New Study: More Trade = More Jobs

One of the big problems with the political debate over US trade policy is that politicians and much of the American public demand that trade policies be sold in terms of jobs, regardless of whether good data tying trade to employment actually exist.  Free traders typically refuse to speak of trade in terms of net-jobs-created because they know that basic economics teaches us that trade liberalization is really about better jobs, not necessarily more jobs.  Protectionists, on the other hand, rarely display such, ahem, economic limitations and are thus all too eager to cite bogus studies tying free trade policies to ridiculously specific numbers of lost American jobs.  (For a great example of this unfairly tilted political playing field, check out this classic column by AEI's Phil Levy on protectionists' absurd claims about supposed US job-losses caused by NAFTA.)

Thus, the typical exchange at a Congressional hearing (or your local watering hole) goes something like this:

Congressman/Bartender: Want to me to support this FTA?  Well, then tell me how many jobs it's going to bring to my district/town.

Naive free trader: Well, sir, free trade really isn't about creating more jobs, it's about productivity gains, creative destruction and better jobs, and, of course, it's about expanding the freedom of the American people to choose how and with whom they do business, rather than forcibly limiting that freedom in order to benefit a select group of well-connected producers and unions.

Angry Protectionist: The FTA will destroy 734.6 jobs.

Seriously, is it any wonder why the poll numbers on trade routinely stink?  Unfortunately, today's economic environment has exponentially increased the political pressure to tie trade (or any other) policies to specific job numbers, so the disadvantage that free traders face in the political arena is even more acute than ever.

That's why a new study in the European Economic Review called "Trade and Unemployment: What Do the Data Say?" could be a really great new resource for those seeking to advocate free trade policies using intellectually honest arguments.  According to the study's authors, there is strong empirical evidence that nations that trade more - through exports and imports - have lower long-term unemployment.  Here's the paper's abstract (emphasis mine):

This paper documents a robust empirical regularity: in the long-run, higher trade openness is associated with a lower structural rate of unemployment. We establish this fact using: (i) panel data from 20 OECD countries, (ii) cross-sectional data on a larger set of countries. The time structure of the panel data allows us to control for unobserved heterogeneity, whereas cross-sectional data make it possible to instrument openness by its geographical component. In both setups, we purge the data of business cycle effects, include a host of institutional and geographical variables, and control for within-country trade. Our main finding is robust to various definitions of unemployment rates and openness measures. Our benchmark specification suggests that a 10 percentage point increase in total trade openness reduces aggregate unemployment by about three quarters of one percentage point.

Did you get that?  Ok, me neither.  Fortunately, Reason Magazine's Ronald Bailey translates this nerdspeak into regular English for us regular folk:

[The study] forthrightly asks the question: Does exposure to international trade create or destroy jobs? Their answer strongly backs the observation made by Franklin more than 230 years ago. “A 10 percent increase in total trade openness reduces aggregate unemployment by about three quarters of one percentage point,” they conclude. To be a bit more precise, they find, “A 10 percentage point increase lowers the equilibrium rate of unemployment by about 0.76 percentage points.” Trade creates jobs.

In general, the higher a country’s volume of international trade, the higher is its degree of openness. Trade openness is generally measured by adding together the value of both exports and imports and dividing that sum by total gross domestic product (GDP). Crudely, let’s say an economy imports $10 billion annually and exports $10 billion annually and has a total GDP of $100 billion. That would yield a trade openness index figure of 20 percent. Another country with a GDP of $100 billion exports $15 billion and imports $15 billion, yielding a trade openness index of 30 percent.

Roughly speaking, U.S. GDP was $15 trillion in 2010, and exports and imports combined totaled just over $4 trillion, yielding a trade openness index figure of 27 percent. Without going into detail, the European economists derive a real trade openness index by taking differing price levels among countries into account.

The researchers then compare the relative trade openness of 20 developed countries in the Organization for Economic Cooperation and Development with their unemployment rates over time. They take into account other factors such as union membership, national employment protection policies, tax rates on wages, and the generosity of unemployment insurance....

The researchers go on to analyze the effect of freer trade on a selection of 62 developing countries. They take into account features like the size of the black market economy and whether a country is landlocked or not. Again, they find that openness to trade boosts employment, concluding that “the effect of a 10 percentage point increase in openness lowers unemployment by about 1 percentage point.”

So why does free trade create more jobs? The study suggests that freer trade boosts overall productivity, enabling companies to hire more workers. Trade enhances competition which weeds out inefficient firms and allows more productive ones to expand. As the average efficiency of firms in a country increases, they can earn more revenues by boosting production. And that leads to hiring additional workers.

In short, the study's authors have demonstrated through oodles of hard data that all the increased productivity and long-term economic growth caused by trade ends up eventually translating into not only better jobs, but also more jobs.  (And please note that trade deficits and surpluses don't matter - what does matter is total trade, regardless of the "balance.")

Pretty cool, huh?  Actually, it's more than cool - it's a very, very helpful little nugget for the upcoming congressional debate over pending US trade agreements with Korea, Colombia and Panama, which will doubtlessly increase total trade by eliminating barriers on goods and services traded between the countries involved.

Now, let's go back to our earlier hypothetical:

Congressman/Bartender: Want to me to support this FTA?  Well, then tell me how many jobs it's going to bring to my district/town.

Emboldened free trader: Well, sir, countries that trade more have significantly lower unemployment than those that don't, and this FTA will inevitably increase US trade with Korea/Colombia/Panama.  And, of course, free trade is also about expanding the freedom of the American people to choose how and with whom they do business, rather than forcibly limiting that freedom in order to benefit a select group of well-connected producers and unions.

Angry Protectionist: The FTA will, umm, destroy 734.6 jobs.  Hey, stop laughing at me.  Seriously, stop.  That's not cool.

Much, much better.

UPDATE: In a case of crazy coincidence, Cato's Dan Griswold just published a new blog post on the latest bogus "jobs" study.

KORUS Afterthoughts

With a KORUS deal in the bag and both Presidents signaling strong support, here are a few more things - some big, some little - to consider since last Friday's original post on the new agreement.

• It turns out that the agreement included more new protectionism than I originally noted.  In particular, Korea now gets to maintain its tariffs on US pork until 2016, instead of 2014 as originally agreed in 2007.  (The Korea Times has a nice rundown here.)  Market access for American pork was one of the big achievements of the original 2007 agreement, so this is a little more serious than it sounds.  That said, this bad change, like those on autos, won't override the agreement's overwhelming economic benefits, but it still stinks that our administration is bragging about "improving" a free trade agreement by increasing trade barriers, not lowering them. 

• Thinking more broadly about last week's deal, it becomes pretty clear to me that the Koreans really caved.  Not only does the laundry-list of achievements/concessions appear to favor US negotiators (Nice work, team! Way to keep the US market closed! Grumble grumble), but the re-opening of the agreement necessary to complete last week's deal is also a dramatic shift from Korea's consistently firm stance on the FTA that, for economic, strategic and political reasons, they would not agree to substantive, textual changes.  So why the complete reversal, especially when, armed with the Korea-EU FTA and similar trade agreements with other US competitors, the Koreans had the upper hand?  I can only think of one thing, and it actually has very little to do with the FTA: North Korea.  It seems to me that the only thing that changed between last month's embarrassing meeting and non-agreement between Presidents Obama and Lee and last Friday's deal was the unprovoked attack on South Korea (and murder of several of its citizens) by a certain psychopathic dictator and his babyfaced dictator-in-training to the North.  After those Nork missiles were fired, I think completion of these distracting trade negotiations got a lot more urgent, and the South Koreans decided that the long-term bilateral relationship was a lot more important than a few million dollars in automobiles nonsense (and the UAW had no counterbalancing concerns, of course).  So in the end, it could be that the most effective KORUS negotiator wasn't an American or a South Korean but instead a stumpy, murderous jerk who likes to look at things.

• Not everything about the KORUS deal surprised me.  For example, we got to watch our Mercantilist-in-Chief go through some typical contortions to avoid mentioning the economic benefits that Korean imports would provide American consumers (including many businesses).  In his remarks heralding last week's agreement, Obama stated that KORUS will benefit American exporters ("For our farmers and ranchers, it will increase exports of American agricultural products. From aerospace to electronics, it will increase our manufacturing exports to Korea, which already support some 200,000 American jobs and many small businesses."); he stated that it will benefit Korean exporters and consumers ("They will gain greater access to our markets and make American products more affordable for Korean households and businesses -- resulting in more choices for Korean consumers and more jobs for Americans."); but he didn't say anything about American consumers and the (very significant) benefits they'd derive from the FTA.  I guess American imports into Korea benefit Korean households and businesses, but Korean imports to the US?  Not so much.  And once again, when faced with a very public opportunity to educate the public on all of trade's benefits, President Obama whiffed.  Shocking, I know. 

• Finally, and on a serious note, has anyone given any thought to how this new deal will affect congressional consideration and approval of FTA?  Sure, people are already vote counting, but that's not actually my concern (I think the agreement will pass pretty easily).  Instead, I'm very curious as to whether this "new" agreement will be covered by the now-expired Trade Promotion Authority (aka "fast track"), which subjects trade agreements completed and signed before July 1, 2007 to strict procedural requirements and thus prevents congressional meddling.  A few observers are assuming that TPA will apply because the original agreement was signed on June 30, 2007, but the law on TPA (19 U.S.C. 2191-2194 and 3803-3805) states, inter alia, that it will cover trade agreements "entered into" by the President before July 1, 2007.  Thus, it appears that whether TPA applies to the KORUS will rest entirely on whether the 2010 changes on autos, beef, etc. mean that the agreement wasn't "entered into" until now.  The changes announced to the FTA - especially those affecting the countries' previously-agreed tariff schedules - almost certainly constitute substantive changes to the agreement, so I'm having a very hard time figuring out how someone can seriously argue that TPA will apply - i.e., that the agreement wasn't substantively modified such that it must be re-signed and "entered into" again.  [Note: USTR is calling this a "supplemental agreement," so maybe they're going to spin this as outside the original agreement, but that seems like a pretty hard sell considering that specific tariff lines, present in the original agreement, have been changed by the 2010 pact.] 

• And trust me, this is no small matter - if TPA doesn't apply, then all of its important procedural limitations - short timelines, limited committee consideration, no amendments, etc. - don't apply.  And, as I discussed a few weeks ago, TPA effectively prevents a few powerful congressmen or senators from singlehandedly derailing the deal (through procedural maneuvers, "poison pill" amendments and other nasty things).  Senate Finance Committee chair Max Baucus is apparently spitting mad that last week's deal didn't address Korean restrictions on US beef exports, and while he's powerful enough to scuttle the deal, I doubt he'll do it (although he might use his new power to get Korea to move on beef outside the confines of the FTA).  On the other hand, folks like anti-trade stalwart Sen. Sherrod Brown (D-OH) would probably have no such reservations, particularly if Brown's favorite constituents - the United Steelworkers Union - decide to oppose the deal (as of now, they're still decidingdetermining what goodies they can squeeze out of the White House).  So am I missing something here, or is TPA a bigger issue than most people are considering?  I'd assume that the White House and USTR have already considered this important procedural issue, so maybe I'm worrying about nothing; then again, considering that this is the same team that amateurishly allowed the President to set - and then miss - a very public November 2010 deadline for KORUS' completion, I'm not so sure about that anymore.  I guess we'll find out soon enough.

A little more food for thought.  Your thoughts on the last point would be particularly welcome.

[UPDATE: According to Reuters' Doug Palmer (via Twitter), USTR and the White House say that TPA will apply.  I'd prefer to hear that from the congressional experts - i.e., the House and Senate parliamentarians, and maybe the Ways & Means and Senate Finance trade counsels - not the agreement's salesmen.]

If You Read Only Two Things Today, Read These Two Things

I'm sure I'll be found guilty of overselling these two articles, but alas.  First up is Kevin Williamson's hilarious, deadly-accurate critique of the administration's wrongheaded China currency scapegoating.  My favorite lines:

Obama and the Sinophobe wing of the Democratic party have seized upon what is for them a nearly perfect issue: the valuation of China’s currency, the renminbi. The issue is complicated enough to accommodate the intellectual vanity of the president and his coterie while consigning most voters to a state of rational ignorance, and the narrative is flexible enough to be used to explain away a great many varieties of bad economic news. It’s the all-purpose phlogiston of the self-consciously cerebral policy set. Massive trade deficits? Blame the renminbi. Investment in decline? Blame the renminbi. The fact that Obama’s reckless State of the Union promise to double American exports is starting to look like the sort of thing a luckless gambler says to himself before putting his Greyhound-ticket money on the craps table in Vegas? Blame the renminbi. Persistent levels of historically high unemployment? Chinamen are stealing our jobs and using their artificially devalued currency to do it....

The People’s Republic of China is a for-profit police state, and we should not be under any illusions about the chances of its reforming its ways and further liberalizing its economy and politics, or the possibility of its chauvinistic rulers’ acting with regard to anything other than the ruthless pursuit of their national interest, in whatever distorted way they define that. While Deng Xiaoping’s much-vaunted economic-liberalization program worked undeniable wonders, the thawing of the Chinese economy came to a halt years ago, and if there is any political progress in sight, it is not obvious. All of which really ought to be of interest only to full-on Sinologists, because, the Obama administration’s populist fist-shaking notwithstanding, China’s economic policy is not what ails America — any more than Japan’s economic policy was what ailed America during the Carter years, that awful interlude during which Honda and Toyota viciously conspired to dump affordable, reliable, fuel-efficient automobiles on unsuspecting Americans who really wanted to buy an AMC Gremlin but were duped into an upgrade by those inscrutable Orientals and their long-game industrial policies. China’s economic policy is what ails China. Fortunately, today as in the 1970s, most of what is troubling the U.S. economy is the result of decisions taken in the United States, not in faraway Asian capitals. The American problem is in Washington, not in Beijing....

How Japan went wrong is a big and complicated and contested story, and it is really beside the point: What most matters right now is what Beijing thinks happened to Japan. In the Chinese version, the United States forced Japan to allow the yen to appreciate, with Washington orchestrating the Japanese catastrophe with malice aforethought. So when Barack Obama comes around saying, in effect, “Pump up that renminbi — or else!” the guys in Beijing are pretty sure they’ve heard that story before, and they do not plan to be played for chumps the way they think the Japanese were. They drive tanks over people who don’t see the world the way they do, and they are not going to be bullied by Professor Obama....

So what should the United States “do” about China? Nothing. Nada. Sit on our national hands. Economists who have looked at the renminbi situation conclude that the currency is indeed undervalued, but that it could climb as much as 6 percent with basically no effect on the U.S.-China trade relationship. Even if the renminbi were allowed to climb the full 20 or 30 percent by which the most fearful China hawks believe it to be undervalued, it is extraordinarily unlikely that this would have the effect of causing manufacturing employment to shift from China to the United States. If that $5 plastic toy at Wal-Mart goes up to $6, is that suddenly going to make California, Ohio, or New Jersey more attractive to low-end manufacturers than China, India, or Bangladesh? Doubtful. In all likelihood, the result would simply be that the United States would pay more for its imports than it does today — meaning that our trade deficit would get worse, not better. Paying more money for the same amount of stuff would not make us any richer, nor would replacing Chinese imports with imports from Vietnam, Mexico, or Honduras.

As a matter of pure economic calculation, the costs of trying to force Beijing to act in accordance with Washington’s desires almost certainly are greater than the value we would derive from whatever marginal success we might have in the endeavor. For all the talk about our “competitiveness” vis-à-vis China, the complexities of the relationship, the differences in comparative advantage, and the fundamental unknowability of the future all make it difficult even to define “competitiveness” in this context, and more difficult to cultivate it intelligently — and much more difficult to cultivate it intelligently by pressuring Beijing to act in ways Beijing is not inclined to act.

Washington probably cannot get Beijing to change its ways, but Washington can change its own ways, which would be considerably more productive and a heck of a lot less likely to lead to a trade war — or a war war. We can start with acknowledging what has made our competitors stronger over the years: savings, investment, and innovation — the things that lead to productivity, the only economic measure that really matters, being as it is the factor that enables high levels of employment, high wages, and general prosperity. A recent report from the nonpartisan and excruciatingly sober-thinking Brookings Institution offered four main things the United States should do in response to the rise of China. Three of them were content-free: “Blah, blah, blah, be more assertive, elicit support of other emerging blah, blah, blah, high-level engagements.” But the first one was: “Get real on deficit reduction.”

Under Obama-Pelosi-Reid, we have been levying a heavy tax on the future to fund today’s spending. Republicans now have a chance to change that, and it is essential that they do, because everybody can do the math on this question: As the expatriate investor and Asia bull Jim Rogers put it in an interview with National Review earlier this year, “If you look at the huge creditor nations in the world, they’re all in Asia: China, Hong Kong, Singapore, India. Saudi Arabia, if you want to go that far west. This is where the money is — and you know where the debts are.” But taking the necessary steps would put President Obama at odds with his fellow Democrats and cause Professor Krugman and Robert Reich to keen like veiled women at a Levantine funeral procession. Obama would still rather be at odds with the Chinese, who don’t get to vote in 2012 and haven’t been big campaign donors since the Clinton administration.

Amen, Kevin. Amen.  There's a lot more juicy goodness in the article (it's long and worth it), so be sure to read the whole thing.

Next up is my sometimes-colleague* Dan Ikenson who, it appears, has finally given up on the faint hope that President Obama could be America's next great free trade president, and fires off a stinging criticism of the President's big NYT op-ed on India and his hopes for US-Asia trade.  His comments are similar to my my own on the op-ed, but he adds a lot of meat to the bones that I (lazily) threw out there:

At the beginning of the Obama administration, I had the audacity to hope that the new president would defy conventional wisdom and become a proponent of trade and a good spokesman for its benefits. Scott Lincicome and I even wrote a 20,000-plus word Cato analysis explaining why the economic, geopolitical, and domestic political environment offered the president a unique opportunity to steer his party back to its pro-trade roots....

Alas, our study, “Audaciously Hopeful: How President Obama Can Restore the Pro-Trade Consensus,” was just a little too. It fell on deaf ears. It was ignored. In fact, it’s almost as if the past two years of trade policy were conducted to spite the recommendations in that paper...
Despite all that, I remained audacious (or gullible) enough to hold a glimmer of hope that the president would finally see the wisdom in our advice—given the new political landscape. That glimmer was snuffed out with publication of an oped in the New York Times this past Saturday, in which President Obama betrays profound misunderstanding of trade and its purpose. The president portrays trade as an enterprise that is won or lost at the negotiating table, where only the most savvy or most committed negotiators can succeed in bringing home the spoils. The president promises to fight hard to get Americans their fair shake from this dog-eat-dog process, while actual producers, consumers, workers, and investors are relegated to tertiary roles.

The central dysfunction between Americans and trade is the assumption—reinforced in the president’s op-ed—that exports are good, imports are bad, the trade account is the scoreboard, and our trade deficit means that we are losing at trade. That dysfunction resides comfortably within a zero-sum worldview, which the president touts in a purposeful cadence throughout the oped....

By opining about trade without understanding that its real benefits are manifest in imports (here’s Don Boudreax’s elaboration of that process), the president is simply reinforcing myths that will continue to confuse and divide Americans. As long as politicians insist that our trade account is a scoreboard and that a surplus is a trade policy success metric, Americans will continue to be skeptical about trade.

As with Williamson's piece, be sure to read all of Ikenson's much-warranted diatribe here.  It's a fantastic example of (a) why mercantilist policies or rhetoric don't advance (and often retard) free trade, open markets and public support therefor; (b) how many of us - even sorta-partisans like me! - had genuine hopes that Obama would be pretty good on trade; and (c) based on Obama's two-years in office, just how silly we were to harbor those hopes.

House Passes Currency Legislation; Whoop-Dee-Freakin-Doo

Only moments before being forced to adjourn for its mid-term election recess, the US House of Representatives today overwhelmingly passed angry-sounding legislation targeting "unfair" currency practices by certain unnamed countries (yes, I'm looking right at you, Chinese Government).  Sigh.  I've already gone over at ridiculous length why any unilateral action against China's currency policies is a really dumb idea, and Cato's Dan Griswold today gives us a good summary of many of those reasons (citing, as always, oodles of good research by his team):

• A stronger Chinese currency will not put a major dent in our large bilateral trade deficit with China, certainly not any time in the near future. 

• The bilateral deficit with China and America’s overall trade deficit is not a drag on growth or a barrier to manufacturing exports and output. 

• U.S. manufacturing has not been decimated by trade. In fact it has been expanding as American producers move up the value chain to more sophisticated, high-tech products. 

• Provoking a needless trade spat with China will jeopardize the healthy export success American companies have enjoyed in China’s fast-growing market.

AEI's Phil Levy helpfully (and humorously) adds that the CBO scoring of this big legislation is, well, less than exciting:

The House bill itself has gone through changes to make it fit with global trade rules. Those changes affect key provisions like whether Commerce must do something, or whether Commerce may do something.  How can one parse all this to see what it means? The Congressional Budget Office can!  That’s their job—to look at impenetrable or improbable pieces of legislation, take them seriously, and cost them out impartially. That’s what they just did on the China bill.  They were not asked to figure out how many American jobs it would produce; they were asked about revenue and cost effects, but those should give us a clue.

How much money would these new tariffs deliver in the next year (fiscal 2011)? CBO says: $0.

So much for an effective and speedy remedy to the recession.

Perhaps it was expecting too much to have a complicated procedural change kick in so soon. What about the year after that, fiscal 2012? CBO says: $5 million.

A little perspective may be helpful here. In 2009, U.S. imports of goods from China were $297 billion. So we’re talking about an average tariff rate change of 0.0017 percent. That’s expected to triple in fiscal 2013, to $15 million in revenue, perhaps 0.005 percent.

Finally, the latest news out of the Senate is that consideration of, and a vote on, any currency legislation in that chamber is increasingly unlikely, even in a post-election "lame duck" session.  So if the bill won't help (and might hurt) the US economy, and it won't help the budget, and it's almost certainly going to die in the Senate, then why'd the House overwhelmingly pass the darn thing?

Three guesses (if you need a hint, just check my blog post from yesterday).  Or as Griswold eloquently put it:

Advocates of the legislation say it is about jobs, and they are partly right. The bill is about saving the jobs of incumbent lawmakers who are desperate to appear tough on China trade, which they blame for the loss of U.S. manufacturing jobs.

Zing!  But hey, just for the sake of argument, let's assume that (i) the Senate comes back from the mid-term elections and just decides to go all damn-the-torpedoes-crazy and pass this bill; and (ii) President Obama signs the thing because he's overdue on some zany AFL-CIO payback.  Would this just-passed legislation, if it became law, cause a "trade war," like many people seem to think?

Quick answer: Nope.

Now, don't get me wrong, I think this whole episode is about as distasteful and embarrassing as they come (and considering we're talking about the US Congress here, that's saying a LOT).  And I'm particularly disappointed that President Obama has once again voted "present" on an important trade issue by not  preempting the House vote with a veto threat (and thus signalling the stupidity of aggressive unilateral chest-thumping).  But none of that changes the fact that, if it became law, this particular legislation probably won't have a big effect on things, at least in the near term.  I've already given several media interviews on this subject today (I'm so famous, I know), so here's the Cliff Notes version of what I told the journalists:

Assuming the bill becomes law as written, a large spike in CVD petitions against China is highly unlikely in the near term.  Instead, only a small number of “test case” petitions would likely be filed initially in order to determine how the Department of Commerce intends to exercise its initiation authority under the revised legal standard.  It's important to remember that the revised bill does not force the Department to initiate a CVD investigation based on alleged currency undervaluation. It only narrows the Department's discretion to refuse to initiate based on an allegation of export contingency and describes how the Department must calculate the subsidy benefit.  In short, if the administration wanted to not initiate a CVD investigation of alleged currency undervaluation, the door's still open for Commerce to do so, but only a little.  (And it's also important to remember that the US courts are highly deferential to technical administrative decisions like that.)

Should DOC decide to initiate CVD investigations in those test cases and then go on to find significant levels of subsidization, several more petitions would likely follow. However, even if DOC signals a broad and aggressive desire to go down this road, the number of new petitions will still be limited by (1) practical considerations surrounding the time and expense of filing a CVD petition; (2) the requirement of proving "material injury" at the International Trade Commission before the imposition of remedial tariffs (and that's typically the more difficult part of any AD/CVD investigation); and (3) the requirement that the petition be supported by a significant proportion of a domestic industry that manufactures a "like" product.  On the other hand, the new law would likely encourage industries with existing CVD orders on Chinese goods to request administrative reviews and submit new subsidy allegations to increase countervailing duties under those orders.

Or as I put it to the Wall Street Journal: "The change in language... gives the administration 'a way to say no' to U.S. industries and could signal to China that Washington isn't looking to declare a trade war over currency practices."  Now, it would intensify market uncertainty for Chinese exporters (and US consumers of Chinese goods), so it's not totally benign, but the bill's not the giant anti-China club that its supporters - and much of its opposition - claim it to be.

So be angry at (most of) Congress, folks.  They certainly deserve it for proving once again what misleading, self-interested jerks they are.  And be miffed with President Obama for once again putting politics over good policy.  And be embarrassed about the dismal state of American trade policy.

But cool it on the "trade war" talk, ok?

(Especially considering the undeniable fact that the Senate probably won't even touch the darn thing after the elections because all that great political motivation to be a raving protectionist will have just disappeared.)

PC4D: Dirty Foreign Cheaters and Deja Vu All Over Again

As I noted yesterday, the latest in my new blogseries (fake word!) "Protectionist Campaigning for Dummies" involves Senate legislation (S. 3080) sponsored by Sens. Arlen Specter (RD-PA), Bob Casey (D-PA) and Sherrod Brown (D-OH) that would allow domestic firms involved in US trade remedies investigations of directly competitive foreign imports to go to US courts instead of the US International Trade Commission (ITC) for a determination of whether such imports "injure" the domestic industry at issue.  As I briefly explained, under US law and WTO rules, "injury" must be found before the United States can impose remedial tariffs on imports in order to protect domestic industries.

I hoped to discuss the actual legislation tonight, but the full text of the bill still isn't available (ed. note: the bill was published on 3/12).  Thus, for now I'm just going to rebut the blatant misrepresentations in the Senators' joint press release and Sen. Specter's floor statement introducing the legislation (the "Unfair Foreign Competition Act of 2010").  And I have a special - almost surreal - surprise at the end of this entry, so be sure to read all the way through.  Here's the key text of the press release:

“Job creation and job retention in this country depend, in large part, on our ability to enforce existing trade laws,” Senator Specter said. “This legislation would give an injured industry the opportunity to seek reliable enforcement in federal court so that we can stop anticompetitive, predatory trade practices which steal jobs from our workers, profits from our companies, and growth from our economy.”

“Unfair trade practices have shipped Pennsylvania jobs oversees and increased our trade deficit," said Senator Casey. “One of the best job creations strategies is to make foreign governments play by the rules and create a level playing field for American workers.”

Senator Brown said: “If we’re going to create manufacturing jobs, we need to start enforcing trade law. American manufacturers can compete with anyone – but they need a level playing field. This bill would prevent a flood of unfairly-subsidized imports from shuttering our factories.”...

The legislation comes as China continues to engage in trade and market-distorting practices in violation of WTO rules and U.S. laws. By allowing countries like China to ignore international trade rules, the U.S. has lost countless manufacturing jobs and has a skyrocketing trade deficit. The latest trade numbers indicate that imports from China have exceeded U.S. exports by a staggering $208.6 billion.

Sen. Specter's floor statement echoes some of these assertions and adds a few others.  (Again, please note that I'll deal with the "injury" issues and the legislation's actual "substance" later and for now am only focusing on Specter's other misstatements):

The latest trade numbers demonstrate that the U.S. trade deficit with China in November 2009 was $20.2 billion. Over the years, imports from China have exceeded our imports by a staggering $208.6 billion. This is not evidence that American manufacturers cannot produce goods efficiently or compete with foreign markets; rather, it is evidence of unlawful behavior on the part of China. Such behavior is tantamount to international banditry, and it must not be tolerated....

The enforcement of trade laws should not be a partisan issue. To those who decry our enforcement mechanisms as unabashedly protectionist, let me be clear. I believe in free trade. International trade and open markets are crucial to the economic prosperity of this country. But the essence of free trade is selling goods at a price equal to the cost of production and a reasonable profit. When one country engages in dumping or subsidization at the expense of other countries, it is the antithesis of free trade....

China's succession to the WTO accelerated a "race to the bottom" in wages and environmental quality.

Given these factors, in addition to China's mixed record on providing market access to the United States and its failure to provide protection of U.S. intellectual property rights, I urge that the Congress reexamine our trade agreement the United States signed with China and, if necessary, seek to withdraw permanent normal trade relations status from China. Such a withdrawal would be a serious measure, but we must be willing to demonstrate that we are serious about holding China to its international commitments.

When the United States granted most-favored-nation status to China in 2000, we lost our ability to demand that China play by the rules. We may have to regain this leverage if we are to maintain an equitable trading relationship with China and keep our domestic industry strong.

As President Obama recently noted in his remarks at the Senate Democratic Conference, the United States is home to some of the most innovative, skilled, and efficient workers in the world. But advances in efficiency and innovation by our producers cannot make up for the unfair advantage held by countries that engage in illegal trade practices. Our industries can compete if the playing field is level, but if foreign exporters are not held accountable, and can freely undercut American producers with dumped goods and government subsidies, this country's economic future will be at risk. We must take a stand and we must do it now.

Very scary!   Well, not if you know the facts and recognize that the Senators here are just employing several of the same protectionist myths and rhetorical tricks that I've already gone over.  They're also adding a few new ones that I've covered elsewhere, so I'll quickly dispense of the old ones and devote more time to debunking the new ones.  Now let's get started.

Recycled Myth #1: America's manufacturing sector is disappearing.  Umm, totally untrue, Sen. Brown.  Indeed, US manufacturing was setting all sorts of performance records before the recession, and is leading the economy out of recession now.  Oh, and American industrial output is still about 2.5 times larger than China's output (by value).  So much for those "shuttered factories," huh? 

Recycled Myth #2: Free trade has destroyed US manufacturing jobs.  As we already know, this myth a time-honored classic and is totally and utterly false - manufacturing jobs have decreased in the United States, in most other developed countries (several with trade surpluses) and in China because of productivity gains and changing consumer tastes, not free trade.  And as I noted last week, US manufacturing jobs have been declining in total since 1979 and as a share of GDP since the 1950s - long before trade was little more than a rounding error as a part of the US economy.

New (Sorta) Myth #1: The US trade deficit is a sign of economic weakness.  This myth is partially new because I only discussed it in passing last week.  However, I've certainly dismantled it in previous blog entries.  As I stated last week, "[R]ecent government statistics show that 2009 witnessed a very significant contraction in US imports, total US trade (exports and imports), and the US trade deficit.  And do you know what else characterized 2009?  Cripplingly high unemployment!"  In fact, there's a strong, positive correlation between the trade deficit and the US economy - as the US economy grows, so does the trade deficit, and as I just noted above, as the US economy shrinks (i.e., in recessions), the trade deficit contracts along with it.  Why?  Well, as Cato's Dan Griswold noted in a recent Free Trade Bulletin, rising imports are not a drag on growth but in fact usually signal rising demand in the domestic economy, just as falling imports are a reliable sign of slumping demand.  And if you needed any more data to back up that statement, here's Dan Ikenson's and my 2009 Cato Institute paper:

Between 1983 and 2007, the annual U.S. trade deficit increased from $67.1 billion to around $819.4 billion— or by nearly six-fold in real terms.  During that same period real GDP grew at an average annual rate of 3.2 percent and employers added an average of 1.8 million net new jobs to payrolls every year.  The unemployment rate also declined over the period: the average rate in the 1980s was 7.2 percent; in the 1990s it was 5.7 percent; and, between 2000 and 2007 it averaged 5.0 percent.

I'd say that ends that debate, wouldn't you?  Nevertheless, Ikenson and I also discuss on pp. 20-22 of that same paper how it's even dumber to point to a bilateral trade deficit with China as a harbinger of economic doom (as the Senators do above).  First of all, such accounting is completely nonsensical in this era of global supply chains where Chinese exports contain only 30%-50% value-add.  Just consider the iPod: it's designed, marketed and sold in the US; its parts are made all over the world (including Japan, Taiwan, Korea and some in the US); it's assembled in China; and then it's shipped to the United States (as a $149 product from China).  Looking at the US-China trade deficit alone, you'd think that the US was "losing at iPods" by $149 per unit.  Yet because Apple sells the iPod for $299, its American designers, engineers, marketers, executives and shareholders reap the majority of the iPod's profits, not China.  As such, that "iPod trade deficit" is totally meaningless.  Second, the US-China trade deficit is rendered even more meaningless by the fact that imports from East Asia have remained remarkably steady over the last 15 years or so, and China's increasing share of US imports came at the expense of other Asian countries, not US manufacturers.

So the next time a politician tries to use the trade deficit as a reason to support his legislation, just stop listening.

(Note also that the Senators' discussion of the trade deficit uses the classic "causation-correlation" rhetorical trick - claiming that simply because the US trade deficit increased while US manufacturing jobs declined, the deficit actually caused those job losses.  As I've clearly demonstrated above, that's complete economic fiction.)

New Myth #2: We're losing at trade because our trading partners cheat with impunity and because we're not enforcing our trade laws.  The Senators really try to sell us on the idea that China's a big cheater and we need "tougher laws" to help reverse (a) the "bad" trade deficit; and (b) the "decline" of US manufacturing.  We've already gone over how (a) and (b) are dead wrong, but the underlying issue - cheating and enforcement - is also completely false.  First, this myth clearly implies that there are no "enforcement mechanisms" in place right now, despite the fact that we have domestic "unfair trade" laws (antidumping, countervailing duty, safeguards, etc.), WTO dispute settlement procedures, and even bilateral dispute mechanisms in all of our FTAs.  Second, it implies that we're currently not enforcing the trade rules that are in place, when in reality the United States has been a complainant in almost 100 WTO cases in the trade body's 15 year history, and there are literally hundreds of duties in force against "unfairly traded" foreign imports as a result of our domestic trade laws.  That's a lot of "enforcement."

Furthermore, the idea that our trading partners are all cheaters, and that the only reason we have trade deficits is because China and others are illegally dumping/subsidizing their imports, is just poppycock.  While it's undeniable that some countries are engaging in illegal behavior, the reality is that such chicanery affects a tiny fraction of overall global tradeflows.  For example, in our 2009 paper, Dan Ikenson and I calculated that the combined trade volumes affected by the current US anti-subsidy cases against China represented less than one percent of the entire US-China trade deficit.  For the sake of argument, let's assume that the Senators' new legislation would triple the number of "illegal" Chinese imports subject to US trade laws - that would only mean that less than three percent of the bilateral trade deficit is made up of unfairly traded products, and that the remaining 97% of those imports are fairly traded!  So while "China cheats" makes for a great soundbite, it certainly isn't the driving force behind the US-China trade relationship.  The same holds true for other markets - cheating simply doesn't define or drive global trade.

(It should also be noted that in talking about enforcement on the Senate floor, Senator Specter used the classic rhetorical trick "I'm a free trader, but..."  Sure you are, Senator, surrrrrre you are.)

New Myth #3: free trade leads to a "race to the bottom." The final protectionist myth - glancingly referenced in Specter's floor speech - is the oft-referenced idea that free trade creates a desperate race to the bottom in terms of wages and environmental standards.  Yet as Ikenson and I note:

[I]t is incomplete and misleading to speak of the “advantages” held by foreign-based producers in the realm of international competition without speaking of the advantages held by American-based producers. Sure, lower wages abroad can serve as an incentive to off-shore manufacturing or to outsource services functions, but wages are neither the only—nor the most important—consideration in these production/investment decisions. If wage differentials were determinative, there would be very little manufacturing or services activities in the United States. It would all be gone.

Instead, we see large and increasing foreign direct investment flowing into the U.S. industrial base year after year. Why is ThyssenKrupp building a $3.7 billion green field steel production facility in Alabama? Why do foreign nameplate automakers continue to invest in U.S. manufacturing facilities?  Why do the 5.3 million Americans employed by U.S. subsidiaries of foreign-owned companies earn on average 32 percent higher compensation than workers at U.S.-owned companies?  Because there is no race to the bottom in pursuit of lower wages and lax standards, as some suggest. Rather, there is a race to the top—for skilled workers, for access to production facilities closer to markets, for investment in countries where the rule of law is clear and abided, where there is greater predictability to the business climate, where tax rates are more favorable, where the specter of asset expropriation is negligible, where physical and administrative infrastructure is in good shape, and so on.  Labor costs are but one of a multitude of considerations driving investment decisions. With respect to virtually all of the other factors, the United States fares extremely well relative to most other countries.

Indeed, a recent study by McKinsey & Company found that in 2008 rising oil prices, the declining value of the U.S. dollar, and logistics concerns, among others, could cause many investors to rethink off-shoring strategies and even to consider “re-shoring” manufacturing facilities in the United States.  The study makes clear that sourcing decisions require a complex calculation in which labor costs are one of many factors.

That McKinsey study proved prescient.  For example, according to a recent article in the Detroit News, several Michigan firms have "insourced" jobs that were formerly sent offshore.  So much for that giant sucking sound, huh?   And just in case you need any more evidence about the "race to the bottom myth," just read Jagdish Bhagwati's awesome book In Defense of Globalization.  Dan Griswold summarizes Bhagwati's findings on trade and the environment:

In two meaty chapters, Bhagwati chops the legs out of the argument — heard frequently in the Democratic primary debates — that the U.S. must impose labor and environmental standards on poor countries in any future trade agreements. He points to evidence establishing that U.S. multinationals do not seek out less developed countries with low standards; they locate most of their affiliates in other high-wage, high-standard countries, and when they do invest in poor countries, they invariably pay wages and maintain standards far above those prevailing in the local economy. The result is not a "race to the bottom," but a race to the top. An inescapable implication is that if the Democrats succeed in withholding U.S. trade and investment from poor countries because they are poor, it will mean slower growth in those countries: fewer girls studying in school, and more working in farms, factories, and brothels.

'Nuff said.

Finally tonight, I'd like to discuss a, umm, familiar-sounding comment that I received on last night's blog post about the new Specter/Brown/Casey legislation.  As you'll recall, the primary impetus for my original "Protectionist Campaigning for Dummies" series on Congressman Gene Taylor's anti-NAFTA legislation was an anonymous and provocative comment from someone named "Researcher" that was chock-full of protectionist myths.  When I discovered (via my visitor log) that "Researcher" worked in the US House of Representatives, he revealed himself in a subsequent blog comment to be Rep. Taylor's policy director (Brian Martin), and his "big reveal" utilized a lot of the rhetorical tricks that protectionists often use to debate free traders.  I then proceeded to dismantle those tricks and assumed that that would be the end of my interactions with anonymous congressional staffers.

Boy, was I wrong.

The comment I received this morning on the new Senate "injury" legislation - from a "john" - was similarly substanceless/vitriolic and, to my extreme surprise, came from:

IP Address: 156.33.70.181; Location:  Washington, D.C.; ISP:  United States Senate.

You cannot make this stuff up.  Now, I have no proof that the comment came from a staffer in the office of one of the Senators who sponsored S. 3080, but "john" received a direct link to last night's post from an email (a Google news alert, perhaps?), and both the comment's timing, tone and circumstances sure seem to match those of the esteemed "Researcher" from last week (who, again, turned out to work for the sponsor of the legislation I had criticized).  And just like last week, john's comment is chock-full of rhetorical tricks and protectionist myths, so without further adieu, here it is, typos and all:

Do you have a rebuttal? Have you seen the trade deficit? Have you see the job losses? Do you recognize the importance of manufacturing to national security and middle class creation at all? The idea of county might be a quaint concept to you but it is the only thing that can protect us from the disaster capitalism you preach.

Well, john.  Here's my rebuttal, line-by line.

john: Have you seen the trade deficit? 
Scott:  Yes, I have.  And, as noted above ("New Protectionist Myth #1"), I've also seen the high economic growth and low unemployment accompanying the trade deficit.  You, john, obviously have not.

john: Have you see {sic} the job losses?
Scott: Yes, I have.  And, as noted above ("Recycled Protectionist Myth #2"), I've also seen that US manufacturing jobs have been declining for decades - in the US, in Germany, in China, and elsewhere - and that productivity, technology and consumer preferences are the primary causes of these job losses, not trade.  I also see that you are trying to employ the "correlation-causation" rhetorical trick by trying to claim that the rising trade deficit caused US manufacturing job losses.  Of course, the deficit declined last year, and we lost millions of American jobs, so your trick is actually pretty lame, john.

(As an aside, john's heavy-handed use of such misleading rhetoric definitely qualifies him for designation as an "Unfrozen Caveman Politician":

Awesome.)

john: Do you recognize the importance of manufacturing to national security and middle class creation at all? 
Scott: But, john, as I note above ("Recycled Protectionist Myth #1"), US manufacturing (i) is on the upswing and leading us out of recovery, (ii) was just dominating prior to the current recession, and (iii) remains over two-and-a-half times bigger than its counterpart in China.  And as for trade and "national security," I covered that protectionist myth last week.  In short: it's completely bogus, john.

john: The idea of county {sic, I think} might be a quaint concept to you but it is the only thing that can protect us from the disaster capitalism you preach.
Scott: And what protectionist comment would be complete without the ad hominem attack?  Of course, if john had just taken a moment to read this blog, he would have seen that my "disaster capitalism" isn't based on name-calling or baseless assertions about the "concept of country."  It's based on tons of hard data and historical evidence which clearly demonstrate that the pernicious, political protectionism advocated by john and his Senate boss (or neighbors) would be as economically harmful as it is immoral and misleading.

So thanks, john, for your enlightening, if typo-ridden, comments.  And since I was kind enough to respond to your comment, maybe you could answer one quick question for me:

Given how closely your commenting behavior tracks that of your predecessor in the House (Brian "Researcher" Martin), just how common is is for congressional staffers, on the taxpayer's dime, to comment anonymously on blogs critical of their bosses' legislation?  And is there a protectionist staffer commenting handbook or something?  Because it sure seems like it.

Final note to the general audience: is it just me, or do the House and Senate really need to talk more?  I mean, I thought that the stories about cross-chamber disconnect were just conventional wisdom, but sheesh!