Destroying the Myth that Trade Deficits Are a Drag on the US Economy

As I've repeatedly noted on this blog, a rampant misunderstanding of the US trade deficit drives much of the public criticism (and fear) of American free trade policies.  Those who propagate this misinformation - e.g., journalists, politicians, private sector advocates and policy wonks - do so out of either simple ignorance or willful disregard for the truth.  Sadly, it's far more often the latter than the former, so that's why studies like the brand new one from Cato's Dan Griswold are absolutely essential to dismantling the all-too-widely-accepted protectionist myth that the US trade deficit is a harbinger of economic doom.

In "The Trade-Balance Creed: Debunking the Belief that Imports and Trade Deficits Are a "Drag on Growth," Griswold argues (emphasis mine):

A nearly universal consensus prevails that the goal of U.S. trade policy should be to promote exports over imports, and that rising imports and trade deficits are bad for economic growth and employment.

The consensus creed is based on a misunderstanding of how U.S. gross domestic product is calculated. Imports are not a "subtraction" from GDP. They are merely removed from the final calculation of GDP because they are not a part of domestic production.

Contrary to the prevailing view, imports are not a "leakage" of demand abroad. In the annual U.S. balance of payments, all transactions balance. The net outflow of dollars to purchase imports over exports are offset each year by a net inflow of foreign capital to purchase U.S. assets. This capital surplus stimulates the U.S. economy while boosting our productive capacity.

An examination of the past 30 years of U.S. economic performance offers no evidence that a rising level of imports or growing trade deficits have negatively affected the U.S. economy. In fact, since 1980, the U.S. economy has grown more than three times faster during periods when the trade deficit was expanding as a share of GDP compared to periods when it was contracting. Stock market appreciation, manufacturing output, and job growth were all significantly more robust during periods of expanding imports and trade deficits.

The goal of U.S. trade policy should not be to promote exports at the expense of imports, but to maximize the freedom of Americans to trade goods, services, and assets in the global marketplace.

Indeed.  Griswold, of course, supports all of these arguments with oodles of verifiable data - something his opponents rarely, if ever, provide.  (I especially like the table on page 9, which undeniably supports, with US government data, the bolded passage above.)  So it goes without saying that I highly recommend reading the whole study.  It's well worth your time.

Christmas Quick Hits

Things are about to get realllly slow in anticipation of the Big Guy's arrival on Saturday, so here's a cavalcade of reading material to tide you over:

• Cato vs. the US Antidumping Law.  Advantage: Cato.

• Rep. Michelle Bachmann (R-MN) comes out swinging against the United States' embarrassing, anti-competitive corporate tax rate.

• The 111th Congress is over, and so is China currency legislation (until the next election season, natch).

• At literally the 11th hour, Congress extended trade benefits for Andean countries and US consumers of goods from those countries.  But by failing to extend the Generalized System of Preferences, Congress screwed over other developing countries and US consumers (who saved $577 million in 2009 due to the program).  Gee thanks, Sen. Sessions.   By the way, be sure to check out that USTR press release: Amb. Kirk talks about import benefits and tariff savings.  Nice!

• Great essay by GMU's Don Boudreaux on tariffs, freedom and that age-old canard that protectionism propelled the US to glorious heights in the late 1800s. 

• Free trade helps ensure peace on earth (and goodwill towards men, I'm sure).

• An excellent defense of those dastardly market speculators.

• And, finally, a Christmas monkey message:

Merry Christmas, everyone.

A Deficit of Economic and Strategic Thinking (UPDATED)

Yesterday, the US House of Representatives passed by voice vote legislation that would establish a commission (yes, another one) to study the US trade deficit.  Anyone who reads this blog regularly will understand just how much this legislation makes me want to set my hair on fire (answer: a whole frickin' lot).  But Cato's Sallie James does a great job summarizing my - and all free traders' - frustrations, so I'll just let her do the complaining (lots of good links in the original blog post, so be sure to check it out):

A bunch of lawmakers — led by Reps. Defazio (D, OR), Slaughter (D, NY), Kaptur (D, OH) and Massa (D, NY) — recently introduced a bill (H.R. 1875) to establish an “Emergency Commission To End the Trade Deficit.” The House passed the bill by voice vote this afternoon.

After drawing Congress’ attention to a whole lot of scary-sounding data about the trade deficit (my colleague Dan Griswold explains why that metric is misleading as an indicator of national wellbeing), the national debt (which I agree is a problem) and the supposed death of manufacturing, the bill calls for a $2 million (for now) Commission, the purpose of which is to:

develop a trade policy plan to eliminate the United States merchandise trade deficit by January 1, 2019, and to develop a competitive trade policy for the 21st century. The plan shall include strategies necessary to achieve a balance of trade that fully reflects the competitiveness and productivity of the United States and also improves the standard of living of United States citizens. [my emphasis]

It is as though the standard of living for Americans over the past few decades of trade deficits had been falling, rather than rising. As though a balance of trade was an end in itself.

A lot of the Commission’s work would be “merely” reporting on various aspects of our trade relationship with the rest of the world. But I do not for one second think that these lawmakers will be happy to take the Commission’s report and forget about it. They’ll want to torture that data until it confesses what they want, and then they’ll want to take action based on that confession. My hunch isn’t totally baseless, either. Plenty of clues lie in section 4(5), for example, which asks the Commission for suggestions for:

(A) the development of bilateral and multilateral trade relationships based on market access reciprocity; [i.e., managed trade]

(B) the retention and expansion of the manufacturing, agricultural, and technology sectors in the United States; [sounds like a call for protection]

(C) the discouragement of the expatriation of United States plants, jobs, and production to countries that have achieved competitive advantages by permitting lower wages or lower health, safety, and environmental standards, or by imposing requirements with respect to investment, performance, or other obligations; [ditto]

(D) methods by which the United States can effectively compete in a global economy while improving the labor, social, and environmental standards of its trading partners, particularly developing countries; [protectionism disguised in a humanitarian costume]

(E) methods by which the United States can respond to substantial shifts or manipulation of currency exchange rates that distort trade relationships; [highly risky -- and probably ineffectual -- unilateral sanctions on, reading between the lines, China]

(F) methods for overcoming and offsetting trade barriers that are either not subject to or otherwise inadequately addressed by the World Trade Organization or other multilateral arrangements; [unilateral sanctions outside the rule of international law that -- for better or worse -- the U.S. initiated, sponsored and adopted]

(G) specific strategies for achieving improved trade balances with those countries with which the United States has significant, persistent sectoral or bilateral trade deficits, including Canada, the People’s Republic of China, Mexico, and Japan; [see (A) above]

(H) methods for the United States to respond to the particular needs and circumstances of developing and developed countries in a manner that is mutually beneficial; [who knows what is lurking behind this statement] and

(I) changes that may be required to current trade agreements and organizations to allow the United States to pursue and nurture economic growth for its manufacturing, agriculture, and other production sectors in a manner that ensures improved compensation and quality of life for United States citizens. [sounds so pleasant and inoffensive, doesn't it? Make no mistake, though: There's a whole lotta infant industry protectionism lurking there. The use of the word "nurturing," for example, is a flashing red light] (all emphases and bracketed comments mine)

If this bill passes the Senate and is signed into law (a big if, admittedly), that is the final death knell for any pending trade agreements, since the bill also calls for a moratorium on free trade agreements until the Commission’s report is issued and hearings held.

The freedom of individuals to trade across borders has rarely been held in so much contempt.

Indeed.  Now, as a quick aside (and the only bright spot in this news), Reuters reports that the aforementioned trade agreement moratorium was dropped in the final version of the bill, so there's a little silver lining.  But the rest of the bill, sadly, remains intact.  Fortunately, the chances of the Senate passing this nonsense are hovering right between slim and none because, unlike the the lower chamber, only one-third of the Senate is up for re-election in November.  (Yes, I'm cynical, but I'm also right.)

Nevertheless, that this horrid piece of nonsensical legislation passed by voice vote (i.e., without any debate or controversy) in the House is a pretty clear sign of where the political debate over free trade in general, and the trade deficit in particular, stands right now.  In short: it's in the crapper.  And because the facts on the trade deficit overwhelmingly support free traders, this sad reality begs the obvious question: how on earth can legislation this stupid pass the House so easily?

Well, beyond the fact that it's an election year and stupid things happen in an election year, the (other) obvious answer is (as I've said repeatedly): poll after poll demonstrates that a slim majority of the American people don't support truly free trade and don't know the basic facts about the trade deficit, and until this changes, you're always going to find a few hundred less-than-principled House members (from both parties) who will vote "aye" on whatever piece of anti-trade garbage put in front of them.  Thus, if free traders are ever to win this debate, the job of those few principled politicians is to get out there and spread the gospel - to attack the protectionist, mercantilist myths spewed by the bad guys and to demonstrate why they're wrong and why they're misleading the American public.

And it's on this latter point where things really get depressing.  You see, in response to the House vote, two of the "good guys" - Reps. Dave Camp (R-MI) and Kevin Brady (R-TX) - released the following statements (emphasis mine):

CAMP: “I will support this legislation today because it is an attempt to help U.S. manufacturers. But let’s be clear – another commission, especially one that is wrongly premised on the notion that we should apologize for or even avoid trade – is hardly what private sector job creators need…We have years of real world results to understand that the best way to increase American exports and reduce the trade deficit is to open more foreign markets. The United States has trade agreements with 17 countries, and in 2009 we had a trade surplus in manufactured products of over $26 billion with these countries. So far in 2010, we have a trade surplus in manufactured products of $9.4 billion with these countries. The three pending trade agreements would continue this success. According to the independent, non-partisan U.S. International Trade Commission, these three agreements could increase U.S. exports by at least $13 billion. This substantial increase in U.S. exports is possible because these agreements level the playing field for American workers.”

BRADY: “It’s important to tackle America’s trade deficit the right way, and everyone understands another government commission is no substitute for new customers for American workers, farmers and manufacturers”, said Congressman Brady. “The best way to shrink the trade deficit while strengthening America’s economy is to reduce America’s dependence on foreign oil and open the world to more U.S. products and services. If they are serious, Democrats and the White House can start by taking up and passing the pending trade agreements with South Korea, Panama and Colombia.”

I hate to disparage two elected officials with a good history of resisting US protectionism, but as the bolded passages make clear, Reps. Camp and Brady are advocating mercantilism, not free trade.  In the process, they expressly accept the (wrong) premise that the trade deficit is a horrible problem to be solved and a harbinger of American economic demise.  And, as I've noted repeatedly, when pro-trade folks rely on mercantilist arguments (instead of ones that embrace exports and imports) to refute anti-trade positions or defend US FTAs, they will always - always - lose the debate because the protectionists will immediately point to the current trade deficit as concrete evidence that, by the pro-traders own metric, the United  States is "losing" at trade and thus drastic protectionism is warranted.  This is exactly the trap into which Camp and Brady mindlessly fall, and I wouldn't be surprised at all if some trite protectionist immediately fired off a statement refuting the Congressmen's well-intentioned (I assume) press release with a few simple stats about the expanding US trade deficit under "NAFTA-style" trade agreements that are very similar to the pending FTAs that Camp and Brady advocate.  Blech.

And, look, I know that Camp and Brady too are facing re-election in November, and those aforementioned polls on trade probably weigh heavily on their (or their congressional staff's) thoughts about taking this issue head-on.  But, seriously, folks, if you're going to respond like this, just don't say anything at all because this stuff is not helping the cause.  At all.

As recent history has repeatedly taught us, until the "good guys" decide to adopt a smart political strategy that embraces economic reality and calls out the opposition for the smarmy, incorrect politicians that they are, public opinion on trade will never change.  It'll continue to stink, and we'll thus continue to see stupid anti-trade legislation breeze through the House every two years.

I'd say it's time for a new approach, wouldn't you?

UPDATE: Ms. James has found a few more changes in the bill (including the title), and has therefore posted a follow-up blog entry here.  In short: the deck chairs have been rearranged, but the ship's still aiming for the iceberg.

Center for American Progress, France Blindly Push for Carbon Tariffs

The left-leaning Center for American Progress has issued a new paper calling for the implementation of a US-EU system of carbon tariffs.  The author, CAP's Jake Caldwell, summarizes his case as follows:

Carbon tariffs—which the United States and the European Union could decide to impose on greenhouse-gas-intensive products imported from countries refusing to take action on climate change—have the potential to play an important role in these [climate change] discussions moving forward. Carbon tariffs can be an effective policy tool to reduce global emissions and preventing carbon leakage, or the migration of carbon-intensive industries to countries with more lax regulations.

But we must proceed cautiously. Carbon tariffs may also present significant risks to the multilateral trading system and the Earth’s climate if they are designed and implemented poorly and do not fundamentally reduce global greenhouse gas emissions. That’s why the United States and the European Union should work together to design and implement an open and transparent approach to carbon tariffs as part of an overall effort to reduce global greenhouse gas emissions.

Caldwell goes on to explain, as pleasantly as possible, how and why carbon tariffs should be a part of the United States' and EU's future climate policy plans.  As to the latter issue, Caldwell's two primary reasons for supporting carbon tariffs are (i) to stop "carbon leakage" (i.e., the movement of emissions-intensive production to poorly regulated countries); and (ii) to ensure the competitiveness of the domestic industries being strangledregulated by new climate change schemes.  Unfortunately, Caldwell's discussion includes not a shred of evidence that carbon tariffs would actually, you know, achieve those objectives.  (Seriously, there's not a single link or footnote to anything of the sort.)  On the other hand, Caldwell could have spent two minutes on this blog and found oodles of scholarly evidence (see, e.g., here, here, here and here) showing that they would not.

As for the "how," Caldwell provides a laundry list of ideas about what his ideal system should entail: (i) apply carbon tariffs in an open and transparent manner; (ii) exempt least developed countries from tariffs; (iii) consider countries’ greenhouse gas reduction efforts; (iv) establish a joint US-EU working group to identify the relationship between trade and climate change issues; (v) invoke a joint US-EU agreement to apply a “peace clause” for an initial period of 10 years; (vi) allow national leaders to make a final decision on carbon tariffs; and (vii) consider other policy options to address carbon leakage and competitiveness.

I won't get into all of these issues, but I find (i) and (iv) to be really, really interesting (and not in a good way).  On "transparency and openness," Caldwell doesn't really explain how that would work, but I (and many scholars and developing countries) am rather skeptical that such "transparency" is possible or even helpful for developing a "fair" system.  Indeed, I wonder if he's ever seen or read a 100+-page Department of Commerce decision memorandum in a US trade remedies investigation - one that imposes supposedly "remedial" tariffs of 100% or higher on "unfairly traded" Chinese imports, and requires a Rosetta Stone to even begin to understand (hence, why I'm employed).  And that's just the public memos.  There are always hundreds more pages of proprietary calculation documents.  So knowing how our existing remedial tariffs are calculated and imposed on "unfairly-traded" imports, does Caldwell really think that similarly "remedial" tariffs on "non-green" imports would be calculated and imposed any differently or better?  Oh, and let's also keep in mind who's lobbying for, and drafting, these carbon tariff "transparency" regulations.  (Hint: it ain't developing country governments, their exporters or US consumers.)

On point (iv) (i.e., the "joint US-EU working group to identify the relationship between trade and climate change issues"), I'm just flat confused.  According to Caldwell, his working group would "consider a range of issues including the use of carbon tariffs and... guide the WTO’s approach to these issues."  Well, considering how darn controversial carbon tariffs are for developing countries and that they could literally start a trade war, shouldn't an honest and sound environmental policy first consider and determine the "relationship between trade and climate change" before strongly advocating dangerous systems that include border measures based on that relationship?  And second, does Caldwell actually think that a US-EU working group, which excludes 151 other WTO Members, would be well-received and adopted at the WTO, which relies on consensus-driven decision making?  Or does he think that the WTO's seriously independent Appellate Body would gladly be "guided" by the very developed countries whose carbon tariff measures would no doubt be challenged (by India, China or other Members) before it?  (Quick answer: Not gonna happen, dude.)

And speaking of the WTO, it's a tad, ahem, unfortunate that Caldwell glosses over the very serious legal concerns raised by India and others that carbon tariffs don't comply with WTO rules.  His only legal justification is the now-notorious joint paper by the WTO and the UNEP which, as Caldwell rather coolly admits, only "suggests border adjustment measures may be consistent with WTO rules in certain circumstances." (Waffling emphasis mine.)  Of course, all those qualifiers are totally necessary because Cato's Sallie James and the Indian Government, among others, have both provided ample legal argument that most carbon tariff schemes would not be consistent with global trade rules.

Indeed, it's James' analysis which is most interesting here because one of her paper's main points was that WTO rules necessitate that "[a]ny trade-related measures (such as tariffs on goods from noncapped countries) need to be based strictly on the goal of protecting the environment, rather than an attempt to level the playing field for domestic competitors shackled by climate change regulations. Breaking the link between the trade measure and the goal of protecting the environment is a sure invitation to WTO dispute-settlement proceedings."  Yet, as noted above, one of Caldwell's two big reasons for carbon tariffs is the need to maintain the competitiveness of US and EU manufacturers.  In other words, Caldwell in one breath brushes off WTO concerns over carbon tariffs, yet his primary reasoning for their use is precisely what will trigger a big WTO dispute.

Umm, what!? 

So to recap, Caldwell (i) provides no empirical support for, and ignores the boatloads of evidence against, his main carbon tariffs justifications; (ii) proposes a "system" that is almost certainly impractical; and (iii) ignores carbon tariffs' legal problems under WTO rules.  But other than that........

But hey, all's not lost for Caldwell, as today's other carbon tariffs news shows that he's not alone out there in his support for the controversial measures.  Euractiv reports that the French government, fresh off the collapse of its own national efforts to impose carbon tariffs, is aggressively pushing for them at the EU.  Problem is that most every other European nation (minus Italy) and the EU's Trade Commissioner Karel De Gucht (among others) oppose carbon tariffs because they'd raise prices for consumers and possibly start a trade war.

Funny how Caldwell, while mentioning France and Italy, also fails to mention that stubborn little fact, huh?

(Actually, no it's not.)

Finally, A Trade Dispute I Fully Support

WorldTradeLaw.net is hosting a great online debate on Free Trade vs. Protectionism between the Cato Institute's Dan Griswold and Ian Fletcher of the US Business and Industry Council.  Griswold is the author of Mad About Trade: Why Main Street America Should Embrace Globalization, and Fletcher is the author of Free Trade Doesn't Work: What Should Replace it and Why.  Safe to say that it's pretty obvious who will be arguing what in this debate (and which side I intensely favor).

The guys' opening statements have been posted today.  Griswold's is here, and Fletcher's is here.  Unsurprisingly, I already have a few comments on each post, but I'll save them to the end.  (Wouldn't want to influence your reading!)

Do enjoy.