The Cato Institute

The WTO is the Best Hope for Disciplining China’s Trade Practices

The Trump administration’s current approach of using unilateral tariffs to curtail China’s protectionist trade practices is ineffective and hurts U.S. businesses and consumers…

A multilateral solution harnessing the World Trade Organization’s (WTO) dispute settlement system is the better solution.

While some of China’s specific practices may be a problem, its desire for economic development is natural and appropriate. Demonizing China for participating in trade practices which are common in other countries exacerbates the problem. Whatever policies are adopted with respect to Chinese trade should not try to limit China’s economic ambitions. 

When practices do arise that are protectionist or otherwise problematic, the U.S. along with its key allies should utilize internationally agreed upon trade rules to steer China toward market-oriented solutions. Despite the belief that China “cheats” at trade and therefore litigating through the WTO would be worthless, China actually has a relatively strong record of compliance. Of the matters litigated against China since it joined the WTO, 12 were litigated all the way through, while 10 were either addressed in settlements or dropped. In almost all of these completed cases, China’s response was to move toward greater market access by altering its measures and practices to comply with WTO rules.

While this litigation has been successful, there are several possible WTO complaints that have been overlooked, including those involving general intellectual property protection and enforcement, trade secrets protection, forced technology transfer, and subsidies. One glaring example is the U.S. failure to pursue broad WTO complaints targeting China’s transgressions against U.S. intellectual property rights.

The existing WTO rules are not adequate in all respects to deal with the unique challenges presented by China. The remedy for this inadequacy is not, however, abandoning those rules, but the adoption of more and better ones. China’s protectionist policies should encourage countries to redouble their efforts to reinvigorate the rules-based trading system by negotiating new rules to discipline protectionist actions and encourage China to adopt market-based approaches. These new rules could include Chinese accession to the WTO’s Government Procurement Agreement, negotiation of new disciplines on subsidies for state-owned enterprises, and negotiation of disciplines on forced localization of services and other aspects of digital trade and digital trade in services, to name a few.

The Trump administration may prefer the contentious use of unilateral tariffs, but if they are looking for effective approaches to addressing Chinese protectionism, WTO disputes are the better avenue. 

The WTO dispute process is not perfect but, it’s biggest flaw is that it is underutilized. The Trump administration should work with U.S. allies to use the WTO dispute process to press China to fulfill its promises and become more market-oriented.

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One Hundred Years Too Many — #EndTheJonesAct

Cato’s Herbert A. Stiefel Center for Trade Policy Studies’ new campaign targets the onerous Jones Act for repeal by its hundredth anniversary in 2020…

The Merchant Marine Act of 1920, better known as the Jones Act, not only has failed to meet its stated objectives—ensuring adequate domestic shipbuilding capacity and a ready supply of merchant mariners in times of national emergencies—it has actually inflicted considerable economic harm through a variety of direct and indirect channels. 

Restricting domestic shipping services to vessels that are U.S.-built, U.S.-owned, U.S.-flagged, and U.S.-staffed has created myriad unintended consequences. While the law is billed as promoting a strong domestic maritime industry, it has actually presided over its decimation.

Shielded from competition in the construction of vessels for the Jones Act trade, the U.S. shipbuilding industry has become staggeringly uncompetitive. American-built coastal and feeder ships, for example, cost between $190 and $250 million, whereas the cost to build a similar ship in a foreign shipyard is about $30 million. Accordingly, U.S. shippers buy fewer ships, U.S. shipyards build fewer ships, and merchant mariners have fewer employment opportunities.

High replacement costs, meanwhile, cause ship owners to squeeze as much life as possible out of their existing vessels. Three out of every four U.S. container ships surpass the typical 20 year economically useful life of a ship, and 65% of the fleet is more than 30 years old. These ships are not only inefficient, but also lack key safety features available on newer vessels.

Jones Act supporters still justify the law under the guise that it is vital to U.S. national security. To the contrary, however, the law has led to a maritime sector that is uncompetitive, diminished in size, and increasingly unprepared to play a helpful role in times of war or national emergency. Since the 2003 Iraq War, the Jones Act fleet has declined from 151 ships to 99, and a senior Pentagon official was forced to admit this year that the United States may “need to rethink policies of the past in order to face an increasingly competitive future.” Moreover, in recent natural disasters, such as Hurricane Maria, rather than serving as an asset, the Jones Act functioned as an impediment by disqualifying ships for providing relief.

High economic costs resulting from Jones Act restrictions are robust, and trickle down through numerous industries. While the law’s most direct consequence is to raise transportation costs, which are ultimately reflected in higher retail prices, it also generates enormous collateral damage through excessive wear on the country’s infrastructure, time wasted in traffic congestion, and the accumulated health and environmental toll caused by unnecessary carbon emissions and hazardous material spills from trucks and trains.

Despite these considerable costs, repealing the Jones Act will not be easy. After nearly 100 years, incumbent interests, regulators, and politicians have become used to the privileges of a system that benefits a concentrated few. If Congress is unable to fully repeal the law, the authors offer three important reforms that would help lift the burden of the Jones Act on the U.S. economy. First, the federal government should grant limited cabotage rights to non-Jones Act compliant vessels. Second, permanent exemptions should be granted for Alaska, Hawaii, Puerto Rico, and Guam, which are located many miles from the U.S. mainland. And lastly, Congress should eliminate the burdensome U.S. build requirement.

That such a burdensome law has evaded reform for nearly 100 years speaks to the determination of a small, well-connected class of producers and unions that have blocked any attempt to challenge the Jones Act. But the environment for reform is ripening, and the time has finally come to turn the tables and for Congress to repeal this onerous law.

Over the course of the next two years, the Herbert A. Stiefel Center for Trade Policy Studies will engage in a concerted, multifaceted campaign to educate policymakers and the general public on the havoc wrought by the Jones Act. 

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Nobody Wins a Trade War

At midnight tonight, special U.S. tariffs on imports of steel and aluminum from Canada, Mexico, and the European Union will go into effect. With the Europeans, Canadians, Mexicans, and Chinese all preparing to retaliate, we may soon be engaged in a dangerous trade war…

This announcement comes on the heels of one made earlier this week regarding the “trade war” with China, which is back on 10 days after Treasury Secretary Steve Mnuchin declared it to be “put on hold.” (I guess it was just a rain delay.) On June 15, the administration will publish the final list of Chinese products—about 1,300 products valued at about $50 billion—that will be hit with 25 percent duties. The Chinese government has published its own list of U.S. exports that will be hit with retaliatory duties in China.

So, as has been the case every day for the past 16+ months, the U.S. and global economies (even as they’ve strengthened) remain exposed to the whims of an unorthodox president who precariously steers policy from one extreme to the other, keeping us in a perpetual state of uncertainty. With the Europeans, Canadians, Mexicans, and Chinese all preparing to retaliate in response to these precipitous U.S. actions, at the stroke of midnight we may finally get the certainty of the beginning of a deleterious trade war.

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Cato Trade Conference: Will the Transatlantic Trade and Investment Partnership Live Up to Its Promise?

The Transatlantic Trade and Investment Partnership (TTIP) negotiations were launched to great fanfare in mid-2013 with the pronouncement that a comprehensive deal would be reached by the end of 2014 on a “single tank of gas.” But after more than two years and 10 rounds of negotiations, an agreement is nowhere in sight and substantive differences remain between the parties.

Despite a retreat from the original level of ambition, skepticism is mounting on both sides of the Atlantic that a deal will be reached anytime soon. What are the prospects for fulfilling the promise of a comprehensive trade and investment deal between the United States and the European Union? What exactly is under negotiation, and what is the strategy for advancing those negotiations?

These and many other questions will be addressed through panel presentations, roundtable discussions, and debates by more than 30 trade experts at a special conference to be held at the Cato Institute on Monday, October 12th, from 8:30am-5:00pm.

If you can’t make it to the event, you can watch it live online at www.cato.org/live and join the conversation on Twitter using #CatoTTIP. Follow @CatoEvents on Twitter to get future event updates, live streams, and videos from the Cato Institute.

Get More Information and RSVP…