Category Archives: Trade

In the News: Supply Chains

I can’t access the article due to a paywall, but on December 3 I was quoted in the Washington Times about tariffs and supply chains networks.

Can Regional Trade Agreements Replace the WTO?

Trade policy is in a bad place right now, with two consecutive protectionist administrations in the U.S. and the World Trade Organization (WTO) possibly damaged beyond repair. The Hudson Institute’s Thomas J. Duesterberg recently argued in The Wall Street Journal that one solution would be a pivot to regional trade agreements. While that’s not the worst idea on paper, I sent the following letter to the editor pointing out that it wouldn’t work in practice:

Thomas J. Duesterberg rightfully worries that the World Trade Organization may be damaged beyond repair (“The WTO’s Fast Track to Irrelevance,” op-ed, Nov. 29). A trade organization has enough on its plate without having to deal with trade-unrelated issues such as labor, human rights, and climate. But Duesterberg’s solution of expanded regional trade agreements would likely have the same problems.

Trade-unrelated provisions are part and parcel of trade agreements these days, as the United States-Mexico-Canada Agreement’s 2,000-page length shows. The solution is to confine trade agreements to trade and treat separate issues separately. Until that root problem is addressed, trade policy will remain ugly, whether negotiations happen at the WTO or regionally.

Ryan Young

Senior Fellow, Competitive Enterprise Institute

Washington

On the TV: Supply Chains

This morning I appeared on C-SPAN’s Washington Journal to talk about supply chains, opposite the Economic Policy Institute’s Robert Scott.

Video and a transcript are here.

Speaking at CEI Supply Chains Event on 11/30

CEI is hosting an online Zoom event on November 30 on supply chains, featuring my colleagues Sean Higgins, Marlo Lewis, Iain Murray, and me. It will begin at 12:00 ET. You can register here. The full event will be posted on YouTube afterwards.

Here is the invitation text:

Just in time for the holiday season, the global supply network is fraying in ways that affect our everyday lives. While Washington policy makers debate short-term fixes, the only real solutions are long-term reforms. Please join CEI for a discussion of the root causes of our current crisis that have been percolating for years pre-COVID. CEI Vice President Iain Murray will moderate a discussion with our respective experts in trade, labor, and energy policy, Ryan Young, Sean Higgins, and Marlo Lewis. 

Sean Higgins, Research Fellow, Competitive Enterprise Institute

Marlo Lewis, Senior Fellow, Competitive Enterprise Institute

Iain Murray, Vice President, Competitive Enterprise Institute

Ryan Young, Senior Fellow, Competitive Enterprise Institute

Tuesday, November 30, 2021

12:00 – 1:00 pm EST

Register: https://cei-org.zoom.us/webinar/register/WN_B4kvgNobRcKCjbpfqOTxhg

Sign up to join the conversation live and receive a link to the video archive following the event.

Registration confirmation and event reminder emails will be sent from CEI Events at no-reply@zoom.us 

Questions? Email events@cei.org 

Sean Higgins is a research fellow at the Competitive Enterprise Institute specializing in labor and employment issues. Prior to joining CEI, he covered the intersection of politics and economics as a journalist for two decades, as senior writer for the Washington Examiner, Washington correspondent for Investor’s Business Daily, and a contributor to publications like The Wall Street JournalFortuneReason and National Review Online.​

Marlo Lewis is a senior fellow at the Competitive Enterprise Institute. He writes on global warming, energy policy, environmentalism, and the precautionary principle. Prior to joining CEI in 2002, he was director of external relations at the Reason Foundation, staff director of the House Government Reform Subcommittee on National Economic Growth, Natural Resources, and Regulatory Affairs during the 106th Congress.

Iain Murray is vice president for strategy, senior fellow, and director of the Center for Economic Freedom at the Competitive Enterprise Institute. He is author of the best-selling books The Socialist TemptationThe Really Inconvenient Truths, and Stealing You Blind: How Government Fat Cats Are Getting Rich Off of You. He has written extensively on the role free markets play in improving our lives.

Ryan Young is a senior fellow at the Competitive Enterprise Institute. His research focuses on regulatory reform, trade policy, and antitrust regulation. He writes the popular “This Week in Ridiculous Regulations” series for CEI’s OpenMarket blog.

Court Strikes Down Trump Tariff: Precedent for Institution-Level Changes?

Pessimism reigns for trade liberalization in the short run, but there is fresh hope for the long run. A new court decision over solar panel tariffs shows why. Reason’s Eric Boehm’s headline sums it up: “A Judge Just Did What Biden Wouldn’t: Dump Some Trump Tariffs.” This is good news, but it gets better.

The decision’s importance isn’t about the solar panel tariffs themselves. It’s about the separation of powers. And political institutions, such as the separation of powers, are what drive trade policy in the long run—not adjustments to this or that tariff rate. The rules of the game determine how it is played. Those rules have been out of whack for some time, and presidents have been abusing them. That could start to change if this precedent were to influence other cases.

In short, the court ruled that the executive branch overstepped its tariff-making authority, so it partially negated some solar panel tariffs that President Trump enacted without congressional input. Most readers know that Article I, section 8 of the U.S. Constitution states that only Congress has taxing authority. The Constitution grants the president no such powers.

There is some history behind why the president was still able to unilaterally enact tariffs without congressional input. This context is important for understanding why trade policy has become so dysfunctional and which institution-level changes will be most effective in reforming it.

In the mid-20th century, Congress wanted to pass large-scale tariff relief, but was systematically incapable of doing so. Nearly every tariff had its own special interest in some member’s district defending it. So even though almost everyone agreed that tariff relief as a whole is good policy, they couldn’t it done. Hundreds of small exemptions added up quickly, and trade reform bills became so watered down as to become useless.

Worse, tariff liberalizations were necessary to meet requirements under the General Agreements on Tariffs and Trade (GATT), which was founded in the aftermath of World War II, and was the predecessor to the World Trade Organization (WTO). GATT was established in part to preserve peace after the horrors of World War II; countries that trade seldom go to war. It was also established as a way to undo the U.S. Smoot-Hawley tariffs and foreign retaliatory tariffs that had reduced foreign trade by two thirds and left it clogged with paperwork and corruption.

The solution to this special interest sludge, Congress believed, was to outsource tariff policy to the president. The thinking was that the president represented the country as a whole, rather than small slices of constituents, and so would be less prone to lobbyists’ pleas. So, the 1962 Trade Expansion Act and the 1974 Trade Act both contained provisions granting the president the authority to unilaterally impose tariffs under certain conditions without a vote in Congress.

It didn’t work. Tariffs did go down over time, but those provisions had little to do with it. They were almost entirely dormant until the Trump administration. And instead of using them to lower tariffs, Trump used them to raise them—eventually doubling America’s average tariff rate in about three years.

This week’s court decision said that the Trump administration overstepped its bounds on a solar panel tariff it imposed under Section 201 of the 1974 Trade Act, which lets the president enact tariffs to protect domestic industries from foreign competition.

It is a narrow ruling that affects only one of the three major tariff-making provisions—and the least-used one at that. Much the bigger fish are Section 232 of the 1962 Trade Expansion Act, a national security provision that was invoked for the steel and aluminum tariffs, and Section 301 of the 1974 Trade Act, a treaty violation provision that was invoked for the China tariffs.

But this week’s court decision sets a precedent. Again, what is important isn’t what the ruling does to solar panel tariff rates, though any tariff relief is welcome. What is important is what the ruling means for institutions, such as the separation of powers. Iain Murray and I have been arguing for years that tariff reform depends on restoring a healthier separation of powers. For a long time, the executive branch has been too powerful relative to Congress. And the problem gets worse with each new administration, regardless of which party is in power.

Which leads to a bit of bad news. The Biden administration actually defended the Trump administration’s position in the case. Politicians rarely argue to reduce their own powers, and that’s what this case is really about.

It is also bad news that President Biden is seemingly allergic to tariff reform. Even a modest reform like resetting tariffs to 2017 levels would help unclog supply networks while lowering consumer prices during a time of high inflation. It’s as close to a win-win as there is in politics—helping the economy and making the other party look bad at the same time. But Biden isn’t doing it. He is even airing new proposals, such as carbon tariffs, that are essentially Trump-era trade policies in green packaging. And if he needs to, he might try to do it without Congress having a say.

Even with a court victory, the short run still looks bad for trade policy. The Trump tariffs should now be called the Trump-Biden tariffs. The Biden administration is also delaying or ignoring other important facets of trade policy, including trade agreements with the United Kingdom and European Union, rebuilding the WTO, and rejoining the Trans-Pacific Partnership, which is carrying on without American involvement.

Any significant positive move on trade policy is likely years away, but this week’s court decision gives some hope for the long run. That is because policies, in the long run, do not depend on changing this or that tariff rate. They depend on institutions. The more we can chip away at executive power and contain taxing power to the legislative branch, where it belongs, the better off we will be. This is just a baby step, but as every parent knows, baby steps lead to good things.

Steel, Aluminum Tariffs to Remain Above Pre-Trump Levels

It is not asking much to undo President Trump’s doubling of U.S. tariffs, which are a major contributor to today’s supply network crisis. But apparently even this is asking too much from an administration that largely shares Trump’s economic views. While the weekend’s news about the easing of steel and aluminum tariffs against the European Union was welcome, it is too small to do much good. Nor does it treat root problems.

The tariffs will actually remain in place. The U.S. will simply allow 3.3 million metric tons of EU-made steel into the U.S. duty-free before charging tariffs. For context, U.S. producers made 72 million metric tons of steel in 2020, so the exemption will have only a small effect on steel prices. Shipments beyond 3.3 million metric tons will still be charged a 25 percent tariff. In addition, the EU agreed to not enact new retaliatory tariffs that were scheduled to take effect on December 2.

Not imposing new tariffs is different from lowering existing ones. It also has a much effect. Under the new agreement, all other existing trade barriers will remain in place. Total U.S.-EU trade barriers will remain higher than they were four years ago. This is bad news for consumers and producers on both sides of the Atlantic, at a time when prices are rising and supply networks are strained.

The agreement even adds new trade restrictions where there were none before. The New York Times reports:

The agreement will also place restrictions on products that are finished in Europe but use steel from China, Russia, South Korea, and other countries. To qualify for duty-free treatment, steel products must be entirely made in the European Union.

Tariffs mean higher prices. The new exemption’s small size means that steel and aluminum prices will remain above pre-tariff levels. Cars, construction, and other steel-using industries will continue to have shortages and higher consumer prices.

The exemption will also do little to relieve strained supply networks. For example, there is now a shortage of truck trailers, called chassis, used for hauling shipping containers to and from ports. Chinese-made chassis are currently subject to 220 percent tariffs, which makes them unaffordable for many smaller trucking companies. Washington’s goal is to have them buy American-made chassis instead.

The trouble is that those tariffs also allow U.S. chassis producers to keep their prices high. They don’t have to worry about truckers turning to competitors—which is ironic in a time of rising antitrust enforcement. While that goes straight to the chassis makers’ profit margins, it harms everyone else. Ports stay clogged, truckers can’t do much to help unclog them, and consumers face higher prices and shortages. About the only winners are domestic steel producers and their labor unions, which is likely the point.

The U.S.-EU trade dispute also remains unresolved. This agreement is more of a cease-fire. A law of tariffs, rediscovered during the Trump era, is that other countries nearly always retaliate in kind against new tariffs. What happened here is that the U.S. is partially rolling back one of its new tariffs, and the EU is rolling back its retaliation. Nothing has been liberalized on net. Other long-running disputes over aerospace subsidies and other issues remain in play.

COVID-19 is still hampering the economy and supply networks are still in crisis. Now would be a good time for actual trade liberalization, rather than merely preventing another round of protectionist escalation. But on trade, as with many other issues, the Biden administration is difficult to tell apart from its predecessor.

Green Protectionism on the Rise?

The $3.5 trillion budget proposal that the Democratic leadership in Congress is putting together will reportedly include the world’s first carbon tariffs, which are added to goods coming from countries that do not meet certain environmental regulatory standards. The only difference from Trump-era trade policy is the green packaging.

It is far from a sure thing that the carbon tariffs will be enacted; proposed budgets never get enacted in their original form, and it is still early in the process. As The New York Times reports, “Democrats released no details about their tax proposal on Wednesday. Calling it simply a ‘polluter import fee,’ the framework does not explain what would be taxed, at what rate or how much revenue it would expect to generate.”

Given how the vagueness of the proposal at this point, it is possible that it was leaked in part to gauge public reaction. That reaction should be negative.

Carbon tariffs of any kind would have practical difficulties. One is retaliation. Every time we raise our tariffs, our trading partners raise theirs in return. It happened with the Smoot-Hawley tariffs during the Great Depression, and it happened more recently with each new round of the Trump tariffs. A Biden carbon tariff would almost certainly have the same reaction.

A second problem is the timing. The economy is still recovering from a pandemic. Industries that might be hit include automobiles, which use gasoline and steel; construction, which uses steel and lumber; and smartphones and tablets, which use rare earth elements.

Automakers are already facing a supply crunch, in part because existing trade policies limit their options for semiconductor chips. Housing prices are at record highs. Everyone from students to gig workers would benefit from more affordable smartphones and tablets. Just as the highest inflation in 13 years is pushing those prices up, carbon tariffs would push them even higher.

Right now, the economy needs renewal and resilience. Consumers and businesses would benefit from a renewed commitment to free trade that fixes that last administration’s mistakes. And supply networks would be more resilient against future crises if they had fewer obstacles blocking goods from getting to where they are needed. More deficit spending and the same old trade protectionism will not help the recovery.

A third problem is cronyism. From domestic companies’ perspective, Washington is offering to raise their competitors’ costs for them. This would allow American companies to raise their prices without having to improve their products. As long as a carbon tariff proposal remains a live idea, Washington lobbyists will be making a lot of money—as will the campaign coffers of influential members of Congress. The scramble will be even more intense for as long as it is unknown which industries will be affected, as industries lobby to get themselves shielded from competition.

The list goes on. Diplomatic efforts that could be spent building counterweights to Chinese and Russian illiberalism would instead be spent fighting with allies. The World Trade Organization’s dispute resolution system, currently being rebuilt almost from scratch, would be clogged up with years of avoidable litigation, echoing the long-running Boeing-Airbus dispute between America and the European Union. Upcoming trade agreement negotiations with the European Union, the United Kingdom, and others would become more difficult.

In short, carbon tariffs have substantial costs and almost no benefit—carbon emission reductions, if any, would be too small to have a measurable effect on climate. Nor would there be a reliable way to measure those reductions, if any were to happen. Even if the policy were to work as intended, nobody would be able to tell.

There is still time for Democratic leadership to walk this one back. Rather than make terrible Trump-era trade policies even worse, Congress and President Biden should pursue an agenda of liberalization. Several ideas for one are in the trade chapter of CEI’s most recent Agenda for Congress.

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.