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 The Trump tariffs against Chinese goods should have been entirely repealed as part of the agreement, but were not.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.

Minimum Wages Rise Across the Country

Twenty four states rang in 2020 with minimum wage increases. Most of the increases are modest, so the tradeoffs will be, too. But there was curiously little discussion of those tradeoffs. This is a common tendency among both the media and the general public. They often prefer to either deny that tradeoffs exist, or else play them down. This is unfair to affected workers.

The New York Times editorial board, for example, in a recent editorial titled “Double the Federal Minimum Wage,” opens:

Opponents of minimum-wage laws have long argued that companies have only so much money and, if required to pay higher wages, they will employ fewer workers.

Now there is evidence that such concerns, never entirely sincere, are greatly overstated.

Not only does this piece downplay unemployment tradeoffs, it is one of only two types of tradeoffs it mentions. The editorial also calls for increasing tipped workers’ wages, but those workers mostly disagree, preferring sometimes-informal tipped income over a higher formally reported wage.

Regarding unemployment, the Times piece cites the famous 1993 Card and Krueger study that found no unemployment increases in the aftermath of a New Jersey minimum wage increase. That study relied on survey data, in which business owners sometimes give less-than-honest answers, so as not to appear stingy or heartless. Card and Krueger also did not control for outside economic factors, or what statisticians call “the dreaded third thing.” These relevant third things include macro-level financial, economic, and monetary policy conditions, and local government policy changes other than minimum wage increases. By focusing on only one industry, fast food, Card and Krueger also did not see how other sectors responded to the same increase and possibly affected each other’s behavior.

Job cuts are one of the rarest tradeoffs to minimum wages. It is a drastic measure employers will take only if they have to. Instead, employers typically make much subtler, but more widespread cuts in other areas so they can avoid firing people. This is why, while most studies do find job losses from minimum wage increase, they are typically modest. This is not a victory for minimum wage increase advocates. It means they are not looking very hard for tradeoffs.

My recent paper focuses on those many tradeoffs. When wage pay goes up, non-wage pay goes down to roughly cancel it out. That means cuts to vacation time and perks like free food or parking, less generous insurance, less workplace flexibility, less attention paid to working conditions, and on and on. The mix of tradeoffs is different at every company, and for every affected worker inside a given company, but their rough effect is to roughly cancel out the benefits of the increase. Moreover, larger companies take advantage of minimum wage laws to artificially hobble smaller competitors by raising their labor costs. That is where the debate should be. Jobs are a small part of a much larger picture.

While the House passed a $15 federal minimum wage bill last year, the Senate is not likely to take it up. The more than 50 increases that have just taken effect are all at the state and local level, but minimum wages will almost certainly be a significant campaign issue in 2020. Regardless of November’s election results, next year’s incoming Congress will likely attempt another increase next year, just as most Congresses have over the last 80 years or so.

For more on minimum wages, see my paper “Minimum Wages Have Tradeoffs.”

This Week in Ridiculous Regulations

The new year started off with a literal bang, though as of this writing the worst Iran scenario seems to have been avoided. The Senate is poised to move on its two biggest items, impeachment and the USMCA trade agreement, though the timelines for both are uncertain. On the regulatory front, the 2020 Federal Register took just five working days to exceed 1,000 pages. New final regulations for the week range from air compressors to beef promotion.

On to the data:

  • Last week, 62 new final regulations were published in the Federal Register, after 48 the previous week.
  • That’s the equivalent of a new regulation every two hours and 20 minutes.
  • Federal agencies have issued 83 final regulations in 2020. At that pace, there will be 2,965 new final regulations. Last year’s total was 2,964 regulations.
  • There were also 28 proposed regulations in the Federal Register last week, for a total of 41 on the year. At that pace, there will be 1,465 new proposed regulations in 2020. Last year’s total was 2,106 proposed regulations.
  • Last week, agencies published 281 notices, for a total of 412 in 2020. At that pace, there will be 14,715 new notices this year. Last year’s total was 21,804.
  • Last week, 1,308 new pages were added to the Federal Register, after 1,194 pages the previous week.
  • The 2020 Federal Register totals 1,730 pages. It is on pace for 61,786 pages. The 2019 total was 72,561 pages. The all-time record adjusted page count (which subtracts skips, jumps, and blank pages) is 96,994, set in 2016.
  • Rules are called “economically significant” if they have costs of $100 million or more in a given year. One such rule has been published this year. Four such rules were published in 2019.
  • The running cost tally for 2020’s economically significant regulations is currently zero. 2019’s total ranges from net savings of $350 million to $650 million, mostly from estimated savings on federal spending. The exact number depends on discount rates and other assumptions.
  • Agencies have published three final rules meeting the broader definition of “significant” so far this year. 2019’s total was 66 significant final rules.
  • So far in 2020, 12 new rules affect small businesses; one of them is classified as significant. 2019’s totals were 501 rules affecting small businesses, with 22 of them significant.

Highlights from last week’s new final regulations:

For more data, see Ten Thousand Commandments and follow @10KC and @RegoftheDay on Twitter.

This Week in Ridiculous Regulations

Happy New Year, everyone. We’re doing a slightly different format this week, on account of the new year starting mid-week. With just two days’ worth of data so far, year-to-date totals and annual projections for 2020 are not yet very informative. Also, Wayne Crews did a year-end look at regulation in 2019 for Forbes, and I did one here. In another piece, Wayne found that for every law passed by Congress in 2019, agencies issued 28 new regulations. He calls this ratio the Unconstitutionality Index. See also related coverage in the Washington Examiner (twice) and the Epoch Times. With those bases already covered, this week’s roundup will simply summarize last week’s new regulation highlights so they don’t get lost in the ether. Back to business as usual next week.

From the 27 final regulations issued from December 30-31, 2019:

From the 21 final regulations issued from January 2-3, 2020 (no Federal Register on New Year’s Day):

For more data, see Ten Thousand Commandments and follow @10KC and @RegoftheDay on Twitter.

In the Media: Regulation

Wayne Crews and I are both quoted in an Epoch Times writeup on regulatory burdens in 2019.

Charles Davenant on the Need for Humility in Policymaking

Douglas Irwin, on page 53 of his 1996 book Against the Tide: An Intellectual History of Free Trade, quotes from page 32 of Charles Davenant’s 1696 Essay on the East India Trade:

“Wisdom is most commonly in the wrong, when it pretends to direct nature.”

This wisdom applies to much more than trade restrictions and government-granted monopolies.

How Much Federal Regulation Was There in 2019?

Happy New Year, everyone. Now that 2019 is just about over, we have some data on how much new regulation hit the books. Note that these numbers are preliminary and might change. The source for most of the numbers is FederalRegister.gov. The page number counts are taken from the Federal Register’s daily digest email. Wayne Crews’ Ten Thousand Commandments also has abundant data.

The general story the numbers tell is that the Trump administration has been steadily increasing its pace of regulatory activity. It has enacted some positive reforms through Executive Order, such as its one in, two out rule, and two orders to make regulatory dark matter more transparent. Dark matter is regulation that has the force of law, but never went through the proper public notice-and-comment rulemaking process. The administration missed an opportunity to codify these reforms in proper legislation when Republicans held both chambers of Congress, so these reforms are vulnerable to reversal when the White House eventually changes hands. In the long run, this may end up as the Trump administration’s biggest missed opportunity.

Deregulatory efforts will likely continue in 2020, but will likely to be more than offset by regulatory increases elsewhere. Trade barriers have more than doubled since 2017. While the USMCA trade agreement will keep tariffs against Canada and Mexico in check, it contains substantial new regulatory burdens and non-tariff trade barriers. Upcoming agreements with China, the United Kingdom, and the European Union, if these happen, due in part to USMCA’s precedent, will also likely contain substantial new regulatory burdens.

The emerging antitrust alliance between national conservatives on the right and progressives on the left may also result in major new regulatory barriers against competition that will not necessarily show up in rule counts or Federal Register page counts.

With that for context, here are some early data on new regulation in 2019:

  • There were 2,106 proposed regulations in 2019. This is very close to 2018’s 2,072 proposed regulations, and a nearly 15 percent increase from the Trump administration’s first year figure, 1,837 proposed regulations in 2017.

  • 2,964 final regulations. This is down from 2018’s 3,367 final regulations and 2017’s 3,280 final regulations. This makes 9,405 new final regulations during the Trump administration from its January 20, 2017 inauguration through year-end 2019. At that pace, it will likely pass the 10,000 mark in February or March 2020.

  • 21,804 agency notices. This is where a lot of regulatory dark matter appears—rules which have the force of law, but were never put through the proper rulemaking process, which includes a public notice-and-comment period. 2019 was down slightly from 2018’s 22,025 notices and 2017’s 22,137 notices. From inauguration through year-end 2019, the Trump administration issued 64,485 agency notices.

  • 72,561 Federal Register pages. This is the highest figure of the Trump era, and a sharp increase over the Trump administration’s first two years. Using adjusted page counts, the 2018 Federal Register was 64,582 pages, and 2017’s was 61,950 pages. Significantly, 2019’s page-count increase happened despite near-zero activity during the month of January, when the federal government was partially shut down. It is likely that at least some pages that would have appeared in January instead appeared during later months, resulting in little total change. But it is also possible items were simply never published—which likely represents decreased transparency rather than decreased activity. We will likely never know the exact balance.

Interesting, and busy, times are ahead.