Category Archives: Trade

A Better Approach to Tariff Diplomacy

In diplomacy, carrots tend to be more effective than sticks. Yet, two consecutive administrations have used tariff threats to try to achieve their objectives. Former President Trump did four rounds of back-and-forth tariffs against China, and President Biden is trying it now to counter proposed digital taxes from six mostly European countries. The strategy has yet to work. Over at National Review, I take a look at a better way: Rather than threaten new tariffs, promise to remove old ones as a sweetener.

Why not scrap Trump’s steel and aluminum tariffs in exchange for scrapping proposed digital taxes? Carrots are often more effective than sticks.

The metal tariffs will also likely be an issue at this week’s United States–European Union summit. European leaders want a December 1 deadline for ending them. In return, they would end the retaliatory tariffs they immposed in response. A digital tax moratorium should also be part of the deal.

Here at home, the metal tariffs are slowing the COVID recovery by raising auto and housing prices, which were already at record highs. They are also causing needless diplomatic frictions with allies. Removing them is a win-win.

Even if the diplomatic goal fails—there are no guarantees in foreign policy—the lower tariff would still help the U.S. economy. Read the whole thing here.

Boeing-Airbus Dispute Remains Unsolved: Tariffs Gone, Subsidies Stay

The European Union and the United States eagerly announced today that they had resolved their 17-year dispute over aerospace subsidies. They exaggerate their claims. It is good news that both sides are standing down on tariffs for at least five years. But the reason for the dispute in the first place was over subsidies to Boeing and Airbus. Those will remain in place.

The tariffs that each side levied on the other had the explicit goal of stopping the subsidies. The World Trade Organization even allowed tariffs on each side to go through, on the theory that these wrongs were intended to make a right. But as usually happens with tariff-based diplomacy, it didn’t work. As a result, industries from cheese and wine to motorcycles had to deal with tariffs for years over a dispute they had nothing to do with. And now that the tariffs are going away, they didn’t accomplish their actual goal.

Why are the U.S. and EU suddenly OK with each other’s aerospace subsidies? China. China’s aerospace sector is heavily subsidized. Both Europe and the U.S. feel it is better to work together to counter China than to squabble with each other.

Their fears may be exaggerated, though. Industries that rely on subsidies and are essentially government enterprises tend not to be very competitive in the long run. Yes, China’s aerospace market share is increasing, but subsidized and protected industries grow soft. Their corporate cultures are closer to the Post Office than to Silicon Valley startups. So are their rates of innovation.

Still, for the sake of argument, assume that China’s model of government subsidies and control does work in the long run, and Boeing and Airbus become also-rans. Relatively poor Chinese taxpayers would essentially foot the bill for relatively wealthy American and European airlines and travelers. This is income redistribution in reverse. Even this unlikely best-case scenario is unwise policy from China’s perspective.

Most of the 20th century’s economic history showed that state planning doesn’t work. Even if Boeing, Airbus, and their captured politicians think the short term looks scary, there is no reason for this current instance of state capitalism to be any different in the long run.

This week’s decision to remove the Boeing-Airbus dispute tariffs was a wise one. But if the goal is to make the aerospace industry more competitive, President Biden and European leaders did not do that. They need to end subsidies that make companies soft and dependent. The best way to counter China’s state-run enterprises is not with our version of the same thing. It is with actual enterprises.

Some of my earlier commentary on the Boeing-Airbus dispute is here. My papers on the Export-Import Bank, whose billions of dollars in annual assistance to Boeing played a starring role in the dispute, are here and here.

Stimulating the COVID Recovery without Trillions in Spending

Over at Inside Sources, I make the case that deregulation, freer trade, and continued vaccinations will do more to open up the economy than the trillions of dollars of politicized spending Congress is lining up:

Federal, state, and local regulators eased more than 800 regulations last year that were blocking access to telemedicine, medical supplies, and food and grocery deliveries, along with unneeded occupational licenses that were keeping people out of work. We’ve already seen the benefits. Now policymakers need to continue this important work as entrepreneurs look for ways to adapt to the new normal but find themselves blocked because they don’t have the right permit.

Steel and aluminum tariffs left over from the Trump administration are adding hundreds of dollars to car prices and thousands of dollars to construction costs, at a time when housing prices are becoming unaffordable for many buyers. Congress could get rid of them today if it wanted to. Congress should also stop Biden’s proposed doubling of Canadian lumber tariffs, which would further increase housing prices while alienating an ally with whom we just signed the USMCA trade agreement. He has also proposed an additional $2 billion in tariffs against six mostly allied countries with whom we will be negotiating trade agreements in the near future. These would come into effect in the middle of the holiday shopping season.

My colleague Wayne Crews has a good term for this type of proposal: a deregulatory stimulus. Read the whole thing here.

Steel Companies Lobby for Steel Tariffs, Biden to Double Lumber Tariffs

One of the first things President Biden should have done upon taking office was to eliminate the Trump tariffs. This would have provided potent economic stimulus without any additional spending. Instead, as my colleague Iain Murray points out, Biden is making the Trump tariffs his own—along with all of the consumer harm, corporate cronyism, slowed recovery, and diplomatic strain that tariffs cause.

It is easy to see why some steel producers are lobbying to keep steel tariffs in place. Steel prices are at record highs, and U.S. steel companies don’t have to worry about customers getting a better deal from someone else. However, steel-using industries, from autos to construction, are paying record-high costs, and passing them on to consumers. Steel’s gain is offset by everyone else’s loss, to the tune of about $900,000 per steel job saved.

Meanwhile, President Biden is proposing to double tariffs on Canadian lumber, at a time when lumber prices are also at record highs. First, this is a dubious foreign policy gesture. Canada is an ally, with whom we just signed the USMCA trade deal. Second, and closer to home, housing prices are increasing rapidly, up and out of reach for many families. The administration has some explaining to do about why it wants to make housing even less affordable when the economy is still in recovery mode.

Congress should not let President Biden copy his predecessor’s mistakes. They should reclaim the tariff-making authority they mistakenly gave away to the president. Congress can do this by repealing Section 232 of the 1962 Trade Expansion Act and Sections 201 and 301 of the 1974 Trade Act. These are what made the Trump-Biden tariffs possible, and apparently it will take Congress to stop them. The time to act is now.

For more on how to improve trade policy, see the trade chapter in CEI’s recently released Agenda for Congress.

U.S. Trade Representative Tai Should Rethink Keeping China Tariffs in Place

Over the weekend, The Wall Street Journal interviewed Katherine Tai, the new United States Trade Representative. She has a lot of work ahead of her to undo the damage from the Trump administration’s protectionist turn. But she made two disappointing remarks about the approach she plans to take on the tariffs Trump placed on Chinese goods worth $377 billion per year. These can be undone at any time by either Congress or the stroke of President Biden’s pen.

First, as she told the Journal:

“I have heard people say, ‘Please just take these tariffs off,’” Ms. Tai said. But “yanking off tariffs,” she warned, could harm the economy unless the change is “communicated in a way so that the actors in the economy can make adjustments.”

The top trade policy priority right now should be to prevent normalizing President Trump’s trade policies. He doubled U.S. tariffs in one term, in unpredictable fashion. That was the radical change that made planning difficult. Restoring tariffs to where they already were for a long time would be far better for giving businesses something to plan around.

Tai has this argument backwards, and with poor timing. Businesses are struggling to recover from the COVID slowdown. Lowering tariffs would provide an economic stimulus that requires no new spending. Economics aside, the politics of undoing Trump’s China tariff are also positive. It sends a message of moving on, and a responsiveness to consumers, businesses, and economic realities.

Her second disappointing remark is about leverage:

The negotiator also cited tactical reasons for her reluctance.

“No negotiator walks away from leverage, right?” she said.

Tariffs do not give the U.S. any leverage, so there is none to walk away from by repealing them. Their purpose was to get China to reform its unfair trade policies, which is the right goal, but tariffs never had a chance of achieving it. The first round sparked no reforms, only retaliation. Trump enacted a second round and got the same result. On it went, and now three quarters of China’s exports to America are tariffed, there are retaliatory tariffs on the same proportion of American exports to China, and Beijing has not made a single notable reform.

True, withdrawing tariffs would also fail to convince China to reform, but that does not justify keeping them or trying to use them as leverage. Tariffs simply do not work with Beijing as a negotiating tactic. They are like trying to use a hammer as scissors. They are the wrong tool for the job. When a strategy fails, the right thing to do is admit it and try something else.

There is a lot the U.S. can do to help along Chinese reform. We now know tariffs are not part of the list. There is also no silver bullet. Pundits and voters hate hearing this, but it’s true. Pretending that there is a silver bullet in order to appeal to them will do no good. Change in China must ultimately come from within, but there is still a lot the U.S. can do to help. It takes a multifaceted strategy that is more subtle than tariffs, and gets less media coverage than summits or negotiations.

Continued economic, intellectual, and cultural engagement with China will let ordinary Chinese people see how much richer and freer liberal policies are. Walls don’t work, but bridges, windows, and conversations do. This is a slow, bottom-up process that is difficult to measure with statistics.

But just as blue jeans, underground rock music, and American movies helped to win the Cold War, today’s equivalents can help ordinary Chinese people see the connection between liberalism, markets, and prosperity—and work toward moving their own country in that direction.

That is a long-term process, but there is important work right now that Tai, President Biden, and Congress can do to help get it started. First on the agenda should be getting rid of the Trump tariffs. Neither Tai’s “companies will have problems adjusting” argument nor her leverage argument hold water. The right thing to do is to rip off the Trump-era band-aid and move on to policies that at least have a chance of working. Congress or President Biden could do this tomorrow.

Repealing these bad policies is not enough, though. The larger system that makes tariff abuse possible needs reform. As we recommend in the new CEI Agenda for Congress, this would mean repealing Section 232 of the Trade Expansion Act of 1962 and Sections 201 and 301 of the Trade Act of 1974.

These provisions allow the president to enact tariffs without congressional approval. The China tariffs were enacted under Section 301. The steel and aluminum tariffs—against allies we’ll need as counterweights to China—were enacted under Section 232, allegedly for national security reasons. It’s time for them to go, and Tai can play a role in making that happen.

The Trans-Pacific Partnership is an important diplomatic counterweight to China; the U.S. should rejoin it. Tai and President Biden should work to rebuild the World Trade Organization’s dispute resolution process, where the U.S. wins more than 85 percent of the cases it brings. Renewing Trade Promotion Authority (TPA) would speed up negotiations for a trade agreement with China, if the president chooses that route. At the very least, TPA would help with upcoming agreements with the United Kingdom and the European Union, whose help we’ll need to counter Chinese influence. Tai can play an important role working with Congress to renew TPA before it expires in July.

This is a somewhat slow period in China-U.S. relations. The tariff back-and-forth is likely over with Trump out of office. The Phase One agreement, which was unrealistic to begin with, was made completely unworkable by COVID, and is essentially dead.

But over the medium to long term, working to liberalize China will be a top economic, diplomatic, and humanitarian priority for the United States. Tai stumbled out of the gates in her first interview, but it’s a long race. With the right policies, she can help make historic positive changes that will benefit both the American and Chinese people.

For more on those policies, see the trade chapter in CEI’s new Agenda for Congress, my paper on COVID-related trade reforms, and Iain Murray’s and my paper “Traders of the Lost Ark.”

Some Good Tariff News

I’ve written before about the 17-year-long dispute between the United States and the European Union over Boeing and Airbus subsidies. Each jurisdiction has placed tariffs against the other until they drop the subsidies, which, given political realities, will not happen. As a result, tariffs intended to spur reforms are not going to work, but were going to stay in place anyway, and with the World Trade Organization’s blessing.

There is good news to report. Those tariffs will now be suspended for four months, on both sides. In a phone call, President Biden and European Commission President Ursula von der Leyen agreed to the suspension to give them time to negotiate further.

The negotiations will likely be unproductive, but the tariffs should still not come back. They affect everything from French wine to American motorcycles—industries that have nothing to do with aerospace, and have done nothing wrong to deserve being hit with tariffs.

Both governments are wrong for subsidizing private businesses like Boeing and Airbus. But neither wants to fix it unless the other side does first. The scene is reminiscent of the Dr. Seuss story “The Zax,” in which two Zax, who only walk forward, both refuse take a step to the side and let the other one by when they come face to face, even though both would benefit.

Most of the Biden administration’s actions so far have indicated that it will keep most of President Trump’s trade barriers, while adding a few of its own with green branding, but this is one area where the administration has taken a step in the right direction.

For more ideas on positive trade policy, see the trade chapter in CEI’s soon-to-be released Agenda for Congress, and CEI’s upcoming event celebrating its release, as well as Iain Murray’s and my paper “Traders of the Lost Ark.”

More Interconnected than Most People Think

From page 70 of Johan Norberg’s 2020 book, Open: The Story of Human Progress:

What we now think of as Western civilization is a combination of a philosophical heritage from the Greeks, religions from the Middle East, creatively interpreted by Romans in what is now Turkey, and scientific ideas borrowed from the Arabs and the Chinese. We got our alphabets from the Phoenicians, and our numbers are called ‘Arabic numerals’ because we learned them from mathematicians in Baghdad, who got them from the Indians.

New EU Tech Rules will Chill Innovation and Harm Consumers

This is a press statement originally posted at cei.org.

The European Union today announced new rules it claims will change the way technology companies operate. The EU says the Digital Services Act and the Digital Markets Act “will create a safer digital space for users” and “level the playing field so that digital businesses can grow.”

Vice President for Strategy Iain Murray said:

“The European Union’s proposed new powers allow it to treat American tech firms as cash cows, to be fined whenever it finds them guilty of providing too much discretion to consumers or allowing too much speech. Its proposed veto on acquisitions will also chill innovation in the European tech sector as it will make the prospect of significant rewards for an acquisition-based business strategy less likely. Europe will act as an anchor on tech innovation, slowing progress and reducing consumer welfare worldwide. The incoming Biden administration should avoid making the same mistakes.”

Senior Fellow Ryan Young said:

“The European Union’s two proposed tech regulation bills have two fatal flaws. One is that, on purpose or not, they are trade protectionism under another name. Many of their provisions are aimed at the large U.S. tech companies. Taking them down a notch would give an opening to EU-based tech companies, the thinking goes. As with President Trump’s trade wars, this will harm consumers without actually helping the industry. The two bills also leave in place the EU’s stifling regulatory culture that is the root cause of Europe’s lack of tech sector innovation.

“The second fatal flaw is that the EU’s proposals would actually lock in the existing American firms’ dominance. They are the only companies that can afford the massive content moderation costs the EU is demanding, or the large fines. Startups that might one day dethrone today’s giants cannot afford these costs, and may not even bother trying to compete.”

Read more:

Book Review: Adam Minter – Junkyard Planet: Travels in the Billion-Dollar Trash Trade

Adam Minter – Junkyard Planet: Travels in the Billion-Dollar Trash Trade (New York: Bloomsbury, 2013).

Waste not, want not. Minter’s tour of the global scrap and recycling industry is fascinating. He grew up in the industry, as the son of a scrapyard owner in Minnesota. As Minter got older and learned the business (and dealt with his father’s messy personal life), he discovered a whole world based on turning trash into treasure, and parlayed that into a journalism career, based in Shanghai. The amount of creativity and hidden efficiencies he finds are a source of optimism. A dreary-sounding dirty job turns out to be vibrant, innovative, and highly globalized.

At the same time, Minter is realistic about his industry. There are some shady goings-on in the circuit recycling and scrap metal industries in China, including corruption, dishonesty, and worker mistreatment. On balance, the ingenious ways entrepreneurs find to reduce, reuse, and recycle waste are good for the environment. But there are still some problems, especially in China. While these abuses are almost certainly greener than shutting down these industries would be, there is room for improvement.

If there is a lesson to be learned here, the most effective way to make sure people are responsible environmental stewards is to allow them to make a profit, and allow them to be creative. As in so many other policy areas, progress happens from the bottom up, not the top down.

Minter recently published a sequel of sorts, titled Secondhand: Travels in the New Global Garage Sale.

Tit-for-Tat Tariffs Don’t Work: Boeing and Airbus Show Why

A 16 year-long aerospace subsidies dispute between the United States and the European Union began another round this week. The U.S. claims that the EU’s Airbus subsidies are unfair. The EU argues that America’s Boeing subsidies are unfair. Both sides are right. But neither wants to admit that the other side has a point, too. The result has been tit-for-tat tariff increases and no subsidy reforms.

Today, the World Trade Organization (WTO) ruled that the EU may impose tariffs on up to $3.99 billion of American goods, because Boeing’s favorable tax treatment violates WTO rules.

This follows a 2019 decision allowing the U.S. to impose tariffs on up to $7.5 billion of EU goods due to the EU’s Airbus subsidies.

Boeing called today’s decision “irrelevant.” Last year, Washington state repealed the tax provision at the center of this decision. However, the larger sticking point in the dispute remains. Yes, this one tax break is gone, but Boeing still receives massive subsidies. That means the EU will not stop pressing the matter. Nor has the EU reformed Airbus’ special treatment. That means the U.S. won’t stop, either.

In addition to being ineffective, the tariffs are causing collateral damage to other industries that have nothing to do with the dispute, from French wines to American motorcycles. This deadweight loss matters at a time when the world economy is already hurting due to COVID-19.

The lesson both sides need to learn is, don’t copy other people’s mistakes. Instead, set a better example. Subsidized companies grow soft and lose their competitive edge. There is a reason why so much aerospace innovation these days, from space travel to supersonic flight, is happening outside of Boeing and Airbus’ subsidized comfort.

The right thing to do is for governments to stop subsidizing private businesses—even if the other side doesn’t. Set the right example. Boeing would likely do just fine without subsidies. They would certainly have far more incentive to improve their products and address their safety concerns than they do now.

And if Boeing can’t survive without subsidies, there is no shortage of entrepreneurs capable of unleashing engineering and manufacturing talent.

Either way, consumers and taxpayers win. Europe and Airbus can then either follow America’s positive example or be content with subsidized mediocrity. Realistically, they will very likely choose the subsidies. But we cannot let Europe’s mistakes be our own. The U.S. has been doing that for at least 16 years now, and we know it doesn’t work.

A modest starting point on the U.S. side would be closing the Export-Import Bank, which often devotes half of its business to securing below-market financing rates for Boeing’s customers, many of whom are state-owned. Boeing set record profits while Ex-Im was mothballed from 2014-2019, so we already know the company will do just fine without that multi-billion-dollar program.

For more on that idea, see my most recent Ex-Im paper.