Category Archives: International

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.

In the News: China Trade

I can’t read the article due to a paywall, but I am quoted in the Las Vegas Review-Journal about the just-signed Phase One of a trade agreement with China.

Senate Passes USMCA, Sets Bad Precedent for Future Agreements with China, UK, EU

The U.S.-Mexico-Canada (USMCA) trade agreement passed the Senate today, 89-10. As with the Phase One agreement with China that was also signed this week, USMCA is valuable damage control. Three years of unpredictable tariff increases, threats of increases, and diplomatic tensions will hopefully have more stability going forward. Unfortunately, while NAFTA needs some updates, few of them are contained in USMCA’s more than 2,000 pages.

As far as short-term policies, USMCA is not very different from NAFTA. USMCA’s real cost is long-term, which is why Iain Murray and I came out against USMCA last month. Its bad precedents will likely inform upcoming agreements with China, the United Kingdom, and the European Union. Unlike USMCA, these upcoming agreements are potentially transformative. It is important to get them right.

Trade agreements should stick to trade issues. That is the real lesson of the USMCA battle. USMCA is filled with trade-unrelated provisions covering labor, regulatory, environmental, and other policies. It contains naked giveaways to business, labor, and environmental interests. To the extent these provisions touch trade at all, they make it more cumbersome—opposite USMCA’s purpose. These same special interests will almost certainly ask for more, and receive, larger handouts in future agreements.

China is struggling to choose between freedom and continued despotism. The United Kingdom is leaving the European Union. And the EU itself is undergoing changes both internally and on its place on the world stage. The U.S. must engage each of them in ways that ensure mutual peace and prosperity. Part of that larger agenda is free trade. Our upcoming trade agreements with them must be open, transparent, and contain as few trade-unrelated complications and special interest giveaways as possible. These side agreements risk scuttling needed reforms and inflaming diplomatic tensions, while increasing corruption.

USMCA sets a bad precedent for these more important upcoming agreements. Its ratification makes it much harder to overcome political inertia and move global trade policy in a simpler, more open direction. USMCA may be a fait accompli, but it is not too late to learn from it and do future agreements the right way. This means sticking to trade and, to the extent possible, leaving politics out.

Phase One Trade Agreement with China: Tariff Stability, at the Cost of Managed Trade

The newly signed Phase One of a trade deal with China has enormous value as damage control against further tariffs, but it comes at a cost. The Trump administration has more than doubled total U.S. tariffs in its first three years, and other countries, including China, have responded in kind. Phase One’s signing hopefully marks an end to a tariff-first trade policy and its unpredictable implementation.

But a ceasefire is not a victory. Massive tariffs put in place less than two years ago will remain in place, and risk becoming normalized. American consumers and businesses will still pay tariffs on 40 percent of Chinese imports that were mostly tariff-free just a few years ago. The Trump tariffs against Chinese goods should have been entirely repealed as part of the agreement, but were not.

Congress has the power to repeal the remaining tariffs and protect against further increases, and should do so immediately. There is already proposed legislation to move President Trump’s Section 232 tariff-making power back to Congress, where all taxing power properly belongs. More substantive engagement with China would involve rejoining the Trans-Pacific Partnership, which is continuing along without U.S. involvement, and using the World Trade Organization’s dispute resolution system, where the U.S. has an 85 percent success rate and a long track record of successfully encouraging reform.

Another cost of Phase One’s stability is transparency. Many terms of the now-signed agreement are still not public. Other provisions are vague. The Chinese government has a lot of work to do before it can be considered a good-faith actor in world trade. Needed reforms range from recognizing its people’s human, political, and economic rights to ending state-approved theft of technology and intellectual property. Beijing also needs to stop its self-harming policies of subsidizing private businesses and insisting on state ownership or control of nominally private enterprises. It will be difficult to hold Chinese leadership accountable to today’s agreement if nobody knows what it is in it, or if its broadly worded provisions prove unenforceable.

Given Beijing’s aversion to liberalizing reforms, this is important. For example, one section addresses forced technology transfers. “However,” The Wall Street Journal notes, “the section doesn’t require China to change any law or regulation to fulfill its obligations.” As a result, none will likely be enacted. That vagueness may have been Beijing’s condition for signing an agreement the Trump administration badly wants for short-term political reasons. In short, Trump may have gotten played like a fiddle. Whatever policy action China takes on technology transfers will now have a patina of legitimacy from the signed agreement. This is a poor political strategy from the U.S. side.

From a philosophical standpoint, the agreement confirms the Trump administration’s belief in managed trade, rather than free trade. It attempts to dictate the buying and selling of agricultural products, and on what terms private businesses may do business with each other. China’s biggest obstacle to sustained future growth is its government’s insistence on micromanaging the economy. President Trump apparently wishes similar obstacles on the U.S. economy.

Finally, the agreement also sits upon bad economics. Specifically, it was largely driven by Trump and his adviser Peter Navarro’s trade deficit ideology. Economists argue that trade deficits have no bearing on economic health, and should not be a policy consideration. For example, just about everyone maintains an ongoing trade deficit with their local grocery stores. The relationship is mutually beneficial, and indefinitely sustainable. Similarly, almost all employers run ongoing trade deficits with their employees. For example, CEI buys my services as a policy analyst, yet I never buy anything from CEI. Even so, CEI’s trade deficit with me is both mutually beneficial and sustainable. At a national scale, trade deficits are an accounting measure, and that’s it. Its number, whether positive or negative, or large or small, is the sum of individual decisions people make on purpose, and to their benefit. The Trump administration’s China policy, including Phase One, is instead driven by long-discredited mercantilist ideas about trade deficits that were last in vogue in the 17th century.

Moreover, dollars sent abroad from buying imports eventually return to the U.S. in the form of direct foreign investment. Those dollars also fund the trillions of dollars of government debt both parties have excelled in creating. When Peter Navarro simultaneously complains of a large trade deficit while bragging about growing direct foreign investment, he is being intellectually inconsistent. Much of the Trump trade agenda, including the Phase One agreement with China, rests on this inconsistency.

Phase One’s tariff ceasefire is a major benefit, but trade barriers against China remain higher on net than before the Trump administration took office. Any agreement built on such a mistaken intellectual foundation will likely not work as its drafters intended—especially when a reelection campaign’s short-term need for a marketable win take precedence over sound long-term policy and the time-tested results of free trade.

Immanuel Wallerstein – The Modern World-System I: Capitalist Agriculture and the Origins of the European World-Economy in the Sixteenth Century

Immanuel Wallerstein – The Modern World-System I: Capitalist Agriculture and the Origins of the European World-Economy in the Sixteenth Century

Wallerstein was the primary creator of the core-periphery framework that many historians use to view world economic history. This 1974 book started it all. Several publishers rejected his initial manuscript, but when he did finally get it published, it caught on quickly. Wallerstein eventually completed four volumes in the series before he passed away in 2019.

In the context of the 16th century, the first major core country was Spain, though the Netherlands and England eventually overtook it as silver-induced inflation and the costs of empire caused Spanish decline. The two periods of Spanish dominance and Dutch-English dominance make up what Wallerstein calls the long 16th century. The periphery economies were the somewhat nearby countries that traded with these core economies throughout the long 16th century, and on through later periods.

Typically, periphery economies provide raw materials and food, which the core countries either consume or turn into more finished products. At this stage of the world economy, there were still countries outside of the European core-periphery network. For Wallerstein, these are simply separate economic systems. The boundaries are fluid, and Wallerstein was quick to point out that his categories are not categorical. Countries such as Poland and the Ukraine were nearly always periphery countries in this period. Russia went in and out of the periphery over the years. Farther-off countries such as India and China had their own independent core-periphery networks.

By the 20th century, with industrialization, mass media, and air travel, the entire world was unified into a single core-periphery system. In this book’s focus, the two-part “long 16th century,” this had not yet happened. But this was also the period when that process began in earnest, which is why Wallerstein’s larger project began there.

Wallerstein was a Marxist, and it shows in his hyper-materialist view of history, and his neglect of individuals in favor of focusing on aggregates such as nations, regions, and classes. It also causes him to ignore non-material factors such as culture, art, social norms about openness and progress, and more. Though he favorably cites Douglass North a few times, proving at least some engagement with the economic history literature, he also is not the most astute economic analyst, especially in matters of monetary policy. He seems not to grasp the concepts of equilibrium, the neutrality of money, or the law of one price. These shortcomings are not fatal to his core-periphery thesis, but they don’t help his case.

As the world becomes ever more prosperous in the 21st century, Wallerstein’s core-periphery framework is quickly becoming obsolete. It’s not the worst way to view the history of empires of colonialism, which are based on exploitation and hierarchy. But the world of the post-1800 Great Enrichment is based increasingly on equal exchange and cross-cultural tolerance and respect. There is a long way to go, obviously, and there will be stutters and reversal. But if the process continues, Wallerstein’s thesis will age as poorly as his Marxism already has.

William Dalrymple – The Anarchy: The East India Company, Corporate Violence, and the Pillage of an Empire

William Dalrymple – The Anarchy: The East India Company, Corporate Violence, and the Pillage of an Empire

The East India Company (EIC) was one of history’s largest monopolies. Its story is relevant to today’s antitrust debate, and the larger question of where the private sector ends and the public sector begins. Dalrymple seems eager to paint a portrait of capitalist and corporate greed, but the facts won’t quite allow it. He grudgingly allows that the EIC was not a free-market institution, but he often insists on treating it that way just the same.

The EIC was a public-private partnership from the start, and received government bailouts. It had de facto taxing authority in India, a power no fully private company enjoys. The EIC had its own 200,000-strong army, twice the size of the British army. The East India Company was a government in everything but name, and it acted like it, to the point of toppling India’s existing government in 1765 and replacing it with itself.

Contemporary economists and philosophers such as Adam Smith and even the conservative Edmund Burke opposed empire and its accoutrements not just on moral grounds, but on fiscal grounds. Ventures such as the EIC cost the government more than they made from it.

Dalrymple doesn’t go into this as much as he should, but the EIC’s story shows that there is no bright line where the private sector ends and government begins. This kind of philosophical discussion would have been very useful for clarifying his message.

The lessons from the East India Company’s story apply to today’s climate of too-big-to-fail, bailouts for politically connected industries, and subsidy programs for businesses big and small. All of these nearly always come with political strings attached, and mix together the public and private in ways few outside of the economics profession expected. Beneficiary companies become executors of government policy, rather than engines of value creation.

In the EIC’s case, this meant corruption, coups, atrocities, war crimes, and racially motivated mass murders. Today’s rent-seekers’ interests are mostly limited to greed, fortunately. But they are still worth fighting about, and EIC’s cautionary tale is useful for that fight.

Paul Kriwaczek – Babylon: Mesopotamia and the Birth of Civilization

Paul Kriwaczek – Babylon: Mesopotamia and the Birth of Civilization

A survey history of Mesopotamia from about 8,000 years ago until the sixth century B.C., with a special emphasis on Babylon, from its rise around 1800 B.C. to its collapse.

The chapters on cuneiform writing, commerce, the birth of trade, and the Sumerian education are especially fascinating. One of the most common archaeological finds are clay writing tablets that students used for practice. From these, we can glean much about how writing was taught, as well as what was taught. Another useful insight is that Mesopotamian language was a lot like ours. It depended heavily on context and inside cultural knowledge. In our time, a sign with a picture of a car can mean many things—a warning for pedestrians, or to mark a parking spot or a garage, and so on. Many cuneiform words were the same way. Their base-60 numbering system treated decimal places similarly—the only way to tell, say, 26 from 206 or 2,006 was context. One imagines this was grist for many a court case.

The famously severe legal codes of Hammurabi and other Mesopotamian figures had a similar lack of literalism. The more severe punishments, including a horrific precursor to Roman crucifixion, were either written down only to instill fear, or were carried out extremely rarely for the same reason. A Gary Becker-inspired economic analysis of how the severity and frequency of Mesopotamian punishments affected crime rates would make for an interesting historical study, though the data collection problems are rather obvious.

Bryan Caplan and Zach Weinersmith – Open Borders: The Science and Ethics of Immigration

Bryan Caplan and Zach Weinersmith – Open Borders: The Science and Ethics of Immigration

A graphic novel about immigration policy, and a superbly done one at that. Caplan, a former professor of mine at George Mason, wrote most of the words. Weinersmith, creator of the Saturday Morning Breakfast Cereal web comic, did the artwork and many of the jokes.

This book is aimed at skeptics, and Caplan and Weinsersmith do a much better job of appealing to them than most people do. In some ways, Open Borders is an example of what happens when someone is able to pass an ideological Turing test—a concept Caplan coined in 2011. They are routinely charitable to their opponents, and confront their strongest arguments as their proponents actually present them. This is much more effective than building up straw men and knocking them down, leaving the original argument untouched. It is also more difficult, which is why many people do not bother.

If immigration restrictionists pick up the book—and early sales figures suggest some of them are—Caplan and Weinersmith should allay a lot of peoples’ fears with their calm, accessible presentation that is rigorously backed with data and research (interested readers can consult roughly 30 pages worth of notes at the back of the book). They convey a tone that is light-hearted and serious at the same time, which is not an easy balance to strike. And even if they don’t convince very many people to embrace open borders, the sheer weight of data, theory, philosophy, and morality in their favor should at least push most readers a little bit in their direction at the margin.

Caplan and Weinersmith make a very good team. Hopefully they collaborate again in the future.

Phase One of a China-U.S. Trade Agreement and the Ratchet Effect

As of Friday, December 13th, the U.S. and Chinese governments have agreed in principle to phase one of a trade agreement. The Chinese government will purchase more U.S. agricultural products, and according to The Wall Street Journal, “Mr. Wang [China’s Vice Minister of Commerce] said that the agreement would cover a range of contentious issues, including agriculture, intellectual property protection, technology transfer and liberalization of the financial sector, without elaborating.” The U.S. will hold off on a planned tariff increase set for Sunday, December 15th. It will also decrease tariffs on $120 billion of Chinese goods from 15 percent to 7.5 percent.

Details are still sketchy at this point, and are subject to change. The agreement also needs to be formally ratified by both countries. It is unclear how long this would take. President Trump also has a history backing out of already-announced major policy changes, and might do so again at any time. This might partially explain Beijing’s muted tone, and why they did not announce such a significant deal until after Beijing’s markets closed. A sudden gain on Friday’s news could be wiped out, or worse, on Monday if Trump backs out over the weekend.

But for the sake of argument, suppose phase one is ratified smoothly. Where would U.S.-China trade stand? It would still be worse off than just a few years ago. Both countries’ trade barriers would remain higher than before the trade war started. The trade war is a fresh example of the “ratchet effect” Robert Higgs warned about in his classic book Crisis and Leviathan. A crisis results in expanded government power, which is never fully walked back. Post-crisis leviathan remains larger on net.

In this case, a fabricated crisis over Trump’s misunderstanding of trade deficits has created a new trade leviathan. If it is ever tamed, it will take years. Both U.S. political parties are taking a populist turn. Chinese President Xi Jinping has spent six years consistently re-centralizing China’s economy and rejecting needed economic and political liberalization. Tariffs from the U.S. are clearly not encouraging better behavior. In this political climate, two years of trade mistakes might take a generation to fix, or longer. Both countries would be better off if they had never fought a trade war in the first place.

Many of China’s promised phase one reforms are vague, and difficult or impossible to measure. It is also unclear what will happen to China’s retaliatory tariff increases, which are penalizing U.S. exporters even as China has lowered its tariffs against the rest of the world over the last two years. The ratchet will remain tighter than before the trade war. It is just a question now of how much tighter.

The story is similar for the U.S., which will keep in place 25 percent tariffs against $250 billion worth of Chinese goods that did not exist two years ago. Those still-new tariffs will keep consumer prices artificially high after phase one passes. Companies in all manner of industries will still be scrambling for ways to adapt to suddenly higher costs and disrupted supply chains.

Businesses in both countries are having to make important long-run decisions right now with no idea of what’s to come next. This is bad for investment, and one reason the risk of recession in the U.S. remains uncomfortably high despite an otherwise-excellent economy.

President Trump has said that phase two negotiations will begin immediately, but there is no indication yet what his goals are for phase two, what its timetable will be, how many phases there will be, or what Trump’s ultimate policy goals are. These will be Trump’s problems for at most another five years. Most businesses hope to be around for rather longer than that, and would like to be able to plan accordingly.

Eric H. Cline – 1177 B.C.: The Year Civilization Collapsed

Eric H. Cline – 1177 B.C.: The Year Civilization Collapsed

The Late Bronze Age in the Mediterranean, roughly 1500-1200 B.C., is an under-studied period of history. Egyptians, Minoans, Myceneans, Phoenician, Hittites, Akkadians, Babylonians, Canaanites, Assyrians, Cypriots, and more all had thriving civilizations and a complex web of regional interconnectedness. It was, to that point, the most prosperous period in all of human history. Some of their interactions were peaceful, such as in the spread of trade, language, and writing. Other interactions, less so. The first battles with written eyewitness accounts date from this period. Ramses II of Egypt had his epic Battle of Kadesh against Muwatalli II of the Hittites around 1250 BC, of which interested readers can find a dramatic retelling in Norman Mailer’s novel Ancient Evenings. The Trojan War happened sometime around 1200 BC.

Most of Cline’s book is a narrative regional history of roughly a 300-year period ending around the time of the book’s title, 1177 B.C. Around this time, most of those civilizations collapsed. Archaeological records show most major cities were burned, and surviving written sources tell of invasions by Sea Peoples, about whom little is known beyond their ferocity and foreignness. Cline chose 1177 B.C. as a landmark date because in that year, the Egyptian pharaoh Ramses III fought the Sea Peoples’ second invasion, and lost. Just as historians use the sack of Rome in 476 A.D. as shorthand for a longer-term process of collapse, Cline doesn’t literally mean the Late Bronze Age ended in 1177 B.C. That invasion was simply the most visible event in a multi-generation process.

Historians have long thought these Sea Peoples were the main culprit of the rapid region-wide collapse. Cline is not so sure, and many modern scholars agree. Cline also explains recent attempts to figure out just who they were. At present, the best guess is they were not a unified civilization. They likely came from the Northern Mediterranean. One such people are the Shekelesh, who were from Sicily, and likely gave the island its name.

It takes Cline until almost the end of the book to get to the freaking point, but his thesis is essentially a “systems collapse” argument. One thing didn’t go wrong around 1177, everything did. The Late Bronze Age civilizations endured long-term drought, famine, foreign invasions, political changes that lopped off an elite class, wars with each other, and even some earthquakes, all around the same time. None of these factors on their own would have been enough to topple civilizations. Taken together, the cascade effect was fatal.

Cline also argues that the region’s cosmopolitan interconnectedness was a factor in their undoing. When one fell, the others were weakened, and on it went, in a domino effect. Here, I disagree, for much the same reason that investors diversify their portfolios.

Suppose a famine strikes one city-state. At any given time, it is unlikely that the entire region is simultaneously having poor harvests. The stricken city can reach out to others for help. By the Late Bronze Age, agriculture was already five or six millennia old. If, say, every fifth year or so would be a bad year in a given place, then every place knew to plan on growing about a fifth more than what it needs for itself. During good years, it would trade this surplus to needy neighbors. During their own bad years, neighbors in better shape would have their own surplus available for trade. This interconnectedness smooths out year-to-year volatility, making each part of the whole stronger.

The troubles of 1177 or thereabouts happened because drought and other disasters hit region-wide, instead of in select local spots. Even a diversified trading network couldn’t overcome that shock.

If anything, the limits of interconnectedness played a role. Transportation was slow and costly back then. Even though there was likely some long-distance trade with the breadbasket regions of Eastern and Northern Europe and with India, it would have been limited to durable goods such as wood and metals. Wheat and other crops would not have survived the trip—or might not have arrived in time to help. There is a reason why today’s only famines are politically created. Global interconnectedness today is stronger than even the forces of nature.

Wars and skirmishes among Bronze Age kings did not affect the vast majority of people, who were busy in the fields. The biggest battles and sieges of cities were one-time events involving tens of thousands of people. This is out of a population of millions, or perhaps tens of millions. These rare catastrophes dominate the written sources, hence why historians focus on them so heavily. But proportionally, they were often unimportant for the region’s standard of living. Written records can only be made by people who know how to write, and in the Bronze Age that was only a select few people, mostly state functionaries and merchants. This availability bias in the sources means that historians who single out war or invasion as a primary culprit for the 1177 B.C. collapse are likely overselling their case.

Cline’s wider system collapse argument has merit. But his argument that interconnectedness was a source of weakness is almost certainly in error.