Managed Trade: USMCA Comes into Effect Today

The United States-Mexico-Canada Agreement (USMCA) comes into effect today. It replaces the North American Free Trade Agreement (NAFTA) of 1994. USMCA’s policy changes are modest, and its economic impact will be small. But it sets a negative precedent for future trade agreements that could have far larger long-term impacts than USMCA itself. Most of its changes also attempt to manage trade, rather than free it. These factors led CEI to oppose USMCA in December 2019.

Some USMCA policy changes are positive, such as a partial liberalization of Canada’s dairy markets. More than half of USMCA’s text is drawn verbatim from the Trans-Pacific Partnership (TPP) that the Trump administration unwisely withdrew from early in its term. My colleague Patrick Hedger wrote about Section 230-style language that will benefit free speech while making all three member countries’ tech industries more competitive.

Other changes are negative. The U.S. essentially dictated to Mexico what some of its labor policies shall be. Not only is this disrespectful to Mexico’s sovereignty, but it is essentially a gift to U.S. labor union interests, and will make autos more expensive for consumers. Auto parts makers’ supply networks, which have built up over decades, will have to be reconfigured to meet USMCA’s requirements for what percentage of parts must come from which countries. But those are smaller potatoes. There are larger ones.

USMCA’s name does not contain the words “free” or “trade.” This is symbolism, but also important. President Trump is a longstanding critic of free trade, and hired his policy advisers accordingly. Their removal of the F from NAFTA accurately reflects their policy goals. They would rather manage trade than free it.

Nor is their planners’ ethos confined to USMCA. The China Phase One deal goes so far as to outline minimum dollar amounts for how much agricultural exports U.S. farmers are to send to China, for example. Of course, the administration’s economic planners could not foresee the COVID crisis. Their quotas are now unlikely to be met even in a best-case scenario, which is causing avoidable diplomatic tensions; the best-laid plans and all that. Some USMCA plans have similarly been thrown off by the pandemic. Supply networks were already rushing to meet USMCA’s country-of-origin requirements. The last few months of lockdown have made the adjustments even more difficult.

USMCA’s missing T, which in NAFTA stood for Trade, is also significant. It belies mission creep. Trade agreements should stick to trade. USMCA emphatically does not.  USMCA’s trade-unrelated provisions include environmental policies, labor policies, intellectual property rules, currency policy, pharmaceutical regulations, and more. Trade-unrelated provisions inflate page counts, create unnecessary areas of contention, prolong negotiations, distract from the matter at hand, and create new rent-seeking opportunities.

The original NAFTA was the first major trade agreement to contain significant trade-unrelated provisions, and deserves criticism on that front. But at least they were shunted off into a side agreement. USMCA bakes its trade-unrelated provisions into the main agreement. The U.S., Canada, and Mexico already enjoy a near-zero tariff relationship, and relatively low non-tariff barriers. Without much left for USMCA to accomplish on trade, non-trade issues are no longer a sideshow. They are the show.

While USMCA is comparatively low stakes and will have minimum economic impact, it sets a negative precedent for upcoming agreements with the, European Union, and China. Relations with the EU have been tense for some time, especially over Boeing and Airbus subsidies. Any further China agreements will be delicate, both because of the COVID lockdown affecting Phase One compliance and President Trump’s reelection concerns apparently influencing his negotiations.

Haggling over non-core trade issues could potentially torpedo those agreements, or dilute liberalization victories for tariffs and other trade barriers. USMCA itself is not particularly harmful. But the precedent it sets might be.

For a more constructive approach to trade policy, see Iain Murray’s and my paper “Traders of the Lost Ark.” For a better approach to trade agreements, see “The Ideal U.S.-U.K Free Trade Agreement,” put together by consortium of groups in the U.S. and U.K., headed by the Cato Institute’s Dan Ikenson and Simon Lester, and the Initiative for Free Trade’s Daniel Hannan.

This Week in Ridiculous Regulations

Consumer spending rose 8.2 percent in May, a new record that gives hope for a quicker economic recovery. On the other hand, new coronavirus cases in the last week set their own record. The virus is apparently ignoring pleas from the White House to reduce testing. Meanwhile, regulatory agencies issued new regulations ranging from dry pea insurance to hammerhead shark management.

On to the data:

  • Last week, 82 new final regulations were published in the Federal Register, after 55 the previous week.
  • That’s the equivalent of a new regulation every two hours and three minutes.
  • Federal agencies have issued 1,511 final regulations in 2020. At that pace, there will be 3,046 new final regulations. Last year’s total was 2,964 regulations.
  • There were also 31 proposed regulations in the Federal Register last week, for a total of 1,074 on the year. At that pace, there will be 2,165 new proposed regulations in 2020. Last year’s total was 2,191 proposed regulations.
  • Last week, agencies published 406 notices, for a total of 11,003 in 2020. At that pace, there will be 22,183 new notices this year. Last year’s total was 21,804.
  • Last week, 1,409 new pages were added to the Federal Register, after 1,192 pages the previous week.
  • The 2020 Federal Register totals 38,740 pages. It is on pace for 78,104 pages. The 2019 total was 79,267 pages. The all-time record adjusted page count (which subtracts skips, jumps, and blank pages) is 96,994, set in 2016.
  • Rules are called “economically significant” if they have costs of $100 million or more in a given year. Three such rules have been published this year. Four such rules were published in 2019.
  • The running cost tally for 2020’s economically significant regulations ranges from net savings of between $1.38 billion and $4.19 billion. 2019’s total ranges from net savings of $350 million to $650 million, mostly from estimated savings on federal spending. The exact number depends on discount rates and other assumptions.
  • Agencies have published 30 final rules meeting the broader definition of “significant” so far this year. 2019’s total was 66 significant final rules.
  • So far in 2020, 294 new rules affect small businesses; 11 of them are classified as significant. 2019’s totals were 501 rules affecting small businesses, with 22 of them significant.

Highlights from last week’s new regulations:

For more data, see Ten Thousand Commandments and follow @10KC and @RegoftheDay on Twitter.

Podcast: Reforming #NeverNeeded Regulations

Mitch Kokai at the John Locke Foundation was kind enough to invite me on his HeadLocke Podcast to talk about #NeverNeeded regulations that are harming the pandemic response, and how to reform them. We discuss individual rules as well as the need to reform the rulemaking process itself that generates 3,000 or so new regulations each year.

The John Locke Foundation also has released a Rebound Plan for North Carolina, where the organization is based—the basketball reference is a nice touch. It contains COVID-related reform ideas for a variety of issues including health care, education, and of course, regulation. Many of the ideas can be applied in other states and at the federal level. It pairs well with CEI’s new 2020 edition of Ten Thousand Commandments.

The podcast is here. The Carolina Rebound Plan is hereTen Thousand Commandments 2020 is here. And CEI’s #NeverNeeded site is here.

Supreme Court Declines to Hear Steel Tariff Case: Time for Congress to Act

President Trump’s steel tariffs were intended to boost U.S. manufacturing. They backfired to the point where a group of steel-using industries sued to stop the tariffs. The case wound its way up to the Supreme Court, which this week announced it would not hear it. The tariffs will remain in place.

Although the Court will not act, Congress has the power to rescind the tariffs at any time. However, as the Cato Institute’s Dan Ikenson told Politico’s Morning Trade newsletter, “Congress is quite content with its abdication of trade authority, frankly.” President Trump is getting all of the blame for the trade war’s failures. This is fine with much of Congress—even many Republicans, who mostly did not favor Trump-style trade protectionism until changing their minds around January of 2017.

Sen. Chuck Grassley (R-IA) has proposed reclaiming some of Congress’ abdicated tariff authority, but his proposal’s political prospects are dim.

The Supreme Court case on the steel tariffs would have hinged in part on the separation of powers. Only Congress has the power to tax. Tariffs are taxes. That means only Congress, not the president, can enact tariffs. But there is a wrinkle. Back in the 1960s and 1970s, Congress delegated away some of its tariff-making power to the president. The steel tariffs were enacted under Section 232 of the Trade Expansion Act of 1962, which empowers the president to impose tariffs without congressional consent, provided they are imposed on national security grounds.

It is hard to tell which way the Court would have decided that question, since separation of powers arguments cut both ways. While the president does not have taxing power, Congress did delegate Section 232 powers to him. But how far does that delegation authority extend? How far do the powers reach? These questions will remain unanswered for now.

While frustrating, this may be for the better. The Supreme Court, whose members are presidentially appointed and Senate-approved, in part for that reason, tends to be permissive of executive power, and deferential to Congress.

The merits of the case are less ambiguous, though that is often of less importance in legal matters. The Section 232 steel tariffs, which originally targeted allies such as Canada and Mexico, do not pass any reasonable national security test. In a phone call with Canadian Prime Minister Justin Trudeau, for example, President Trump claimed that the tariffs were justified because Canada burned down the White House during the War of 1812.

This claim, while weak, is also inaccurate. The White House was burned by British soldiers. Those soldiers were stationed in Canada, but since Canada’s government did not gain independence until 1867, it can hardly be blamed. This also leaves aside Canada being one of America’s strongest allies through multiple wars and other national security threats, as well its largest trading partner.

#NeverNeeded steel tariffs are harming not just the steel industry, but steel-using industries such as construction and automobiles. In all, just the tariffs that President Trump alone has enacted are costing the economy roughly a half percentage point of economic growth, according to the Congressional Budget Office. While the country might have been able to afford such ideological luxury goods during a boom, it simply cannot during the COVID-19 recovery.

In CEI’s most recent Agenda for Congress, we argued that Congress should repeal not just Section 232 tariff authority, but also Sections 201 and 301 of the Trade Act of 1974, which allow presidential tariff-making to address foreign competition and treaty violations. Iain Murray and I also outlined a larger positive agenda for trade policy in our paper “Traders of the Lost Ark.”

The Trump tariffs have to go. Since the Court will not step up, Congress must act.

#NeverNeeded Reg Reform Event on YouTube

This morning’s CEI Zoom event is now on YouTube. Following remarks by OIRA head Paul Ray, Kent Lassman, Wayne Crews, and I discuss regulatory reforms and Wayne’s new Ten Thousand Commandments report. Excerpts from the event are viewable here.

This Week in Ridiculous Regulations

Trade protectionists have taken to calling free traders soft on China. According to John Bolton’s forthcoming book, it turns out to be the other way around. This analyst’s warnings about trade barriers being tools for corruption have turned out to be correct. Meanwhile, regulatory agencies issued new regulations ranging from anabolic steroids to single-use chambers.

On to the data:

  • Last week, 55 new final regulations were published in the Federal Register, after 53 the previous week.
  • That’s the equivalent of a new regulation every three hours and three minutes.
  • Federal agencies have issued 1,429 final regulations in 2020. At that pace, there will be 3,002 new final regulations. Last year’s total was 2,964 regulations.
  • There were also 53 proposed regulations in the Federal Register last week, for a total of 1,043 on the year. At that pace, there will be 2,235 new proposed regulations in 2020. Last year’s total was 2,191 proposed regulations.
  • Last week, agencies published 393 notices, for a total of 10,464 in 2020. At that pace, there will be 21,983 new notices this year. Last year’s total was 21,804.
  • Last week, 1,192 new pages were added to the Federal Register, after 1,178 pages the previous week.
  • The 2020 Federal Register totals 37,330 pages. It is on pace for 78,424 pages. The 2019 total was 79,267 pages. The all-time record adjusted page count (which subtracts skips, jumps, and blank pages) is 96,994, set in 2016.
  • Rules are called “economically significant” if they have costs of $100 million or more in a given year. Three such rules have been published this year. Four such rules were published in 2019.
  • The running cost tally for 2020’s economically significant regulations ranges from net savings of between $1.38 billion and $4.19 billion. 2019’s total ranges from net savings of $350 million to $650 million, mostly from estimated savings on federal spending. The exact number depends on discount rates and other assumptions.
  • Agencies have published 28 final rules meeting the broader definition of “significant” so far this year. 2019’s total was 66 significant final rules.
  • So far in 2020, 275 new rules affect small businesses; 11 of them are classified as significant. 2019’s totals were 501 rules affecting small businesses, with 22 of them significant.

Highlights from last week’s new regulations:

For more data, see Ten Thousand Commandments and follow @10KC and @RegoftheDay on Twitter.

Has Trump Been a Net Deregulator?

Pierre Lemieux, in the cover story of the new Summer 2020 issue of the Cato Institute’s Regulation magazine, draws from the new 2020 edition of Ten Thousand Commandments to estimate the Trump administration’s net impact on regulation:

Trump’s Executive Order 13771, signed January 30, 2017, mandated the elimination of two existing rules (or formal regulations) for any new one implemented. The latest edition of regulatory analyst Clyde Wayne Crews’s annual report Ten Thousand Commandments notes that this goal was more than achieved over the first three years of the Trump administration. However, Crews adds, last year showed a notable loss of momentum as there were more regulatory actions than deregulatory actions in the pipeline at the end of 2019.

And:

Figure 5, which gives the number of pages in the CFR [Code of Federal Regulations] over time, suggests that the Trump administration has roughly capped the total volume of federal regulations at, or slightly over, the 185,000 pages they comprised at the end of the Obama presidency. According to this measure, the Trump administration stopped the growth of regulation, but it did not deregulate. Ryan Young, a senior fellow at the Competitive Enterprise Institute and colleague of Crews, summarizes the situation:

President Trump’s first three years of regulation are mixed. He deregulated in some areas and added new burdens in others. Transparency problems and poor data quality from agencies make it impossible to tell for certain if Trump has been a net deregulator. The most likely verdict is that he has slowed regulatory growth but has not cut regulation on net.

The whole article is excellent. Pierre gives a superb summary of the last three years of economic policy. Wayne Crews’s Ten Thousand Commandments study is here. Wayne and I offer an op-ed length summary of the report here.

Speaking at #NeverNeeded Event on June 22 with OIRA Administrator Paul Ray, CEI’s Kent Lassman, Wayne Crews

On Monday, June 22 at 11:00 ET, CEI is holding a Zoom event on regulatory reform with Paul Ray, who heads the Office of Information and Regulatory Affairs inside the Office of Management and Budget. That’s the agency most directly involved in monitoring the federal regulatory state.

Also speaking at the event are CEI president Kent Lassman, vice president for policy Wayne Crews, and me.

Registration is here. Afterwards, the event will be posted to YouTube. I’ll post a link when it’s up.

This Week in Ridiculous Regulations

The rate of new coronavirus cases increased last week, adding a note of caution to tentative efforts at reopening. Regulatory agencies issued new final regulations ranging from Florida bats to heraldic items.

On to the data:

  • Last week, 53 new final regulations were published in the Federal Register, after 71 the previous week.
  • That’s the equivalent of a new regulation every three hours and 10 minutes.
  • Federal agencies have issued 1,374 final regulations in 2020. At that pace, there will be 3,013 new final regulations. Last year’s total was 2,964 regulations.
  • There were also 53 proposed regulations in the Federal Register last week, for a total of 1,019 on the year. At that pace, there will be 2,235 new proposed regulations in 2020. Last year’s total was 2,184 proposed regulations.
  • Last week, agencies published 410 notices, for a total of 10,071 in 2020. At that pace, there will be 22,086 new notices this year. Last year’s total was 21,804.
  • Last week, 1,178 new pages were added to the Federal Register, after 1,976 pages the previous week.
  • The 2020 Federal Register totals 36,137 pages. It is on pace for 79,248 pages. The 2019 total was 79,267 pages. The all-time record adjusted page count (which subtracts skips, jumps, and blank pages) is 96,994, set in 2016.
  • Rules are called “economically significant” if they have costs of $100 million or more in a given year. Three such rules have been published this year. Four such rules were published in 2019.
  • The running cost tally for 2020’s economically significant regulations ranges from net savings of between $1.38 billion and $4.19 billion. 2019’s total ranges from net savings of $350 million to $650 million, mostly from estimated savings on federal spending. The exact number depends on discount rates and other assumptions.
  • Agencies have published 28 final rules meeting the broader definition of “significant” so far this year. 2019’s total was 66 significant final rules.
  • So far in 2020, 268 new rules affect small businesses; 11 of them are classified as significant. 2019’s totals were 501 rules affecting small businesses, with 22 of them significant.

Highlights from last week’s new regulations:

For more data, see Ten Thousand Commandments and follow @10KC and @RegoftheDay on Twitter.

Unintended Consequences of Price Gouging

Price gouging legislation, though popular, routinely backfires. Price controls make shortages worse. In a crisis, this is especially harmful. And even if price gouging legislation were to tamp down money prices, it worsens increases in non-money prices such as greater scarcity, more difficult searches, longer queues and waiting lines, longer shipping times, and, sometimes, increases in black market activity.

There are private responses to price gouging, though. Amazon, for example, uses artificial intelligence to find price gouging among its third-party sellers. But even this non-legislative effort has had unintended consequences. Bloomberg’s Spencer Soper reports:

But consultants who help merchants avoid suspensions say they were inundated with calls from clients during the price-gouging crackdown. One of them, a former Amazonian named Chris McCabe, says he heard from hundreds of merchants and advised dozens of them to stop selling products because the rules were unclear.

“Amazon just did a giant sweep and they really scared a lot of people away from selling wipes and toilet paper,” he says.

Many sellers believe Amazon’s algorithm is prone to false positives, and its penalties are too harsh. The resulting chilling effect helps no one at a time when just about everyone needs help.

Fortunately, unlike legislation, Amazon is able to react in real-time and improve its price gouging policies. This process will almost certainly take less time than it would for Congress or a state legislature to pass a new law. Part of trial is error. And good institutional design makes it easy to learn from errors and fix them as they happen. These things should not have to wait until the political winds are just right.

There is also a rent-seeking component to price gouging legislation. Economists Steve Horwitz and Michael Munger, in separate interviews with The Counter’s Jessica MacKenzie, make some underappreciated points about price gouging.

Steven Horwitz, an economist from Ball State University, says the cases in California are unusual in that they target large chains, when it is more common to see cases against smaller brick-and-mortar stores. This is in part because smaller stores have fewer resources and are more likely to settle than to fight a lawsuit.

A national seller can react to regional disaster by simply redirecting supply. They can also afford expensive counsel. Smaller companies have neither of these advantages, so legislation makes them more vulnerable. Price gouging legislation can actually be a rent-seeking weapon big companies can use to gain unfair advantage over smaller companies.

Of course, COVID 19 is global, so even the biggest sellers cannot redirect supplies. Hence the recent California lawsuit against Whole Foods, Walmart, Trader Joe’s and Costco, and other large sellers over egg prices.

Duke University’s Michael Munger argues that some price gouging laws lack clear thresholds, which creates uncertainty. Some states have set thresholds, such as a maximum profit margin of 20 percent. But other laws operate essentially by feel:

Munger points out that the law in North Carolina bans price increases that are “unreasonably excessive under the circumstances.”

Price gouging laws are meant to protect consumers from being taken advantage of during crises.

“If I’m a store owner, how do I know if I’m violating the law in North Carolina?” Munger says. “In practice, what this means is, ‘If someone complains….’ That’s not a very good law. If I can’t tell what the law means, it’s too vague.”

I will have more to say on price gouging in an upcoming paper. But these points are good to keep in mind.

Even private price gouging responses have unintended consequences, such as sellers deciding not sell at all right when people need their wares the most.

Price gouging legislation can unfairly favor larger businesses, and they know this.

And many of the laws are vague enough to have the same chilling effect Amazon’s algorithm has had—but will be much more difficult to fix.

Price gouging laws are #NeverNeeded.