talks were “healthy.” Boy, would I like to have been a fly on that wall.
One last comment on Ambassador Schwab’s speech: her belief in a “critical mass” of bipartisan support for free trade is, I think, misguided. I can’t see the Democrats, should they take control of the House(s), giving the Bush adminstration any wins on trade. That leaves us with the original deadline of July 2007 (when the current trade promotion authority expires) for any Doha deal to come to fruition.
Tariff Bill Would Punish Millions of American Families
In an op-ed in today’s Wall Street Journal (subscription req.), Senators Charles Schumer (D-N.Y.) and Lindsey Graham (R-S.C.) threaten to demand a vote on their bill that would drastically raise tariffs on imports from China if the Chinese government does not move quickly to strengthen the value of its currency.
The senators claim that China’s currency, the yuan, is 15 to 40 percent undervalued against the dollar, giving Chinese imports an unfair advantage in the U.S. market and discouraging U.S. exports to China. China revalued its currency by 2.1 percent last summer and it has appreciated another 2 percent since then, but the senators say this is not enough. They blame China’s currency for our large bilateral trade deficit with China and the loss of U.S. manufacturing jobs. Their bill would impose a hefty 27.5 percent tariff if China does not sharply revalue its currency within six months after the bill’s passage.
In a Cato Trade Briefing Paper, “Who’s Manipulating Whom?” published in July, I documented the fact that imports from China have not reduced America’s overall manufacturing output. In fact, since China fixed its currency in 1994, real output at U.S. factories has actually increased by 50 percent. The sectors where China is most competitive—lower-end, labor-intensive goods such as shoes, clothing, and toys—have been in decline in the United States for decades. Goods we used to import from other countries anyway are now imported directly from China. U.S. factories employ fewer workers than they did a decade ago not primarily because of imports from China but because remaining workers are so much more productive.
Imposing the steep tariff called for in the senators’ bill would surely hurt workers and producers in China, but it would also victimize millions of American consumers. More than three-quarters of what we imported from China last year were goods Americans use every day in their homes and offices—not only all those shoes, clothing items, and toys, but also sporting goods, bicycles, TVs, radios, stereos, and personal and laptop computers. The Schumer-Graham bill would be a direct, regressive tax on millions of low- and middle-income American families. It would also jeopardize tens of billions of dollars of sales American companies now make in China, our major, growing export market.
Chances are slim that the Schumer-Graham bill will become law anytime soon, but the fact that such a reckless piece of legislation would be considered on the floor of the Senate should be as troubling to Americans as to the Chinese.
Doctors without Borders
I have to join Ezra Klein in copying in its entirety this Dean Baker post to The American Prospect‘s blog Tapped:
NPR had a piece this morning on the possibiity that Medicare reimbursements for doctors will be cut. It told listeners that if this cut went into effect, then there may be a shortage of doctors who are willing to serve Medicare beneficiaries.
In other contexts, such as supplies of farm workers, custodians, and restaurant workers, NPR has told listeners that shortages meant that the country needed immigrant workers. No one interviewed for this segment mentioned the possibility of more immigrant doctors, even though doctors receive much higher pay in the United States than they do in the developing world, or even Europe. Surely, if the United States worked to eliminate the barriers that make it difficult for foreigners to train to U.S. standards and practice in the United States, there would be large numbers of foreign physicians who would be willing to do the work that NPR tells us American workers do not want to do.
The great thing about economic models is that you can use the same models for almost anything, you just have to change the words that appear on the axis. If getting immigrants, who will accept low pay, to work in our farms and factories makes economic sense, then getting foreign doctors, who are willing to accept low pay, also makes sense. Maybe NPR will one day get reporters who know economics, if we elimiante [sic] barriers to trade among journalists.
Perhaps a cut in Medicare reimbursements could spark a conversation about liberalizing immigration and licensure restrictions on physicians and allied health professionals.
Peter Mandelson Still Wants to Date Us, He Was Just Washing His Hair
The Cairns Group is a group of 18 major agricultural exporting nations. This week they held their 20th anniversary meeting in Cairns, Australia (the site of their first meeting, hence the name of the group). Unfortunately, but perhaps predictably, they were able to make little headway in moving the struggling Doha round of trade talks forward. (The special importance to agriculture in the Doha talks was presumed to give the Cairns Group a strong voice.)
There are a few reasons for this:
First, the Cairns Group has lost some of its gravitas now that the G-20 (a developing country block of WTO members that was formed and at least partly responsible for the disastrous end to the 2003 WTO meeting in Cancun) has entered the fray. The G-20 (which has some overlap in membership with the Cairns Group) is less inclined toward liberalization in general, unless it is liberalization in other countries.
Second, and more importantly, the EU’s trade commissioner, Peter Mandelson, refused to attend the Cairns meetings because of a “prior commitment.” I’ve used that excuse to get out of an unappetizing social engagement, too, Mr. Mandelson, and I’m almost always telling a white lie. In this case, however, the refusal to attend is not so “white.”
Breathtaking
The front-page story on tariff suspensions in today’s Washington Post has to be one of the worst examples of economic policy reporting that I’ve ever seen — and I work in health policy.
(Cato’s trade policy scholars convey that they were particularly suprised that such an article appeared in the Post, whose reporting is normally quite trade-literate.)
The United States of Agriculture?
Every year, Congress spends nearly $20 billion and maintains steep trade barriers to benefit a small group of farmers growing one of about half a dozen “program crops.” A hearing on U.S. farm policy before the full House Agricultural Committee today illustrates the problem beautifully.
All farmers together make up less than 2 percent of the U.S. population, and those receiving federal production subsidies or trade protection are less than 1 percent of the population. Yet our farm programs are designed not to serve the interests of the 99+ percent of us who pay the taxes and consume the food, but the small fraction who grow certain favored crops. In fact, U.S. farm programs benefit a small number of producers at the expense the majority and the nation as a whole.
[In a major Cato study last year, we documented six ways that current U.S. farm programs hurt the average American—through higher food prices, lost jobs, more government spending, environmental damage, stifling of rural development, and the undermining of America’s image abroad. We also hosted a policy forum last month featuring the pro-reform Secretary of Agriculture Michael Johanns.]
So why do these programs persist despite their cost to the general public? Classic interest group politics. Agricultural producers, although small in number, are concentrated, well organized, and highly motivated to save programs that can mean big bucks to their bottom line. Meanwhile the mass of consumers and taxpayers, although an overwhelming majority, are diffused, disorganized and mostly unaware of the cost they pay as individuals for those same programs.
Which brings us to today’s hearing in the House. Who do you think Congress will be hearing from as it begins to rewrite the farm bill? Of the 17 witnesses, not a single one will represent taxpayers, consumers, or non-farm businesses that use those commodities to make their final products. Every witness represents a sector of farm producers. No wonder Congress routinely ignores the interest of the vast majority of its constituents when it writes farm legislation.
Here is the witness list:
Bob Stallman – president, American Farm Bureau Federation
Tom Buis – president, National Farmers Union
Allen B. Helms Jr. – chairman, National Cotton Council, Clarkedale, Ark.
Paul T. Combs – chairman, USA Rice Producers’ Group, Kennett, Mo.
Dale Schuler – president, National Association of Wheat Growers, Carter, Mont.
Gerald Tumbleson – president, National Corn Growers Association, Sherburn, Minn.
John R. Hoffman – first vice president, American Soybean Association, Waterloo, Iowa, also representing National Sunflower Association and U.S. Canola Association
Greg Shelo – president, National Grain Sorghum Producers Association, Minneola, Kan.
Jim Wysocki – president, National Potato Council, Bandcroft, Wis., representing Specialty Crop Farm Bill Alliance and National Potato Council
Jack Roney – director of economics and policy analysis, American Sugar Alliance
Mark Kaiser – board member, Alabama Peanut Producers Association, Seminole, Ala., representing Alabama Peanut Producers Association, Florida Peanut Producers Association, Georgia Peanut Commission and Mississippi Peanut Growers Association
Richard Groven – vice president, National Barley Growers Association, Northwood, N.D.
Jim Evans – chairman, USA Dry Pea and Lentil Council Inc., Genesee, Idaho
Mike John – president, National Cattlemen’s Beef Association, Huntsville, Mo.
Joy Philippi – president, National Pork Producers Council, Bruning, Neb.
Ron Truex – president and general manager, Creighton Brothers, Atwood, Ind., representing United Egg Producers
Paul R. Frischknecht – president, American Sheep Industry, Manti, Utah.
Speak with Forked Tongue; Carry Large 2×4
The next time you meet a Canadian at a cocktail party and consider invoking fuzzy feelings of fraternity by toasting our countries’ recent softwood lumber accord, better to just smile, nod your head, and stare intently at your shoes. Calling the U.S.-Canada Softwood Lumber Agreement (2006) an “agreement” mocks the fact that the Canadians had no viable alternative but to sign on the dotted line.
One option was to endure the cost and uncertainty of continuous litigation, continued restrictions on their lumber exports, and the specter of never again seeing the $5.3 billion in duties collected illegally by U.S. Customs on previous exports. The other option was for Canadians to agree to impose export restraints (in the form of export taxes or quotas) on their lumber and see the return of about 80 percent of that $5.3 billion.
The U.S.-Canada softwood lumber dispute dates back many decades, but the most recent spate of protection, rulings, and edicts relates to litigation that began in the early 1980s, evolved into the Softwood Lumber Agreement of 1996, and then produced new trade remedy cases and a string of litigation beginning in 2001, when SLA 1996 expired. (This paper attempts to present a chronology of events—but the most recent events are not documented therein.)
Make no mistake: the United States is the villain in the lumber dispute. Read the rest of this post »
Public Health & Economic Literacy
My former research assistant is now pursuing a master’s degree in public health at Harvard. She recently blogged about her economics course:
During econ class today, the professor explained in great detail the ways in which the federal government tinkers with agricultural output, like price floors and crop restriction and so forth. A lot of my classmates were genuinely surprised at the extent to which government messes with food production to placate the farm lobby, and that, in turn, surprised me. I thought most people — or most well-educated grad students and medical residents, who make up my class — knew all about concentrated benefits/diffuse costs, and why we probably pay more for milk than we should. At one point, a student from India, astonished, said, “You mean the government actually sets aside these funds every year for this purpose?” Professor: “Of course not. We run deficits.”
Again, these students made it all the way to Harvard without any exposure to such things. Makes me wonder if any research has been done on the economic literacy of the public health profession. (E-mail me here if you’re aware of any.)
Let’s just hope that Adrienne’s econ class is a required course.
A New Solution to the Trade Deficit ‘Problem’
I’ll be honest with you folks — in Australia we have an expression, “Only in America!” It is used whenever outlandish, seemingly crazy, or especially unusual ideas or events occur over here. It is frequently used by news-readers. Please don’t be offended.
Anyway, I am proposing a new expression, “Only from Congress.” It could be used to describe, well, whenever an outlandish, seemingly crazy, or especially unusual idea is announced by members of Congress. And to kick things off, I would like to introduce the first item for your consideration.
Two Democratic senators, Byron Dorgan of North Dakota and Russ Feingold of Wisconsin, have proposed that any company wishing to import goods into America would need a government-issued certificate. The senators, according to this New York Times article (link requires subscription), view this as a “market-based system to cut the trade deficit to zero within 10 years.”
It would work thus: Any company that exports goods would be issued an import certificate that would allow it to import goods. The “exchange rate” would fall from $1.40 in the first year (i.e., $1 worth of exports would earn $1.40 worth of imports), to $1.30 in the second year, and so on until we achieve “balance.” If a company does not wish to import anything, it can sell the import certificate to someone who does. I guess that’s the “market-based” part. Read the rest of this post »
Don’t Count on China
Following on from the visit last month of United States Trade Representative Susan Schwab, the Director-General of the World Trade Organization, Pascal Lamy, is visiting China this week to drum up Chinese support for reviving the Doha round of multilateral trade negotiations. He appears to have been given the same non-response as the USTR.
The Chinese have put the ball squarely back in the court of the EU and the United States, saying it was up to the major developed countries to take the lead in reviving the talks. (full story here).
China has so far kept very quiet in the trade talks, limiting their participation to argue for a ‘time out’ from trade liberalization for newly-acceded members. Having given major “concessions” to join the club, they figure they’ve paid their dues and should be given time to soak up the atmosphere. And given the often poisonous rhetoric surrounding China’s role in the world economy (not least from certain U.S. Congressmen), one can hardly blame them from keeping their heads below the parapet in the negotiations proper.
It is true, as Ambassador Schwab and DG Lamy have argued, that China has gained a lot from joining the WTO (although many of those gains would have been realized anyway as a result of unilaterally liberalizing their economy) and would stand to lose from a failed WTO. Similarly, China should be held to account for the commitments it made upon joining the WTO. But expecting China to take a more active role in the negotiations, and reverse their stance of the past five or so years, is a bit much. And, as they have proved on the currency issue, the Chinese won’t be bullied.
The “quiet diplomacy” to revive the round will likely continue, including at the IMF and World Bank shindigs later this month. But if a miracle occurs and the Doha round is concluded, it won’t be because of China’s efforts.
Rural Newspaper Calls for the President and the Senate to “Mind Their Business”
The Enid News and Eagle posted an opinion article last week on the new farm bill. Admittedly, it is a rural paper (based in Enid, Oklahoma) catering to a rural readership. Most of you will probably not have seen it. But I was struck by a number of passages.
Take this one, for starters:
“It seems the 2002 farm bill was one of the more popular farm bills to come out in the history of farm bills, according to Frank Lucas. The Third District representative has been traveling the state getting input from agricultural officials and farmers on what should be included in the 2007 version of the farm bill.”
Of course the 2002 Farm Bill was popular, Congressman, at least with the “agricultural officials and farmers” you are talking to. A significant backtrack from previous farm bills, payments to farmers under the 2002 Farm Bill are projected to average over US$20 billion per year from 2005 to 2007. Agriculture officials are hardly going to support huge cuts to the agriculture budget, either.
Or consider this gem:
“…the House committee knows the most about agriculture and has the most contact with the people it will affect…”
The Enid News and Eagle is suggesting that the “people it will affect” are farmers and ranchers. This is undeniably true. But this farm bill, like all the others before it, will also affect every taxpayer and consumer of food in the country, not to mention commodity producers abroad. (more here)
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