Category Archives: International

One Way to Block Reforms: Capture the Lawyers

From p. 23 of Richard McGregor’s 2010 book The Party: The Secret World of China’s Communist Rulers:

“About one-third, or 45,000, of the 150,000 registered lawyers in China as of May 2009, were party members. Nearly all law firms, about 95 percent, had party committees, which assessed lawyers’ pay not just according to their legal work, but to their party loyalty as well. Far from being a weakness, the Party considers its penetration of the legal system to be a core strength.”

Economists often write of regulatory capture, in which regulated industries capture the agencies that regulate them, and use that relationship to feather their each other’s nests. It turns out this can also happen in the opposite direction, and governments can capture industries.

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.

Peter the Great’s Tax Policy Innovations

From p. 401 of Peter K. Massie’s 1980 biography, Peter the Great: His Life and World:

The Tsar’s demands for money were insatiable. In one attempt to uncover new sources of income, Peter in 1708 created a service of revenue officers, men whose duty it was to devise new ways of taxing the people. Called by the foreign name “fiscals,” they were commanded “to sit and make income for the Sovereign Lord.” The leader and most successful was Alexis Kurbatov, the former serf of Boris Sheremetev who had already attracted Peter’s attention with his proposal for requiring that government-stamped paper be used for all legal documents. Under Kurbatov and his ingenious, fervently hated colleagues, new taxes were levied on a wide range of human activities. There was a tax on births, on marriages, on funerals, and on the registration of wills. There was a tax on wheat and tallow. Horses were taxed, and horse hides and horse collars. There was a hat tax and a tax on the wearing of leather boots. The beard tax was systematized and enforced, and a tax on mustaches was added. Ten percent was collected from all cab fares. Houses in Moscow were taxed, and beehives throughout Russia. There was a bed tax, a bath tax, and inn tax, a tax on kitchen chimneys and on the firewood that burned in them. Nuts, melons, cucumbers were taxed. There was even a tax on drinking water.

Money also came from an increasing number of state monopolies. This arrangement, whereby the state took control of the production and sale of a commodity, setting any price it wished, was applied to alcohol, resin, tar, fish, oil, chalk, potash, rhubarb, dice, chessmen, playing cards, and the skins of Siberian foxes, ermines, and sables. The flax monopoly granted to English merchants was taken back by the Russian government. The tobacco monopoly given by Peter to Lord Carmathen in England in 1698 was abolished. The solid-oak coffins in which wealthy Moscovites elegantly spent eternity were taken over by the state and then sold at four times the original price. Of all the monopolies, however, the one most profitable to the government and most oppressive to the people was the monopoly on salt. Established by decree in 1705, it fixed the price at twice the cost to the government. Peasants who could not afford the higher price often sickened and died.

And from p. 402:

No matter how much the people struggled, Peter’s taxes and monopolies still did not bring in enough. The first Treasury balance sheet, published in 1710, showed a revenue of 3,026,128 rubles and expenses of 3,834,418 rubles, leaving a deficit of over 808,000 rubles. This money went overwhelmingly for war.

In the News: Facebook’s Antitrust Case

I’m quoted, in French, in Paris’ Le Monde newpspaper about the FTC’s revised antitrust complaint against Facebook:

La FTC « joue sur les mots », abonde Ryan Young du think tank Competitive Enterprise Institute. Pour lui, l’autorité s’est juste « arrangée pour exclure TikTok, Twitter, Clubhouse, Discord, et d’autres de ce marché »« Tout marché est un monopole si vous le définissez de façon suffisamment étroite, et c’est la seule chose que la plainte de la FTC prouve réellement. »

An English-language version of the same story in Techxplore says:

But Ryan Young of the Competitive Enterprise Institute countered that the FTC complaint “relies heavily on wordplay” to define Facebook as a monopoly.

“It argues that Facebook dominates the market for ‘personal social networking services,’ then defines that term in just such a way that excludes TikTok, Twitter, Clubhouse, Discord and others from that market,” Young said.

“Any market is a monopoly if you define it narrowly enough, and that is the only thing the FTC’s complaint successfully proves.”

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.

Science, Openness, and Peace

From pp. 352-353 of Richard Holmes’ immensely enjoyable history of science in the early Romantic period, The Age of Wonder:

On 2 November [the British chemist and forefather of anesthesia Humphry] Davy received the Prix Napoléon (worth 6,000 livres) from the Institut de France in Paris. He knew that accepting the award might be unpopular in wartime England, but followed [British scientist and explorer Joseph] Banks’ line at the Royal Society that science should be above national conflicts. He told [tanner and essayist] Tom Poole: ‘Some people say I ought not to accept this prize; and there have been foolish paragraphs in the papers to that effect; but if the two countries or governments are at war, the men of science are not. That would, indeed, be a civil war of the worst description: we should rather, through the instrumentality of men of science, soften the asperities of national hostility.’

Montesquieu’s doux commerce thesis is that trade promotes peace and prevents war. Here, Humphry Davy, who is not as famous as he should be in the history of science, makes the same argument for science. When ideas and discoveries cross borders, it is less likely that soldiers will. This is an important point in today’s political climate of growing nationalism.

On the Radio: Apple’s EU Antitrust Case

On Friday, I discussed the EU’s new antitrust case against Apple on the Lars Larson show. Audio is here.

EU Antitrust Action Against Apple – Bad for Trade, Bad for Consumers

This press release was originally posted at cei.org.

The EU Commission declared today that “Apple has a monopoly” in the distribution of music streaming apps to owners of Apple devices, the upshot of an antitrust investigation launched last year against the App Store and triggered by a complaint filed by streaming music company Spotify. CEI experts criticized the EU for what will be a poor outcome for consumers, entrepreneurs, and trade.

Ryan Young, CEI trade policy expert

“Antitrust policy can be a form of trade protectionism, similar to tariffs. Europe’s tech industry has long lagged behind America’s, largely due to the EU’s stifling regulatory climate. The EU could boost its tech industry by reforming its own bad policies, such as its corporate subsidies and overly risk-averse regulatory approach. Instead, it is trying to boost Europe-based Spotify by taking U.S.-based Apple to court.

“It is better to build up than to tear down. Europe has plenty of talented innovators and plenty of capital to fund them. The EU would better help consumers and businesses by letting its entrepreneurs innovate, rather than suing foreign competitors.”

Jessica Melugin, CEI technology policy expert

“Apple’s fees are in line with or less than the global industry standard, and Spotify has benefited greatly from the App Store’s distribution network. Spotify chose to offer its product through the App Store and now is crying to regulators in the EU and US for them to intervene and change the rules. Apparently, corporate cronyism is at home on both continents.”

Related analysis: Terrible Tech 2.0: The Most Burdensome, Anti-Consumer Technology Policy Proposals in Washington

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.”