ITC: Eliminating Import Barriers = $2.6B in GDP and $9B in New Exports

Last night I alluded to a new ITC study on import barriers and global supply chains, but I didn't mention the report's headline finding.  The study, which is an update of a periodic report that I last discussed in 2009, found that the simple, unilateral elimination of existing US trade barriers would benefit the US economy to the tune of billions of dollars:

The U.S. International Trade Commission (Commission) estimates that U.S. economic welfare, as defined by total public and private consumption, would increase by about $2.6 billion annually by 2015 if the United States unilaterally ended (“liberalized”) all significant restraints quantified in this report. Exports would expand by $9.0 billion and imports by $11.5 billion. These changes would result from removing import barriers in the following sectors: sugar, ethanol, canned tuna, dairy products, tobacco, textiles and apparel, and other high-tariff manufacturing sectors.

Now, a few billion dollars here and there is certainly not going to save the $15 trillion US economy, but it still isn't chump change and, unlike other government "stimulus" unilateral liberalization involves no new government spending (and thus no new Solyndras!).  Moreover, there is simply no justification for the artificially high prices on basic manufacturing inputs and consumer necessities (especially food, clothing and footwear) that American businesses and families must pay in order to subsidize the well-connected American industries that produce these artificially expensive products.  None.

And let's not forget about that sweet, sweet $9 billion in new exports.  As we all know, the Obama administration is desperately trying to push export expansion as part of its US economic recovery plan.  For example, just yesterday on ABC's "This Week" Austan Goolsbee, the former chair of Obama's Council of Economic Advisers, said that the United States needs to "refocus" its economic strategy by looking to exports and investment.  So, considering the ITC's repeated findings, I guess the White House is busily readying legislation to eliminate existing US import taxes on sugar, ethanol, canned tuna, dairy products, tobacco, textiles and apparel, ball bearings and other manufacturing sectors, right?

Unfortunately, no.  In fact, they've repeatedly pursued the exact opposite approach, erecting, rather than eliminating, US obstacles to imports.  Off the top of my head, they've raised tariffs on things like tires and chicken; they've proposed new trade remedies rules (twice) that would almost invariably lead to increased duties on a wide range of imports; they still haven't allowed Mexican trucks on US roads; they've repeatedly embraced "Buy American" procurement policies; and they've even negotiated higher tariffs on cars and trucks as part of the US-Korea FTA.  So the next time you hear an administration official talk about increasing US exports, be sure to remember that $9 billion worth of exports (and the American jobs that go with them) voluntarily sitting on the sidelines.

And then tell that official to call the ITC asap.

Greasing America's Competitiveness Slide

Last week the World Economic Forum announced some distressing, but not unexpected, news about the struggling US economy:

The U.S. extended its slide in competitiveness for a third year by slipping to fifth in the World Economic Forum’s rankings, which Switzerland topped. 

The U.S. fell one place, two years after losing the No. 1 position for the first time since the Geneva-based organization began its current index in 2004. Concern about public debt and deteriorating confidence in policy makers hurt the efficiency of the world’s largest economy even as faith in its financial industry rebounded, the forum said in its study of 142 nations.In the U.S., “urgent efforts need to be made in terms of macroeconomic stabilization and mapping out an exit strategy from debt,” said Jennifer Blanke, the forum’s lead economist who contributed to the annual study.... 

Switzerland, home to companies including drugmaker Novartis AG (NOVN) and food company Nestle SA (NESN), was credited for its innovation and technological skills. Singapore and Sweden trailed, with Finland leapfrogging the U.S. into fourth place. Germany, the Netherlands and Denmark followed with Japan sliding three places to ninth. The U.K., ranked 12th last year, swapped places with Canada to take 10th.... 

China climbed one level to 26th and Brazil rose to 53rd from 58th while India fell five slots to 56th and Russia dropped to 66th from 63rd.... 

The U.S. ranked 89th for macroeconomic stability amid a record budget deficit, while running 50th for trust in its politicians, the forum said. The survey suggested its government wastes resources and regulation has become more burdensome. A gauge of financial-market development indicated improvement, with the U.S. rising to 22nd from 31st last year. It was ninth in 2008.... 

The report -- published each year by the organizers of the annual conference of business leaders, politicians and entertainers in Davos, Switzerland -- is based on measures of competitiveness and an opinion poll of more than 14,000 business leaders.

The full WEF report is available here, and, while it's always a little tricky to talk about "national competitiveness" (rather than companies' competitiveness), the survey is still a valuable way to measure which governments are implementing the best policies to make their domestic companies more globally competitive.  And speaking of such policies, Cato's Dan Ikenson took to the pages of the WSJ over the weekend to explain a simple policy that could instantly improve American companies' ability to compete in the global economy:

If the president is genuinely committed to spurring economic growth and job creation, he will take the lead on reducing or eliminating duties that U.S. producers pay on imported raw materials and components they need for manufacturing. This would instantly boost the competitiveness of U.S. products at home and abroad. 

The same demographics that have created growing foreign markets also mean there are more foreign suppliers of raw materials, industrial inputs, and other intermediate goods used by U.S. producers in their own production processes. Last year, U.S. Customs and Border Patrol collected $30 billion in duties on $2 trillion of imports, 55% of which were ingredients for U.S. production—such as chemicals, minerals and machine parts. Purchases of imported inputs accounted for more than $1 trillion of U.S. production costs, a price tag that was roughly $15 billion higher than it might have been without U.S. import duties. 

What is the point of negotiating a 5% reduction in a foreign tariff on behalf of certain U.S. exporters while ignoring the fact that, to produce those exports as domestic manufacturers, they are required to pay a 50% import tax on the most crucial raw materials? Reducing import barriers has the same effect on profit as does improving market access abroad, but with the added benefit of increasing U.S. competitiveness. And it can be achieved without waiting for consent from abroad....

Now the president should push Congress to reduce or eliminate, on a permanent basis, all tariffs on industrial inputs so that U.S. producers are more competitive in the global economy and so that America is a more appealing destination for foreign direct investment. That approach has produced good results in Canada, where the government has been reducing tariffs on manufacturing inputs for the past few years. 

Meanwhile, some import duties can be eliminated with a stroke of the president's pen. First should be antidumping duties, imposed on inputs needed by U.S. producers. The antidumping law is purported to penalize foreign producers accused of injuring U.S. firms by selling in the United States at lower prices than they charge at home. Some U.S. industries lobby vigorously for such duties simply because they hobble the foreign competition. 

Yet more than 80% of the nearly 300 U.S. antidumping measures in force today restrict imports of raw materials and intermediate goods, thus penalizing U.S. producers. Antidumping duties on magnesium or polyvinyl chloride or hot-rolled steel may allow domestic producers of those inputs to raise prices and reap greater profits. But they hurt many more downstream U.S. producers of auto parts, paint and appliances, who consume those inputs in their own manufacturing processes and who are more likely to export and create new jobs than are the firms that seek trade restrictions.

Unfortunately, Ikenson notes in a separate blog post last week that the Obama administration is actually pondering the implementation of policies that would lead to higher, not lower, tariffs on US imports:

As the president was pitching his jobs plan last night, his current policies were hard at work discouraging job creation and incentivizing layoffs.

One of innumerable such policies concerns the treatment of imported raw materials and other intermediate goods that are subject to antidumping or countervailing duty measures, but needed by U.S. producers to make their final products. It almost defies comprehension that, in a modern, interdependent economy characterized by transnational supply chains and cross-border investment, over 80 percent of all U.S. antidumping and countervailing duty measures are imposed on these ingredients of U.S. production. This policy drives up the cost of production for downstream U.S. industries, making it more difficult for them to compete in the United States and abroad, curtailing profits, investment, and hiring.

However, under the U.S. Foreign Trade Zones program, some of the costs inflicted on downstream, import-consuming firms can be mitigated. (Of course, the program wouldn’t be necessary if U.S. duties were recognized as just another cost of production and set, optimally, at zero.) Among the aims of the FTZ program is to encourage manufacturing activity in the United States (and to discourage manufacturers from shuttering domestic operations and moving offshore as a result of the burden of paying U.S. customs duties).

FTZs are usually manufacturing plants or facilities physically located within the United States, but considered outside U.S. territory for the purpose of customs duty payment. Goods that enter FTZs are not subject to customs duties (including antidumping or countervailing duties) until they leave the zone and are formally entered into the commerce of the United States. If those goods are used as inputs to a further manufacturing process, the rate of duty applicable to the final product is assessed. If the goods are exported from a FTZ, with or without further processing, no duties are imposed because the product never officially “entered” the United States.

With respect to products made from materials and components subject to AD or CVD duties, the standing regulations require FTZ operators to get advance approval from the Foreign Trade Zones Board if the intention is to sell those final products in the United States. That requirement does not apply when the final product is going to be exported from the FTZ, which provides some incentive to downstream U.S. firms to keep production in the United States by operating as a FTZ.

But now the Obama administration—at the behest of the antidumping petitioners’ bar and organized labor, and despite its own exhortations to U.S. companies to double exports, invest in America, and put Americans back to work—is proposing to seal off that channel of sanity and compromise. New regulations would require advance approval even if the final product was going to be exported.

The requirement of advance approval from the FTZ Board, which is administered within the Import Administration—the same agency at the Commerce Department that simultaneously assists protection-seekers in crafting their AD/CVD petitions, while gleefully implementing and administratively adjudicating the antidumping and countervailing duty laws—will tip the balance in favor of outsourcing production for many firms in many industries. Any benefits of continuing to produce in the United States will be diminish next to the rising costs and uncertainty of doing so.

Thus, companies like Dow Corning, which uses silicon metal to produce silicone components for solar panels, will have that much more incentive to shutter operations in Kentucky and set up shop in Canada or elsewhere, where silicon metal is available at lower world market prices, so that it can compete in foreign solar panel markets with Chinese, Japanese, Canadian, and European rivals.

According to the WEF, the United States is currently the fourth-most competitive economy in the world.  I guess the Obama administration's really gunning for Number 5 in 2012.

Free Trade Helps America's Poor. Full Stop.

One of the themes of this blog is how unilateral elimination of US import tariffs disproportionately helps lower income Americans who have to spend a larger share of their paychecks on necessities like food, clothing and footwear.  Now comes a new study from Ed Gresser at ProgressiveEconomy (yes, you read that right: progressive) which provides further empirical evidence of this indisputable fact.  Reuters has the write-up:

The United States should eliminate most, if not all, of its remaining taxes on imported goods to give low-income consumers extra spending cash, a new report recommended on Tuesday....

The United States collected about $26 billion in tariffs on about $1.9 trillion of imports in 2010, suggesting an average tariff rate of only 1.3 percent.

But in fact, tariffs on individual items vary dramatically, with goods most likely bought by the poor frequently hit with the highest rates, the report said.

Sneakers with a wholesale price of less than $3 have a 48 percent duty, while leather dress shoes only 8.5 percent. The duty on a polyester bra is 16.9 percent but just 2.7 percent on a silk one. A canvas bag faces a 16 percent tariff, but one made from snakeskin 5.3 percent.

Gresser, who worked previously for Senator Max Baucus and the U.S. Trade Representative's office, estimated about two-thirds of U.S. import duties are collected on home goods such as clothes, shoes, towels, pillowcases, luggage, handbags, silverware, plates and drinking glasses. Many of those items are no longer made in the United States.

"Tax analysts know very well that any tax on home goods will be regressive. This is because wealthy families spend the smallest share of their income on home goods, while low-income families -- especially if they have children -- spend the most," Gresser said.

Import taxes are often defended as necessary to protect to American jobs, but falling U.S. employment in high-tariff industries such as clothes, shoes, luggage and linens suggest they have been ineffective at that.

Some 1.34 million Americans worked for clothing manufacturers in 1970, but 40 years later only about 160,000 still do. The U.S. shoe industry has shrunk from 230,000 workers to 1,000 over the past four decades.

The full report, The Rebirth of Pro-Shopper Populism, is available here.  The whole thing is worth reading, but here are my two favorite tables.  The first one shows how our tariffs currently discriminate against low-end consumables (and, of course, the people who buy them).

The second one shows the obscene regressivity of US tariffs:

So a single mom has to work 2.6 times as long as a wealthier person/family to pay off their share of annual import taxes.  Unreal.

Seriously, how on earth are these tariffs still in place?  To line the pockets of a few well-connected US companies and their workers?  Because other countries refuse to similarly help their poorest citizens?

Gimme a break.

Truly great stuff from Gresser and his team.  Now, if only they could convince their fellow Democrats - an increasing majority of whom have abandoned their party's long tradition of support for free trade - of the wisdom of tariff liberalization.

Sadly, I'm not holding my breath.

Documenting the Typically Unseen Victims of US Protectionism

One of the reasons that anti-trade policies prevail in spite of the ample economic and moral arguments against them is that the benefits of protectionism are concentrated and seen, while the costs are diffuse and unseen.  For example, when our politicians are mulling the imposition of tariffs on steel, it's easy for them to identify the few US steelmakers and workers who will benefit by a large amount, while it's harder to predict the many, many American steel consumers (and, in many cases, their workers) who are harmed in smaller-yet-equally-real sums.

This classic public choice dilemma has confounded free trade advocates for decades, and it's why surveys like the one recently conducted by the Coalition for GSP are so important for not only the debate about renewing the Generalized System of Preferences program, but also educating American citizens and policymakers about the very real harms that anti-trade policies inflict on American families and businesses.

As you'll recall, GSP and the similar Andean Trade Preferences Act (ATPA) expired at the beginning of the year due to a classic case of congressional ineptitude and backroom dealing.  Once the program expired, GSP-eligible imports from developing countries that used to enter the USA duty-free immediately became subject to tariffs.  Thus, American importers and consumers were immediately hit with a new tax - totaling hundreds of millions of dollars so far - on the products that they need to survive in this rough economic climate.

In the survey, the Coalition asked two simple questions of these unfortunate American importers/consumers:

1. How much in new tariffs has your business paid in 2011 because of GSP expiration?

2. What percentage of your business comes from products imported under GSP?

If you're like me, the answers will disgust you.  Here's a sample:

• “The timing couldn’t be worse with a weak dollar and inflationary prices on raw materials. My company was just starting to experience growth out of this recession when these three factors hit it hard all at once and crippled us.”

• “This inaction is causing 2 problems. We have paid out over $18,000 in additional duties, making what should have been a slightly profitable year into a losing one and forcing us to cut plans to expand. Also the uncertainty of whether or not this will be signed again makes decision-making even more difficult.”

• “We need GSP renewal. We are losing sales as our products are too expensive & we will have to cut jobs in our office.” 

• “I was set to hire at least one employee and possibly two at the beginning of the year which I scrapped after paying about $12,000 in customs that used to be covered under GSP eligibility.”

• "For very small companies like ours, the loss of GSP and ATPA simultaneously has wrought havoc on our finances. We have paid over $61,000 in duty since Jan. 1, 2011 for frozen food imports. These costs cannot be passed along to our customers, who are large food manufacturing companies with long term contracts. With the problems of availability of credit for small businesses having taken its toll, the increase in the cost of health care premiums for employees, and now the loss of GSP/ATPA, for the first time ever we have had to lay off an employee and cut back on benefits."

Some of our elected officials like to talk about trade policy in terms of accepting "economic reality."   Well, you can get any more real than this, can you?  Sheesh.

The RenewGSPToday website has more horror stories of protectionism's "unseen victims," and I highly recommend that you share them far and wide.  It's about time that the other side of the story was told.

Canadian Elections: Further Proof that Our Northern Neighbors Are Smart (and that Free Trade Isn't Political Poison)

The news about the timely death of what's-his-face has dominated American TV, so you may be excused for failing to notice that Canada had a big national election yesterday, and that the results of that election provided further proof that, when it comes to trade and tax policy, Canada is putting its southern neighbor to shame:

The Conservatives have finally captured their coveted majority government in an historic election that vaulted the NDP to a stunning second-place finish, making them the official Opposition, pushing aside the Liberals to a humiliating third.

At the Telus Convention Centre in Calgary, Conservative Leader Stephen Harper expressed elation at his huge win.

"What a great night," Harper told more than 1,500 cheering Conservative supporters.

"A strong, stable, national Conservative government," he said.

Readers of this blog may recall the not-so-subtle man-crush I've harbored for the Harper government's smart corporate tax and trade policies over the last couple years.  As I said last summer:

Since the global recession hit two years ago, Canada has implemented a broad array of free market tax and trade policies....

At the onset of the recession, Prime Minister Stephen Harper’s government moved aggressively to improve Canadian manufacturers’ global competitiveness. After extensive consultations with Canadian industries, Ottawa unilaterally eliminated tariffs on 1,755 different types of machinery, equipment and other manufacturing materials.

The Department of Finance presented a straightforward rationale for the move: “By reducing the cost of importing key factors of production, tariff relief encourages innovation and allows businesses to enhance their stock of capital equipment.” The Department projected that Canada’s complete liberalization of more than C$5 billion in imports will provide an additional C$300 million in annual duty savings for Canadian businesses.

Canada didn’t stop with tariffs. It also slashed the corporate tax rate to 18 percent. And the rate will fall farther -- to 16.5 percent next year and to 15 percent a year later.

The Harper government reasoned that such tax cuts would help make Canada one of the world’s most attractive destinations for international business investment. And they certainly have a point: Canada’s 2010 marginal effective tax rate is more than 16 percentage points lower than the United States’ 34.2 percent rate and two points below the OECD average.

And Canada has pursued free trade agreements (FTAs) with a passion....

And what, pray tell, was the super-awesome Conservative campaign platform that secured this surprising landmark victory?  Oh, right:

Harper campaigned on a message that the New Democrats stood for higher taxes, higher spending, higher prices and protectionism....

One outcome of Harper’s victory is that planned corporate income tax cuts will move ahead. Canada reduced the federal rate by 1.5 percentage points to 16.5 percent on Jan. 1, and it will fall to 15 percent in 2012 under legislation passed in 2007…

Canada is relying on business investment to help lead the recovery. Energy companies have been a main driver of spending, allowing the country to grow in the fourth quarter at a faster pace than any other Group of Seven country.

To recap: low corporate taxes, free trade and other business/investment-friendly regulatory policies have led to impressive economic growth, and publicly promoting those policies has catapulted Harper's Conservatives to a groundbreaking new majority government in Canada.

Canadians are smart people, eh?

Quantifying the Stagnation of US Trade Policy (and Hoping for Better in 2011)

Last week the Heritage Foundation released its 2011 Index of Economic Freedom - a veritable treasure chest of data for econo-nerds everywhere.  The top-line news emerging from the study is that the United States - in 9th place overall and thus earning the less-than-stellar label of "mostly-free" - continued to lose ground on economic freedom, while much of the rest of the world gained.  Hong Kong once again lead the pack, while Canada expanded its lead over the United States and remained North America's reigning economic champ (something your humble correspondent kinda-sorta predicted last year).

But for my purposes, the really interesting data lie in the Index's review of global "trade freedom" - a score based on a thorough analysis of each country's tariff and non-tariff barriers.  In these data, we see that, while the rest of the world is liberalizing as quickly as possible, the United States continues to stand still (and even retreated a little).  Heritage's Terry Miller and Bryan Riley provide the first part of this story - the "good news" part - in their analysis:

The 2011 rankings of trade freedom around the world, developed by The Heritage Foundation as part of its annual Index of Economic Freedom, show average trade freedom at its highest level to date. Since 1995, the average score out of a possible 100 has grown from 56.7 to 74.8—an impressive 31.9 percent improvement over the 17-year period. The average score improved 0.6 point from the 2010 rankings, a significant achievement given the worldwide reces­sion from which most countries were emerging....

In the 2011 Index, 85 countries improved their scores and 58 coun­tries declined, resulting in a “gainers to losers” ratio of 2.36 to 1. Countries whose scores changed by at least one full point demonstrated a simi­lar trend, with 39 countries improv­ing and 18 regressing....

Miller and Riley go on to demonstrate that more trade freedom means lower poverty, more equality and more wealth, and they conclude by smartly recommending that:

Whenever possible, countries should unilaterally reduce trade barriers that protect politically pow­erful elites at the expense of the gen­eral population. They should also continue to improve on multilateral trade agreements. Free trade will create more freedom, prosperity, and equality for everyone around the world.

Be sure to read the whole thing here; it's well worth your time.  However, the guys at Heritage leave out the other, more depressing, part of the story: while the rest of the world is racing to lower their barriers to free trade in order to reap the benefits from trade that Miller and Riley point out, the United States is stuck in neutral, embarrassingly remaining the 38th most trade-liberalized country in the world - tied with economic powerhouse Namibia and behind such bastions of free trade as Malta and Lithuania.  (Canada, by the way, ranks 8th overall.)

A review of the raw data from 2009-2011 makes this problem even clearer.  The United States' raw trade freedom score dropped 0.4 points between 2009 and 2011, thus making us a little less free today than we were two years ago (and last year).  Meanwhile, almost all of the 37 countries ahead of (or tied with) us in 2011 got freer over the same period:

As you can see from this chart (made by me with Heritage's data), the trade policies of only three countries ahead of (or tied with) the United States regressed between 2009 and 2011.  As already mentioned, the US also regressed, while every one else liberalized (and reaped the benefits therefrom).

Of course, anyone paying attention to US trade policy over the last two years already knew this from the mounds of anecdotal evidence presented on this blog and other (more reputable) outlets.  As I grumbled a few weeks ago:

Obama has placated his anti-trade base (and their congressional muscle) on Buy American, Mexican Trucks, Chinese Chicken Imports, Section 421 (tires), Section 301 (Chinese "green" subsidies), changes to US trade remedies laws,carbon tariffs - the list literally goes on and on.  He shelved his early 2009 support for the Colombia and Panama FTAs (and KORUS until last June) at the first whiff of congressional stink.  He has embraced mercantilism and adopted a "trade policy" in the NEI that is as unoffensive as it is ineffectual. 

Meanwhile, the rest of the world has pursued bilateral and regional free trade agreements at a breakneck pace.  Thus, it's no surprise that the new Heritage data show the United States stagnating on trade while the rest of the world surges ahead.  Indeed, it'd be a shock if the numbers showed anything else.

A lot of pundits and prognosticators are optimistic that this upsetting trend will change course in 2011, and that the Obama administration will finally engage on free trade and help the United States live up to its reputation as the world's free trade leader.  Recent talk from the administration on KORUS, zeroing and Mexican trucks appears to confirm this conventional wisdom, but it's only a start.  A real change of course on US trade policy will require real action to back up the White House's nice words, as well as new trade liberalization policies to catch us up with the rest of the world.

I sure hope that the conventional wisdom on US trade policy in 2011 turns out to be correct because if things don't change soon, we'll all be pining for the good ol' days when the United States sat pretty in 38th place.

The US Government's Horribly Misplaced China Trade Priorities

It's no secret that the US Congress and many in the Obama administration have been somewhat obsessed with US-China trade over the last few years, and considering that China is a rising economic power and one of the United States' largest trading partners, a certain amount of US government attention is arguably warranted.  However, two recent columns from the Wall Street Journal shine a really bright and depressing light on just how misplaced Congress' (and the US government's more generally) priorities have been, and continue to be, with respect to US-China trade policy.

First, the WSJ's Peter Stein explains how the recent good news that two big US investment banks have gained new access to the Chinese market is not nearly as good as it could have, or should have, been:

On Friday, Chinese regulators confirmed that J.P. Morgan Chase & Co. and Morgan Stanley have both been given the green light to set up shop in China's domestic securities market.

Like other investment banks looking to enter the China market, neither can look forward to an awful lot for now. They're both restricted to 33% ownership of a joint venture with a local partner. They can underwrite stocks and bonds, but they won't have the licenses to trade those securities in the secondary market. Even UBS AG, whose UBS Securities is the most active foreign underwriter in China, made a net profit in 2009 of only around 109.2 million yuan ($16.5 million), according to publicly available data.

Foreign banks in general have struggled to build meaningful businesses in China. But the rules that hold back investment banks from doing more China business are unusually strict. Commercial lenders, by contrast, can set up banks in China that they own entirely, avoiding the perennial risk that their relationship with a joint-venture partner sours. In the asset-management industry, foreign investors can own 49% of a joint venture, giving them a bigger slice of the profits. The Street may have only itself to blame.

Foreign investment banks just weren't that into China, or at least its domestic stock market, back when China was negotiating admission to the World Trade Organization in the years before a deal was reached in 2001, says Zili Shao, chairman and chief executive of China for J.P. Morgan. As a lawyer, Mr. Shao worked on setting up China ventures for Goldman Sachs Group Inc., UBS and CLSA Asia-Pacific Markets, a unit of the French bank Crédit Agricole SA.

At the time, China's financial sector was a mess, and its stock market was a far cry from the major force that it is today. With plenty of market opportunities elsewhere, the need to press for access to China might not have ranked as a top priority at the banks. "That was a major underestimation," says Mr. Shao.

David Strongin, managing director of the Securities Industry and Financial Markets Association, says, "We vigorously and aggressively pursued opening China's market." But rules on foreign participation in China's securities industry were among the last unresolved issues blocking China's entry into the WTO, he adds, "so all leverage to negotiate was gone." He describes the current restrictions as "a huge impediment to competing in China."...

Today, says Mr. Shao, there's no discussion taking place about changing the status quo. In Washington, he says, the goal of boosting U.S. access to China's markets has taken a back seat to political pressure for China to revalue its currency. "There is a lot of debate about the currency," he says, "but no one is arguing for greater market access."

Speaking of currency, it's one of the topics in a great new WSJ editorial which explains just how little all that American political effort on China's currency - and the US-China trade balance - could end up getting us.  In the process, the piece hits on a lot of the issues that I've been discussing over the last year or so like China currency, global supply chains, import benefits, trade diversion, the trade deficit, and, of course, really stupid congressional rhetoric:

No sooner has a new Congress arrived in Washington than the anti-China-trade rhetoric has started anew. Senator Charles Schumer, whose Democrats still control his chamber, has said he plans to re-introduce legislation to punish China for its "currency manipulation." Tim Murphy, a Pennsylvania Republican, may push similar legislation he co-sponsored in the past, Reuters reports....

Leaders face many decisions on how best to put the American economy back on a growth track. To the extent that Congressional protectionists will present Chinese exporters as a threat to American prosperity despite all the other more pressing problems America faces, the argument over China's exchange-rate policy is a distraction the economy can't afford.

How much of a distraction is suggested by a paper out last month from the Asian Development Bank Institute. Economists Yuqing Xing and Neal Detert examined the supply chain of the iPhone to reach a surprising conclusion: Technically, the iPhone contributes to America's trade deficit with China.

The basic explanation is that data on bilateral trade are calculated assuming that the entire value of a traded good is created in the exporting country. If that ever made sense, it certainly doesn't in a global economy marked by increasingly complex supply chains.

In the case of the iPhone, Messrs. Xing and Detert note that the device was invented in America by an American company, Apple. The components are manufactured, either inside or out of China, by companies based in several other countries. The only part of the entire process that is unambiguously "Chinese" is the final assembly—a process that, in the estimation of Messrs. Xing and Detert, adds only $6.50 to the $178.96 wholesale value of an iPhone.

Yet that entire $178.96 value ends up attributed to China in the calculation of trade statistics. As a consequence, the iPhone contributed nearly $1 billion to China's bilateral trade surplus with America in 2008, and nearly $2 billion in 2009, the authors of this study conclude. If the trade data had been based solely on the $6.50 cost of assembling each unit, the iPhone would have added only $34 million and $73 million in those years, respectively, to China's surplus.

The ADBI study ought to be required reading on Capitol Hill. Most importantly, it raises the question of how much anyone really knows about what America's trade with China is. Critics of trade data, including us, have long asserted that bilateral statistics are misleading at best. As the bilateral trade deficit with China grew, deficits with South Korea, Taiwan and Singapore declined, confirming that China's comparative advantage lies in the assembly into finished products of components manufactured around the region, due to its low-wage, low-skilled labor....

Crucially, the trade data also miss the broader economic impact of "imports" like the iPhone. The benefits are clear and large, though hard to quantify precisely. First there are the gains to Apple itself. The ADBI study examines only the composition of the $178.96 manufacturing cost of the iPhone. The handsets typically retail for as much as 50% to 100% more than that. The difference consists of the value of Apple's intellectual property in having invented the iPhone, and also the value of marketing in persuading consumers to buy the hot new thing.

The ADBI study doesn't break down that figure, but others have performed similar research in the past. Economists at the Personal Computing Industry Center attempted in 2007 to estimate who profits from the iPod and how. They estimated that for an iPod retailing for $299, retailer and distributor margins account for $75 and Apple's own margin accounted for $80. In other words, more than half the retail price accrued to American companies—and their employees and shareholders—in some form.

None of these studies accounts for another huge way such imports drive growth by spurring innovative new businesses. Telecom companies like AT&T and, now, Verizon have profited by being able to offer data services to iPhone-toting consumers. Countless programmers around the world are now devising applications for the iPhone and iPad, which offer many businesses a convenient new way to reach potential customers.

All of which illustrates the basic truth that trade has always benefited the American economy. Congress can't afford to forget that, no matter how much Members would like to scapegoat Chinese factories for Washington's own policy mistakes.

So rather than launching a trade war with China over $6.50, here's a better agenda for the 112th Congress: Focus on policies that will help Americans and U.S. companies better capitalize on a global economy. That includes better tax policies to reward investment and entrepreneurship; environmental regulation that does not discourage manufacturing in America when it would make business sense; health-care policies that don't deter hiring; and free trade to let Americans import goods like iPhones that will spur new growth.

Like I said, great stuff.   And when you combine the two WSJ pieces, one very important thing becomes crystal clear: the United States government is totally wasting its time on meaningless issues like the trade balance and China's currency and totally ignoring far more important (and valuable) issues like access to China's market, particularly for globally-dominant American service providers.  In short, we're so irrationally focused on a measly $6.50 that we're letting billions of dollars slip out the back door.  Ugh.

One point of contention, however: contrary to Stein's assertions' the United States government does have a huge chance to quickly improve its companies' access to China's relatively closed services market, as well as many other developing countries' goods and services markets around the world: the WTO's Doha Round of multilateral trade negotiations.  Indeed, several studies (like this one) have shown that an ambitious Doha Round agreement on services could  improve global welfare by well over a trillion - with a "T" - dollars, with much of that going to US services companies and their employees.  And, as Phil Levy and I recently noted, there is a very real and immediate opportunity to complete the Doha Round in 2011.

Of course, Levy and I also noted that the fate of the Round rests squarely on the shoulders of President Obama and the US Congress - particularly in their ability to craft a bold offer on agricultural subsidies and industrial market access and convince (or push) other WTO Members to do the same.  Such a plan, however, requires a ton of effort and even more political will, and although the US government has (perhaps) hinted that it's getting serious about Doha, it's still futzing around with silly distractions like China's currency and the bilateral trade balance.  Those in Congress, it seems, are far more worried about $6.50 than they are those untold billions.

Obama, however, need not be so distracted, and next week's meetings with Chinese President Hu Jintao provide the President with the perfect opportunity to prove that he's above the nonsensical nincompoopery of self-interested politicos like Chuck Schumer and is instead ready to lead on trade.  At the meeting, Obama can show Hu that the US is deadly serious about the Doha Round, and that China should be too.  There's no time to waste, and the stakes are just too high to focus on anything else.

Especially a Senator from New York and $6.50.

Monday Quick Hits

Lots of interesting stuff went down while everyone was vacationing.  Here's a quick rundown:

• The Wall Street Journal's editorial board explains how a US antidumping order on magnesium has destroyed American manufacturing jobs in industries that rely on the metal to produce downstream inputs.  The money lines: "In 2005, at the behest of America's monopoly magnesium producer—U.S. Magnesium of Utah—the Commerce Department imposed antidumping duties on magnesium from Russia and magnesium alloy from Russia and China. Five years later magnesium alloy is in short supply in the U.S., leading to much higher prices than in the rest of the world and a crisis for die casters, alloy producers and recyclers.... In a December 6 letter to the ITC, Arkansas Congressman Mike Ross spelled out the problem: 'U.S. manufacturers pay $2.30 per pound on average for magnesium alloy while manufacturers in Mexico, Canada and Europe pay $1.50 per pound and Chinese manufacturers pay $1.36 per pound.' Die casters who have tried shifting to aluminum have lost orders to overseas producers."  Cato's Dan Ikenson piles on by citing the magnesium case as a prime example of US trade policy's cognitive dissonance.

• The Chinese are starting to really hammer home the fact that, as your humble correspondent keeps screaming aboutcalmly mentioning, global supply chains have rendered old school trade stats obsolete tools for measuring actual tradeflows and the efficacy of existing trade policies.  Most of the information cited here is old news for readers of this blog, but here's a new one: "Sheng Guangzu, head of China's General Administration of Customs, told Xinhua in an interview in April that much of China's trade surplus was 'transferred' from foreign-funded enterprises operating in China. In the first 11 months this year, exports of foreign-funded enterprises totaled 779.14 billion U.S. dollars, accounting for 54.7 percent of China's total exports, according to China's customs authorities.  The data also showed that, during the same period, foreign-funded firms generated 112.51 billion U.S. dollars of trade surplus, accounting for 66 percent of China's total surplus."

• In case you missed it, GMU's Walter Williams deftly explains that (a) trade is among individuals, not countries, and (b) free trade is by definition "fair trade."

• The WSJ's Liam Denning discusses why "national rivalry always lurks around an industry as dependent on government support as renewable energy."  His first example: the heavily subsidized United Steelworkers's "Section 301" petition against Chinese green subsidies.  Sounds familiar, eh?

• Heritage's Jim Roberts gives us a quick reminder that free trade is a prime contributor to the dramatic increase in all Americans' living standards over the last 50 years.

• Behold, the stunning incompetence of the federal government: "The U.S. Government Accountability Office said it could not render an opinion on the 2010 consolidated financial statements of the federal government, because of widespread material internal control weaknesses, significant uncertainties, and other limitations.... [Acting Comptroller General] Dodaro also cited material weaknesses involving an estimated $125.4 billion in improper payments, information security across government, and tax collection activities. He noted that three major agencies — the DOD, the Department of Homeland Security, and the Department of Labor — did not get clean opinions. Nineteen of 24 major agencies did get clean opinions on all their statements."

• Cato's Dan Griswold destroys the canard that US multi-nationals corporations' overseas hires are responsible for high domestic unemployment.  In short, companies follow economic growth, not lower wages; and the US still benefits when they do. I'd only add that we'd be even better off if the US adopted more pro-growth tax and regulatory policies.  (More on that point in a great IBD editorial here.)

• It's time for the US to stop futzing around and implement the US-Colombia FTA.  Seriously.

• The US manufacturing sector is cranking.  Fearmongering American politicians were shockingly unavailable for comment.

• A free trader's new year's resolution.

• This is absolutely hilarious (mild content warning).  So is this.

Enjoy.

Back-to-School Blues

From the Heritage Foundation comes a fantastic/distressing graphic showing why the kids shouldn't be the only ones upset while back-to-school shopping this August.  Indeed, mom and dad have plenty of reasons to be miffed too:

Nothing like adding a few hundred unnecessary bucks to American families' back-to-school budgets to really start the 2010 school year off right, huh?  Although I'm sure that these working moms and dads will, like, totally be comforted knowing that their hard-earned dollars are going to line the pockets of America's well-connected shoe/t-shirt/lunchbox/etc. producers and their unions. 

Riiiiiiight. 

And (as I've repeatedly noted) let's also not forget that these taxes are highly regressive, costing poor Americans a far greater percentage of their paychecks than wealthy Americans.  So the next time a protectionist talks about how these tariffs are necessary to ensure "fair trade," try not to laugh in his/her face, ok?

Happy shopping, everyone.

(h/t Andy Roth)

p.s. I've been traveling for business and the internet connection here hasn't afforded me much ability to blog since last week.  I'll be back online soon - there's plenty of new stuff to complain about.

US Proposes "Early Harvest" on Environmental Goods and Services: Good News, Bad News

Bloomberg reports that the United States is seeking an "early harvest" agreement on free trade in green goods and technologies (emphasis mine):

The U.S. is talking with Canada, the European Union and Australia about eliminating tariffs on solar, wind and related energy technologies to spur their use, U.S. Trade Representative Ron Kirk said today.

Kirk said the U.S. is seeking an “early harvest” for an agreement on so-called green technologies, which means an environmental deal wouldn’t have to wait for completion of the Doha Round of World Trade Organization talks. Negotiations on environmental goods have taken place since 2008.

“We think it only makes sense to make the trade of those goods more open,” Kirk said at a Washington event on patent protections. “We think it is important enough” that it could move ahead on its own, he said.

The U.S. and EU in 2007 jointly proposed eliminating trade barriers for 43 products ranging from thermostats to universal joints for wind turbines to parts for boilers. The proposal also called for easing investment rules for environmental services and a longer-term, broader round of tariff cuts for other environmental goods.

Total trade in such products topped $600 billion in 2006, according to U.S. statistics.

Kirk didn’t say when he hopes to wrap up a deal on environmental goods. President Barack Obama has made doubling U.S. exports a top economic goal, and spurring trade in green technologies could help accomplish that, according to Kirk.

The USTR announcement provides free traders with a dash of good news - it's one of the only instances in which the Obama administration has publicly advocated further opening the US market to imports and has proposed a specific plan to quickly accomplish such import liberalization.  Indeed, the only other "true free trade" (i.e., encouraging exports and imports) action that we've seen from the United States in the last 15 months is the negotiations on the Trans-Pacific Partnership (TPP) agreement, but even those talks aren't that big a deal because (a) we have no idea what a final agreement will look like, and (b) it's going to take years to complete.  So USTR's environmental goods plan is a small step forward for a US administration that since its inception has shunned FTAs, the WTO's Doha Round negotiations and every other import liberalization endeavor, and instead has pursued an insanely mercantilist trade policy.

Unfortunately, it's precisely that mercantilism which brings us to the bad things about the US announcement: it completely perverts the original purpose of the proposals on green goods and, in the process, undermines what should be an important public lesson about the benefits of imports (and harms of protectionism) in any market economy.  As the article above indicates, the original proposals on liberalization of "green trade" were part of the 2001 WTO Doha Round mandate, which made clear that these negotiations' primary objectives were to eliminate tariff and non-tariff barriers to trade in environmental goods and services in order to lower costs of, and improve access to, these important green technologies.  Lower costs and improved access, you see, mean more use of environmental products and services, and more use is obviously good for the environment.  (Cheap windmills and solar panels for everyone!  Woo hoo!)

Indeed, former WTO Appellate Body chairman James Bacchus has an op-ed in today's Forbes hitting on this issue while explaining how the WTO can dramatically improve the environment.  He states, in part:

Global implementation of climate-friendly technologies is a key to the success of global efforts to confront climate change. Access to green technologies by developing countries is central to this task. In particular, it is vital to increase energy efficiency in developing countries, which are only one-third as energy efficient as developed countries.

Trade negotiators have been trying to address this need for some time in the prolonged Doha Round of global trade negotiations. On the WTO agenda in the trade round are efforts to reduce or eliminate tariff and nontariff barriers to trade in dozens of environmental goods and services, including everything from wind turbines to solar water heaters to the thermostats and the generators needed to operate renewable energy plants.

Eliminating the barriers to trade in green goods and services would help diffuse them worldwide at the lowest possible cost by reducing their prices. In addition, it would provide incentives and expertise needed to enable developing countries to expand their production, use and export of climate-friendly technologies.

Indeed.  Meanwhile, it would provide consumers across the world with a valuable lesson about the benefits of imports and free trade - increasing use, access and variety, while dramatically decreasing costs.  And all to help improve the environment.  In sum: a very worthwhile endeavor.

So what's my problem?

Well, beyond the obvious fact that countries should recognize these import benefits and liberalize unilaterally instead of reciprocally, take a look at the passage that I bolded in the Bloomberg article above.  As you can see, USTR's sole justification for its green goods proposal is expanding US exports as part of the National Export Initiative (very similar to this new proposal from congressional Democrats).  There's no mention the cost/access/use reasoning of the original Doha Round mandate, and there's no discussion of the benefits of this green import liberalization for consumers in the US and abroad.  Instead, it's all about that same old mercantilist obsession with exports, and once again Americans are left to think that low-cost imports of these great, green products aren't actually good and desirable things.  Nope, we only care about exports in the United States, regardless of the fact that the, you know, environment could significantly improve through expanded American access to, and thus use of, imports of green goods and services.  Thus, USTR's public statements about this great import liberalization agreement actually end up reinforcing the misguided, economically-illiterate idea that import liberalization is bad - precisely the exact opposite point of the original environmental goods/services mandate!

How messed up is that?

So while the substance of the USTR announcement is generally good news, its delivery leaves a whole lot to be desired.  Baby steps, I guess.

Canada Makes Its Southern Neighbor Look Like a Hoser

Reuters reports that the Canadian government will permanently and unilaterally eliminate import tariffs on a wide range of industrial inputs:

Canada's Conservative government pledged on Thursday to become the first G20 country to permanently eliminate all import tariffs on inputs for manufacturers by 2015, and most cuts will take effect immediately.

The tariff cuts on things like raw materials will save companies about C$300 million ($290 million) in a unilateral move that Ottawa sees as one of the boldest measures in its 2010 budget.

"Canada, as a nation whose prosperity is greatly dependent on trade, clearly understands the importance of open markets," the budget said....

The new measures will reduce the number of items subject to import duties ranging from 2 percent to 15.5 percent to 381 items from 1,541 items as of March 5, and that number will fall to zero by 2015.

At that time, the only imports subject to duties in Canada will be supply managed goods in the agricultural sector and consumer products.

The government said its pre-budget consultations showed that small and mid-sized businesses were enthusiastic about the tariff cuts, which will cut costs and paperwork.

Very cool.  With its big announcement, Canada joins several other countries -  including Mexico, India and the United Kingdom - who have recognized the critical importance of imports to their economies and thus implemented government policies reducing barriers to foreign goods, services and investment.  Good for them.

Now granted, the new Canadian trade policies aren't perfect - as Terence Corcoran of Canada's National Post points out, it's both incongruous and unfair for the Harper government to help Canadian businesses with tariff cuts but not to extend the tax savings to Canada's consumers by also eliminating tariffs on farm and downstream products.  Nevertheless, these tariff cuts should be loudly applauded for two big reasons.  First, news of a major developed economy embracing unilateral tariff liberalization to help its domestic manufacturers will provide a very public counterweight to the traditional protectionist myth that foreign imports somehow harm industrial producers and jobs - especially as those companies become more successful.  It also will allow everyday folks (who don't obsess about trade issues like me) to more easily see and understand how protectionism, not free trade, undermines domestic production and jobs.  And as that happens, other tariffs - like those remaining ones in Canada - will inevitably fall (especially with guys like Corcoran loudly calling for their elimination).

Second, Canada's permanent(!) unilateral liberalization (and that of other countries) will stand as a constant reminder of free market sanity - one that dramatically undermines the mercantilist pabulum coming out of many governments these days, including Canada's southern neighbor, the United States.  Just compare and contrast: 

• The Harper government is eliminating import tariffs and lowering the corporate tax rate for the express purpose of increasing its domestic companies' productivity and global competitiveness, while...

• The Obama government's new trade agenda refuses to acknowledge that imports even exist, no less benefit domestic manufacturers (despite the mountains of statistical and anecdotal evidence that such imports are critical to US businesses, and that US tariffs hurt American families).  Oh, and our corporate tax rate remains one of the highest in the world.

Embarrassing, eh?