International Trade Administration
Economists have long understood these benefits, but governments have often interfered with open trading by restricting imports and promoting exports. The International Trade Administration (ITA) engages in both of those activities. It develops "national export strategies" and assists companies selling their products abroad in various ways. The ITA is also tasked with restricting imports under the rubric of ensuring "fair trade." The ITA administers antidumping and countervailing duty laws, which have no economic grounding and are driven by politics.
It is true that leaders of the ITA and the Department of Commerce often play positive roles by promoting the general benefits of trade. However, many ITA activities echo the failed policy of mercantilism, which economist Adam Smith tried to vanquish more than 200 years ago. The ITA often seems to confuse free trade with "fair trade," which is a code word for protectionism. Under the bold headline "Ensuring Fair Trade," the ITA website states:
According to a University of Michigan study, the average U.S. family of four still stands to gain an estimated $7,800 per year if there was total elimination of global barriers to trade in goods and services. The World Bank has reported that the elimination of global trade barriers could lift 300-500 million of the world's poor out of poverty over the next 15 years.1Yet those are the advantages of free trade, not "fair trade"! The frequent use of the phrase "fair trade" in ITA publications and on the ITA website would make Adam Smith cringe.
The origins of ITA can be traced to 1820 when the Department of Treasury began collecting data on America's foreign commerce.2 In 1842, the Department of State began collecting data on foreign trade regulations and related information. The collection of economic data by Treasury and State was expanded in subsequent decades, and ultimately moved to the Bureau of Statistics in the new Department of Commerce and Labor in 1903.
In 1912, the Bureau of Statistics was combined with the Bureau of Manufactures to form a new Bureau of Foreign and Domestic Commerce. This bureau would later become ITA, and was the source of ITA's export promotion activities. Initially, it had 14 commercial attaches abroad and a network of domestic district offices to help exporters.
By 1932, the bureau had 73 commercial attaches in Europe and perhaps 100 others scattered around the world.3 But, interestingly, newly elected President Franklin Roosevelt slashed the bureau's budget and closed 31 foreign and domestic offices.4 Senators sympathetic to the New Deal proposed that Congress "consider the advisability of abolishing the Department of Commerce and the transfer of its indispensible services to other agencies."5 But Commerce survived, and today ITA has about 240 offices around the world and 2,200 persons posted abroad.6
The import protection side of ITA had its origins in the Antidumping Acts of 1916 and 1921.7 Those laws were originally administered by the Department of Treasury, but Treasury began sharing the duties with the Tariff Commission (now the International Trade Commission) in 1954. Due to congressional concerns that Treasury was too lenient in administering the laws, Treasury's tasks were moved to the new ITA in 1980. It turned out that Congress was correct that ITA would be more protectionist than Treasury — research has found that the number of rulings in favor of imposing antidumping duties went up significantly after 1980.8
As an aside, note that many damaging federal activities, such as ITA's activities, began with the collection of detailed economic data. When policymakers start amassing data, they start believing that they can control society with top-down planning. President Theodore Roosevelt supported the creation of the Department of Commerce partly because he wanted a source of detailed business information in order to impose his pro-regulation agenda.9 Or consider that a 1929 article in the department's flagship publication noted widespread agreement that the increased use of economic data by federal policymakers may soon end the business cycle.10
The government should not try to micromanage the nation's international trade and commerce. The ITA should be eliminated to save taxpayers about $370 million a year.11 ITA's import-blocking activities are damaging to the economy, and its export promotion activities are both unneeded and susceptible to corruption, as discussed below.
Restricting Imports
The ITA administers various protectionist measures to respond to "unfair" trading by foreign countries and businesses. It handles the licensing of steel imports and the enforcing of import barriers on textile manufacturers. However, ITA's primary protectionist activity is administering the antidumping and countervailing duty laws.U.S. antidumping law may authorize the imposition of duties on imported goods after reviews by the ITA and the U.S. International Trade Commission (ITC). The ITA must determine if a good is priced below similar goods in the home market or below the cost of production. That might sound straightforward, but there is no accurate way to do such price comparisons in the real world. If the ITA determines that dumping has occurred, the ITC examines whether a U.S. industry has been "materially injured" by the import. If it answers affirmatively, the good in question is subject to U.S. import duties.
The ITA also administers the countervailing duty laws. These laws require that the ITA determine if an imported product is priced at less than "fair" value as a result of the goods being subsidized by a foreign government. If it finds in the affirmative, the ITC then determines whether U.S. businesses have been injured by the import, and if so, duties are assessed.
The premise of these laws is that low-price imports are damaging to America. But low prices benefit both U.S. consumers and U.S. businesses that use imported products. If duties are slapped on imports of steel, for example, steel-using businesses such as automobile firms would suffer. The ITA does not factor in such broader damage when considering antidumping and countervailing duty cases.
ITA investigations are biased in favor of domestic industries that bring complaints.12 One reason for that is the lack of transparency in the agency's decision-making process. Cato scholars Brink Lindsey and Dan Ikenson argue: "Antidumping law is notoriously complicated, and its inner workings are known only to a select handful of users, targets, bureaucrats, and lawyers. As a result, most supporters of the law simply take its appealing rhetoric at face value."13
The antidumping and countervailing duty machinery is politically driven. U.S. industries can petition the ITA to conduct investigations on foreign goods that they object to, essentially using government power to attack their competitors. Not surprisingly, a 2004 study found strong correlations between political contributions made by firms seeking protection and antidumping outcomes in their favor:
The data demonstrate an unmistakable pattern across different types of political spending that the winners of antidumping cases tend to outspend the losers. Furthermore, the results indicate that industries that are located in more oversight committee members' districts or states enjoy a greater probability of favorable treatment from these regulatory agencies. Systematic analysis of policy outcomes suggests that, even when controlling for economic hardship, the more money that firms and associations that favor protection spend, and the more favorable the patterns of congressional representation, the more likely is it that they will enjoy an affirmative decision.14The mere initiation of an antidumping complaint has been found to cause prices of imported goods to rise. One reason is that the antidumping rules foster business collusion:
Antidumping petitions may be used by domestic industries to threaten and induce foreign industries into an arrangement. The threat is credible because if an agreement is not achieved, the investigation proceeds and duties are levied in case of an affirmative decision. Therefore, the antidumping law not only facilitates collusion at a domestic level by inducing domestic producers to coordinate, but enhances collusion at an international level.15Adam Smith famously warned about collusion: "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices."16 But Smith goes on to note that the government can make the problem worse:
It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary.17One particularly corrupting aspect of the antidumping rules was the "Byrd Amendment," which was slipped into a 2000 bill by Senator Robert Byrd (D-WV). Prior to the Byrd Amendment, the revenues generated by antidumping and countervailing duties went to the U.S. Treasury. The Byrd Amendment redirected the proceeds to the industries that petitioned the government for protection, which greatly increased the potential gains for companies bringing complaints against imports.18
In 2003, the World Trade Organization ruled against the Byrd Amendment, and that ruling allowed other countries to retaliate against the United States. By 2005, the European Union, Canada, Mexico, and Japan had all imposed retaliatory duties, which damaged the U.S. economy. The Byrd Amendment was repealed in 2006, but some U.S. policymakers want to resurrect the damaging rules.19
Suppose that antidumping laws made sense in theory and were not distorted by politics. There would still be the problem that the government does not have enough information to execute the laws in a scientific manner. Antidumping cases are supposed to rely on a sophisticated analysis of foreign prices, production costs, and other data to determine whether products are being dumped. But accurate information is usually not available, with the result that ITA bureaucrats essentially just make the data up in many cases.20 As a result, the laws often end up punishing normal competitive businesses practices.21
The government's math in some antidumping cases is remarkably convoluted, as a shrimp dumping case in 2004 illustrated. The ITA concluded that Asian shrimp exporters were dumping their product on the U.S. market, but their calculations were "hocus-pocus" as one commentator noted.22 Imported shrimp were cheaper than U.S. shrimp, but that was because foreign companies had moved toward low-cost shrimp farming methods and U.S. producers had not.
Imported shrimp were slapped with duties to the detriment of U.S. consumers and the restaurant industry. The winners included lawyers and lobbyists. Shrimp exporters in one country, Vietnam, paid $2 million in lawyer fees to defend themselves.23 The state of Louisiana spent $350,000 on lobbyists to push for the duties.24 And the Wall Street Journal reported: "To pay their huge legal bills in the shrimp-dumping case, U.S. shrimpers in eight Southeastern states received cash from their Mexican competitors — who were then not targeted in the dumping case — as well as from a U.S. congressional fund meant to rehabilitate the industry."25
The shrimp dispute, however, is minor league compared to the dumping battle over Canadian softwood lumber, which has raged for more than 25 years. In 1982, U.S. lumber producers complained that the Canadian provinces subsidized their lumber industry by charging less than market value for trees harvested. Canadian producers contended that their mills were more efficient than those of U.S. producers. Canadian lumber is a very important input to the U.S. housing industry.
The long dispute has gone through numerous phases, and it is still not fully resolved. The ITA and the U.S. government have imposed various levels of penalty on Canadian lumber imports since 1986. In the 1990s, the newly created dispute panel under the North American Free Trade Agreement was placed at the center of the dispute. Over the years the panel has repeatedly sided with Canada, as has the World Trade Organization, but U.S. politicians have fought vigorously against accepting international trade rulings.
The battle is very complex with disputes over the details of duty calculations, the legal authority of the NAFTA panel, and other items. In 2006, a seven-year deal was reached to repeal U.S. duties, but to replace them with export taxes in Canada if the price of lumber falls below a certain level.
The dispute has been a massively wasteful bureaucratic exercise. An analysis by the Canadian Press found that lawyer fees on just the Canadian side were more than $300 million during 2002 to 2006.26 That included fees to U.S. and Canadian lawyers paid by the Canadian federal and provincial governments and the lumber industry. If the lawyer fees on the U.S. government side of the dispute were similar, the total cost over this period would have been a stunning $600 million.
Some people believe that our large federal government helps average families and those in need. But in this case, the government created a large transfer of wealth to high-income lawyers, while damaging average American families by pushing up the cost of housing and other wood products. One study in 2000 found that softwood lumber import barriers at the time raised the price of U.S. lumber by 15 to 25 percent and pushed up the cost of new homes by up to $1,300.27
A final troubling aspect of U.S. antidumping laws is that other countries have followed America's bad example and created antidumping laws of their own. U.S. exporters are being injured by an increased use of those measures by foreign governments. American use of antidumping rules has set off a global explosion in copycat laws. According to Lindsey and Ikenson, "Antidumping is contagious. If one country uses antidumping forcefully, it creates pressure from affected industries in other countries for similar measures at home."28
Promoting Exports
The Department of Commerce has been supporting and subsidizing exporting businesses for about a century. Today, most export promotion activities take place through the U.S. and Foreign Commercial Service, which had a budget of $237 million in 2008.29 The FCS conducts market research, hosts trade shows, provides export counseling, and tries to help companies win foreign contracts. It has 108 domestic and 150 foreign offices.There are numerous problems with government export promotion. First, the activities are an unneeded taxpayer expense given that most U.S. exporters are successful without government help. Second, if producers are successful in foreign markets, they earn profits that they can keep. Why should taxpayers help private companies earn higher profits? The government generally doesn't intervene to help purely domestic firms earn higher profits, so why should it help exporting firms earn higher profits?
Third, export promotion is based on the mistaken mercantilist idea that national greatness comes from maximizing exports. In reality, both the expansion of exports and imports under free trade are important sources of economic growth. That is because voluntary market transactions are mutually beneficial, meaning that they expand the utility or well-being of all participants. That economic principle is true whether transactions are domestic or international.
However, let's suppose that it made sense for the government to promote exports. Is the ITA any good at it? The evidence indicates that the ITA's efforts are marginal at best. For example, the Office of Management and Budget gave the Foreign and Commercial Service a fairly low rating of "adequate" on its performance in 2007.30 It makes little sense that career bureaucrats could provide essential help to exporters. For one thing, civil service turnover is extremely low, which suggests that few ITA workers have had much real-world business experience.31
Another problem is that export promotion suffers from excess bureaucracy. The federal government has activities for export promotion in a dozen or more different agencies.32 To try and get this overlap and sprawl under control, Congress created the Trade Promotion Coordinating Committee in 1992, chaired by Commerce. The TPCC is supposed to "develop a comprehensive plan for implementing strategic priorities," and it publishes an annual National Export Strategy.33
The GAO has found that TPCC's efforts are lacking.34 So has the Inspector General for Commerce, who was critical of ITA's lead role in drafting the National Export Strategy:
We found the strategy document lacks clear and measurable export-related goals, does not align export promotion goals with the strategic planning processes of its member agencies, and does not clearly track agencies' actual progress towards those goals.35How could the government create some kind of coherent "national strategy" for America's 25 million businesses? All these businesses have their own unique issues that are constantly evolving as the global economy changes. This brings to mind the ideas of economist F.A. Hayek, who examined the folly of governments trying to substitute their plans for the diverse actions of individuals in the marketplace.
A final problem with federal export promotion is that it has encouraged state governments to partake in similar activities. Indeed, the 2008 National Export Strategy urges state and local governments to get more involved in export promotion.36 But rather than more government intervention, the American economy would do best if policymakers focused on creating a good basic environment for entrepreneurship and growth. If governments get their basic tax and regulatory structures right, trade and investment will take care of themselves.
Commerce and Corruption
The export promotion activities of the Department of Commerce have a dark side. They highlight the problem that when governments get involved with businesses, the result is often corruption. The problem was starkly illustrated by the Ron Brown scandals of the 1990s. Brown was head of the Democratic National Committee and a top campaign fundraiser when President Bill Clinton named him Secretary of Commerce in 1993. Brown's tenure was marred by scandals related to the use of export promotion activities as a fund-raising tool for the Democratic Party.The Boston Globe conducted an investigation of the matter and concluded that "coveted slots on U.S. foreign trade missions generated a major fund-raising bonanza for the Democratic Party during President Clinton's first term."37 As the Clinton administration figured out the fund-raising value of trade missions, the Department of Commerce "dramatically increased its roster for overseas travel."38 Top business executives were expected to pony up to get a seat on the plane with Brown on one of his many foreign missions. Senator Edward Kennedy (D-MA) got into the action by urging that certain business leaders be taken on trips, and he cited their support of the Democratic Party in letters to Brown.39
Business leaders who played the game and made campaign contributions not only got taken on trade missions, but were also rewarded with loans from the federal Overseas Private Investment Corporation. The Boston Globe found a "massive amount of OPIC support given to companies that traveled with Brown and donated to the Democrats."40 Conveniently, one of Brown's top lieutenants at Commerce also served on the board of directors of OPIC.
Ron Brown died in a plane crash in April 1996 in Bosnia while on a trade mission, but investigations into his dealings continued for years afterword. In 1998, U.S. District Judge Royce Lamberth determined that Commerce officials systematically concealed and destroyed documents relating to the trade mission scandal.41 He compared the behavior of Commerce officials to that of "con artists" and "scofflaws," pointing to the "flurry of document shredding in the Secretary's office" after Brown died.42
The triumph of politics over policy was not surprising given that "Brown's Commerce Department was staffed at its senior levels with former Democratic National Committee officials."43 For example, a top party fundraiser, John Huang, was deputy assistant secretary at Commerce under Brown. As far back as 1991, Huang was helping Brown raise money for the Democrats when he was employed by the Indonesian firm, the Lippo Group.44 In 1999, Huang plead guilty to campaign fundraising violations.45 He received a high security clearance at Commerce in a suspicious manner, and he received dozens of classified briefings. At the same time, he was keeping close contact with foreign governments and business interests, for example making more than 400 phone calls to Lippo from his Commerce office.46
Other Democratic fundraisers included the Lums of Oklahoma, who wanted favors from Commerce for their various business interests. The Lums paid a large sum to Ron Brown's son to sit on the board of one of their companies, and the Lum's daughter worked for Brown at Commerce. The Lums were convicted of violating both tax and campaign finance laws.
The lesson that should be learned from these scandals is the danger of entangling the government in promoting private business interests, a danger that the Department of Commerce is particularly susceptible to. As the Washington Post noted at the time of the Brown troubles, "complaints about excessive political influence at Commerce are hardly new. The department naturally takes a pro-business point of view in areas it administers — which besides trade promotion include anti-dumping rules and technology grants. This creates numerous opportunities for pandering to specific companies and industries."47
Rather than pandering to companies, the federal government should create a general pro-growth environment so that all companies have an opportunity to thrive. Federal policymakers are rightly concerned about ensuring that American businesses are competitive in the global economy. But the ITA won't solve that problem by trying to manipulate imports and exports. Blocking imports harms U.S. industries that rely on imports, and it encourages retaliation from foreign governments. Promoting particular exporting businesses can lead to corruption.
Instead, federal policymakers should tackle America's increasingly hostile tax and regulatory environment. The United States has the world's second-highest corporate tax rate and a rising burden of regulations that puts U.S. companies at a disadvantage.48 Rather than having bureaucracies try to manage trade, policymakers should reduce the burden of government to provide entrepreneurs a better chance to succeed in global markets
No comments:
Post a Comment