Category Archives: Trade

Podcast: Inflation

I was recently the guest on the Of Consuming Interest podcast, hosted by Shirley Rooker. We talked about common misconceptions about inflation and a few other economic issues. After we wrapped, the producer said I was “very understandable,” which is easier said than done in monetary economics.

The audio is here.

The Updated Case for Free Trade

Trade is a core value of civilization. The very act of trade implies respect for people’s rights. Suppose you have something I want. I could take it by force or I could offer to trade you something in exchange. Not only that, but since you have the right to say no, I have to offer you something you value even more than what you give up. Civil exchange puts the civil in civilization—both morally, by rewarding peaceful behavior, and economically, by making possible the division of labor.

Stanford University historian Josiah Ober argues that one cause of Ancient Greece’s cultural flowering was a relatively liberal attitude toward trade and commerce—and its decline was caused in part by a turn inwards. The great Belgian historian Henri Pirenne made a similar claim about Ancient Rome. Dartmouth University economist Doug Irwin traces free-trade arguments through Saint Augustine and Thomas Aquinas up to the first modern defense of free trade in Henry Martyn’s 1701 Considerations Upon the East India Trade. Adam Smith made a moral and economic case for trade in 1776 that economists have been refining ever since.

The 30-fold improvement in living standards since around 1800 is due in large part to gradual popular acceptance of the benefits of trade. The process has not been smooth. In the first half of the 20th  century, growing nationalist sentiment and a rejection of bourgeois virtues helped lead to two world wars and the Great Depression. The free world came to its senses after those horrors, and spent the next 75 years lowering trade barriers, helping hundreds of millions of people to rise out of poverty. That era may now have ended with the Trump administration’s protectionist turn, the Biden administration’s normalizing of that change, and rising nationalism here and abroad.

The case for free trade may be an old one, but it needs to be restated often. To that end, the Cato Institute’s Scott Lincicome and Alfredo Carrillo Obregon this week released “The (Updated) Case for Free Trade,” an accessible restatement of the moral and economic case for free trade that offers a stark contrast to the protectionist alternatives politicians from both parties are now proposing.

They also take a look at how trade policy can affect America’s most important foreign policy challenge going forward: China.

China represents real challenges, but dealing with it does not warrant abandoning free trade. Instead, historical and recent evidence demonstrate that China’s economic threat to the United States has been exaggerated, that aggressive unilateralism will prove less effective in influencing the Chinese government’s behavior than multilateral engagement, and that the United States will be better positioned to respond to a rising China if it embraces the openness and confidence that made America an economic powerhouse.

The whole paper is worth reading.

Trade might not be a front-page issue at the moment, but it underlies nearly every issue that is getting significant ink, including supply chain problems, housing prices, the pandemic response, and foreign policy challenges such as those involving Russia and China.

Sound trade policy and the liberal values that undergird it need as many able defenders as they can get; Lincicome and Obregon’s contribution is essential in that regard. Readers interested in another easily accessble defense of free trade should also check out Iain Murray’s and my paper “Traders of the Lost Ark.”

New Export-Import Bank President Has Opportunities for Reform

Reta Jo Lewis is about to become the next president of the Export-Import Bank. The Senate confirmed her nomination yesterday. Called Ex-Im for short, the bank seeks to boost U.S. exports by guaranteeing loans for buyers of U.S. aircraft and other goods. In many years, Boeing has been the beneficiary of as much as half of Ex-Im’s business. Around Washington, Ex-Im is informally known as the Bank of Boeing.

Unlike most other agencies, Ex-Im’s charter expires every so often. If Congress does not reauthorize it, it will close. The last two reauthorization rounds were contentious, with members of both parties calling out Ex-Im on grounds of corporate welfare and ineffectiveness. Ex-Im’s charter lapsed for a good part of 2014 and 2015, mostly closing the agency. It was only allowed to administer its existing portfolio, and was unable to take on new projects. These can exceed $20 billion per year when the agency is at full strength.

During Ex-Im’s shutdown, Boeing, the company most heavily affected, was easily able to find other financing options for its foreign buyers, and posted record profits. Ex-Im has remained open since, survived another reauthorization battle in 2019, and is due for its next reauthorization in 2027.

CEI has a long track record of favoring Ex-Im’s closure. See, for example, my 2014 paper giving 10 reasons to close Ex-Im, and op-eds for American Banker, the Washington Examiner, and Inside Sources, among other outlets.

Since 2027 is a ways off, incoming Ex-Im President Lewis may be interested instead in my paper about ways to reform Ex-Im. There are several ideas she can pursue during her term as Ex-Im’s president and board chairman:

  • Ex-Im should be required to use the same accounting standards as other federal agencies. This would prevent funny business that Ex-Im has used in the past to show a profit while actually losing money.
  • Ex-Im should have a 10 percent cap on how much of its business can benefit a single firm. This would prevent its capture by companies such as Boeing.
  • Ex-Im should remove its quota for green projects so it can choose projects on the merits.
  • Finally, Ex-Im’s in-house definition of “small business” includes companies with up to 1,500 employees. This definition needs to be made more realistic, so its quota of small business projects actually goes to small businesses.

The best Ex-Im reform is to end it. But that will have to wait until 2027.

Steel Tariffs against Japan Lifted, Kind of

President Biden is taking a small step toward tariff relief. Japan’s first 1.25 million metric tons per year of steel exports to the U.S. will now be tariff-free. This amount is roughly equal to its average steel exports to America over the last several years. Exports beyond that will still face tariffs of 25 percent.

On one hand, tariff reductions are good, and this week’s action mostly does away with tariffs on Japanese steel. On the other hand, good policy is simple, and this adds complexity. Regulators, producers, and buyers will have to spend resources tracking tonnage to avoid potential tariffs. The tariff on growth hurts steel-using industries still dealing with supply shortages and price increases. Steel tariffs against most of the world will also remain in place, including against allies. One of President Trump’s most harmful policies remains mostly intact. His tariffs, which are now also Biden’s tariffs, cost the average household more than $1,000 per year.

President Trump initially enacted 25 percent steel tariffs allegedly for national security reasons. Allies such as Canada, Europe, and Japan took issue with being labeled national security threats, which is still a source of diplomatic friction. But the national security justification is pretty obviously a fig leaf.

In order to raise tariffs without congressional authorization, President Trump cited Section 232 of the 1962 Trade Expansion Act, which requires the president to justify tariff increases on national security. But saying doesn’t make it so.

While President Biden deserves praise for this week’s minor tariff relief, it isn’t enough. He should lift all remaining Section 232 tariffs. But even that isn’t enough. The long-term fix is structural. Congress needs to repeal Section 232 outright, so neither Biden nor any future president can abuse his or her powers ever again. The 1974 Trade Act contains similar clauses in its Sections 201 and 301, which Trump used to unilaterally raise tariffs against Europe and China. Those should also be repealed. Taxing power properly belongs to Congress. The separation of powers is an important principle. While it is important for long-lasting trade reform, it is important to many other issues as well.

For more on institution-level trade reform, see my paper, “Repeal #NeverNeeded Trade Barriers.”

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.