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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India’s Modi is No Great Champion of Economic Freedom

Indian prime minister Narendra Modi has been hailed as an economic liberalizer, but new import duties on more than 40 items threaten to reverse the major gains India has made since economic reforms began in 1991…

When Indian prime minister Narendra Modi came to power in 2014, he was seen as a liberalizer, bearing the slogan, “Minimum government, maximum governance.” He has since sharply criticized rising U.S. protectionism under the Trump administration. 

In reality, Modi has expanded the role of government in welfare even while liberalizing the economy incrementally. Most recently, just like President Trump has done in the United States, Modi has promoted measures to protect and support manufacturing jobs in India.

The latest Indian budget — from February 2018 — raised import duties on more than 40 items, ranging from auto parts and toys to candles and furniture, in order to protect uncompetitive small businesses and create jobs in labor-intensive industries. Even before that, India raised import duties on several electronic items, from phone components to TVs and microwave ovens — all done in pursuance of a Phased Manufacturing Program aiming to check massive imports from China and ensure that cellphone assembly and the manufacture of components are done mostly in India. An official task force has also been appointed to look into ways of reducing import dependence.

Modi’s Bharatiya Janata Party (BJP) is not a conventional right-wing party. It rejects both socialism and Western capitalism and seeks a homegrown solution called Integral Humanism. It supports private enterprise but also runs India’s biggest trade union and believes in a wide-ranging welfare state. It has highly protectionist affiliates that have always been wary of multinational corporations and international institutions. It believes in government intervention to create national champions, increase employment, and protect small businesses. The party also contains many liberalizers who succeeded in opening up the economy when the party ruled from 1998 to 2004, overcoming objections from BJP affiliates.

Modi now faces the same global headwinds that Trump does: fear of China, automation, and lack of good jobs. These pressures are driving India’s new protectionism, just as they have done in the United States. Optimists hope the new import tariffs are only temporary. The risk is that the new protectionism will get entrenched and reverse the major gains India has made since economic reforms began in 1991.

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U.S.-U.K. Think Tanks Collaborate to Produce the Ideal Free Trade Agreement

The Cato Institute and the Initiative for Free Trade have combined their expertise to lead a new project articulating the elements of the ideal free trade agreement between the US and the UK…

This week, a collaborative project spearheaded by the Initiative for Free Trade in London and the Cato Institute in Washington, D.C. presents its first fruit. With contributions from policy experts affiliated with 11 U.S. and U.K. think tanks, The Ideal U.S.-U.K. Free Trade Agreement: A Free Trader’s Perspective explains why real free-traders are often skeptical of free trade agreements and includes the proposed text of an agreement that would overcome those concerns. 

The objective of the project culminating in the publication of this collaborative paper is to persuade policymakers and the public in both countries that a comprehensive bilateral trade and investment agreement removing all barriers to trade across all sectors of both economies without exception is in their best interests and to provide the blueprint of an agreement that would be the most liberalizing FTA in the world.

Many good reasons exist to negotiate and conclude a bilateral trade agreement between the United States and the United Kingdom.

One of the best reasons is that it affords two of the world’s largest economies — both deeply committed to the institutions of free-market capitalism and the rule of law — the opportunity to break new ground and pioneer the rules of a genuinely liberalizing 21st-century trade agreement. 

The ideal free trade agreement between the United States and the United Kingdom would create greater prosperity through novel, sensible, transparent rules to eliminate costly barriers to trade, stimulate innovation, encourage competition, provide opportunities for all, and incentivize reform-minded governments around the world to join.

As the Trump Administration wraps up renegotiations of agreements with Korea, Canada, and Mexico, the focus of its trade policy should turn toward achieving freer trade and greater economic integration with the United Kingdom. As the U.K. government prepares to repatriate its authority over trade policymaking for the first time in 45 years, concluding and implementing a free trade agreement with the United States should be among its highest priorities.

In many respects, the U.S. and U.K. economies already benefit from a high level of economic integration. U.S. entities are the largest foreign direct investors in the United Kingdom, and U.K. entities account for the largest share of foreign direct investment in the United States. The value of the cumulative cross-border investment stands at nearly $1.3 trillion today with more than 1.1 million Americans working for British companies in the U.S. and nearly 1.5 million Britons working for U.S. companies in the U.K.

The agreement includes provisions that foreclose governments’ access to discriminatory protectionism and obligate the parties to refrain from backsliding. It achieves maximum market barrier reduction and enables the fullest expressions of market integration, while simultaneously preserving national sovereignty to legislate and regulate in ways that do not discriminate against imported goods, services, or capital.

Among the agreement’s many liberalizing features are provisions that:

• Enshrine the “negative list” approach to liberalization across goods, services, investment, and government procurement, which is conducive to faster, broader, and deeper economic integration
• Eliminate tariffs on nearly all goods upon entry into force
• Permit free movement of British and American workers, conditioned on an offer of employment
• Commit the parties to expedited customs clearance and administrative procedures
• Mutually recognize professional qualifications and licenses
• Mutually recognize the efficacy of conformity assessment, and equivalence provisions, which would allow companies to sell and operate in both markets by satisfying either Parties’ regulations in areas where there is agreement as to the objectives of the regulations
• Are less restrictive on the use of inputs from third countries by lowering “rules of origin” thresholds that must be met to qualify for the agreement’s preferential terms
• Preclude application of anti-dumping measures between the Parties
• Preclude the use of investor-state dispute settlement
• Provide for the accessions to the agreement of other Parties that can demonstrate willingness and capability to meet its market-liberalizing standards

A Change in Trade Relations?

How will President Trump’s meeting with European Commission President Jean-Claude Juncker impact U.S. trade policy?

Yesterday, European Commission President Jean-Claude Juncker met with President Trump at the White House to talk about trade. Afterwards, to the surprise of many (including me), they held a press conference at which they said positive things about the U.S.-EU trade relationship. Then later, President Trump had five positive tweets about the meeting. It was more amicable than anything we’ve seen in U.S. trade policy for many months.

But obviously, positive tweets only get you so far. What does all this mean in terms of substance? That’s hard to say.

While the parties did agree on a couple key points that looks promising — including working towards “zero tariffs, zero non-tariff barriers, and zero subsidies” on non-auto industrial products — it’s not clear how this will develop or if a permanent change in approach is possible. 

Regardless, one day of trade peace is nice after months of harsh rhetoric and escalating tariffs. 

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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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Trump’s Tariff Talk A Key Topic at G7 Summit

President Trump’s ideas on trade often seem paradoxical…

The G7 summit, which groups Canada, the US, the UK, France, Italy, Japan and Germany, was held Canada this past week. As expected, much of the talk was on the Trump administration’s subverting the rules of international trade with a wrecking ball of tariff indiscretions.

As has been the case every day for the past 16+ months, the U.S. and global economies 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.

At the G-7 summit, President Trump floated both abolition of all tariffs worldwide and banning trade with certain countries entirely over the course of just 24 hours.

Unfortunately, rather than seeing free trade as a means of promoting mutually beneficial exchange between buyers and sellers, President Trump thinks of trade as a zero-sum game that sees nations “winning” if they export more than they import.

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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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Is the World Trade OrganizationStill Relevant?

The failure of the last WTO Ministerial Conference in Buenos Aires to produce any new multilateral agreements is the most recent evidence of the organization’s legislative dysfunction and that a new approach to trade liberalization is necessary…

In a new policy paper, James Bacchus, adjunct scholar at Cato’s Herbert A. Stiefel Center for Trade Policy Studies, taps into his unique experiences and expertise as a founding judge and former chairman of the Appellate Body of the World Trade Organization to propose a new roadmap for advancing the international trading system over and around the obstacles that have thwarted progress for many years. His opinion is especially relevant now, given the increasingly precarious state of an institution that has also had to endure rhetorical attacks and subversive actions from the Trump administration.

In the wake of the failure of the Doha Round to produce any sweeping new commitments to liberalization, and in the absence of traditional U.S. leadership on these matters, Bacchus contends that the WTO must get serious very quickly about reestablishing its relevance to the rulemaking process of the global trading system. Trade rules that apply multilaterally and on a non-discriminatory, most-favored-nation basis are essential to the success of the international trading system. Bacchus argues that the current environment has made securing trade deals multilaterally extremely difficult for a variety of reasons, including the fact that at the negotiating table are many more countries at different levels of economic development seeking disparate political and economic outcomes from the process. There is a conflict of objectives and a disparity in the level of ambition among WTO members.

But multilateral agreements based on consensus-driven multilateral negotiations, Bacchus argues, are not the only way to move the global trading system forward. While the WTO holds multilateralism and the principle of non-discrimination as central tenets, the institution still permits—indeed encourages—members to pursue trade liberalization plurilaterally. This tack enables members to experiment with reforms and it helps prevent sclerosis from bogging down the process on account of less ambitious members’ unwillingness to move forward. Nevertheless, this is exactly what has happened and Bacchus writes to remind us of the viable alternatives within the WTO.

The absence of a multilateral outcome in Buenos Aires may have triggered a psychological and tactical shift toward pursuit of plurilateral trade solutions. Digital trade, services trade, fisheries subsidies, environmental goods, investment facilitation, and other issues are all topics immediately ripe for negotiation and agreement. Bacchus concludes that “with many countries turning inward and with many more increasingly weary of endless global trade negotiations that never seem to produce results, plurilateralism may offer the most promising path to multilateralism in the WTO… indeed, for now, it may be the only path.”

By taking a plurilateral approach to multilateralism, the WTO could reinvigorate the trading system while re-establishing its centrality to the process.

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U.S. Sugar’s Dangerous Addiction to Protectionist Policies

The federal government is, in essence, the leader of a nationwide sugar cartel…

The history of the federal government’s sugar program is a prime example of economic central planning in action. Best understood as an involuntary wealth transfer from consumers to producers, the sugar program’s economic cost reaches into the billions of dollars.

For decades, the federal government has been operating a program to control the production and importation of sugar. One of the program’s main purposes is to ensure minimum price levels for sugar that are typically significantly higher than those found on international markets, leading to higher costs for U.S. consumers.

The program’s overriding goals are the provision of a minimum income to sugar producers and a higher price for the product than would otherwise be the case through the use of various measures that restrict supply. This clear gain to producers, however, comes at a notable economic cost both to U.S. consumers and to businesses that use sugar as an ingredient in their products.

The Agriculture and Food Act of 1981  — a series of government imposed mechanisms that sugar prices above those of the international market — is comprised of four key pillars, including price support loans from the U.S. Department of Agriculture, marketing allotments (a limit of how much sugar can be sold), and the Feedstock Flexibility program, which allows the USDA to purchase sugar out of the market. Lastly, and arguably most disruptive, are tariff rate quotas, which limit the amount of raw and refined sugar that is allowed to be imported duty free through preference programs.

These federally mandated rules ensure U.S. businesses that use sugar remain less competitive and U.S. consumers pay more for food products made with domestic sugar.

U.S. sugar policy thus justifiably furthers suspicions among the citizenry that the federal government is more concerned with advancing the narrow interests of well-connected groups such as sugar producers than promoting the country’s general welfare. After all, government market manipulation results in domestic sugar prices twice those of the world sugar market — not to speak of the downstream costs of all the American-made products that rely on sugar.

The U.S. International Trade Commission finds that the removal of import restrictions would produce average annual welfare gains of $342.7 million. Other research indicates that the artificially high cost of U.S. sugar imposes an average burden on consumers of $3.4 billion to $4 billion, and the annual loss of 17,000 to 20,000 jobs in the food industries.

All this raises the question of why such a costly and counterproductive program is kept in place. 

Claims that the program’s demise would result in catastrophic consequences for the industry are to be overstated at best. 

The most common justification is an alleged need for price stability to avoid the boom-and-bust cycle of past years. Additionally, the sugar industry warns that unilaterally disarming sugar supports would result in the U.S. becoming dependent on subsidized foreign suppliers and would prove devastating to the domestic sugar industry. Yet the experience of sugar industries in countries with much more free market approaches like Australia, one of the world’s largest sugar exporters, makes these warnings likely overwrought.

A sane sugar policy by the United States would be no sugar program at all. Sadly, that’s not currently on offer. What is available, however, is legislation that takes a notable step toward a sugar policy oriented to consumers and markets rather than lobbyists and politicians. While not ideal, it is a very real opportunity to pare down a particularly insidious symbol of narrow self-interest triumphing over the common good.

A bipartisan group of lawmakers have begun to notice the sugar program’s myriad pitfalls and have introduced legislation which would be a significant step towards reducing the size and scope of this harmful policy. However, it falls short of dismantling the nationwide sugar cartel for good.

The Sugar Modernization Act of 2017 proposes the sugar program operate on a zero net cost basis to the federal government, the repeal of both marketing allotments and the Feedstock Flexibility program, and to loosen tariff quota rates—a change that would translate into increased imports and lower sugar prices.

While imperfect, the recently introduced legislation would likely curb some of the program’s worst excesses, and could hold the best promise for genuine reform of the deeply flawed and costly U.S. sugar program. Although it falls short of ideal by failing to abolish the program wholesale, this legislation is perhaps the best option for reform in recent memory.

It’s (well past) time to end the U.S. government’s protectionist sugar program. 

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