Trade Protectionism at the Worst Economic Time

Trade Protectionism at the Worst Economic Time

SEPTEMBER 24, 2009

"What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom.  If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage...In every country, it always is and must be the interest of the great body of the people to buy whatever they want of those who sell it cheapest.  The proposition is so very manifest, that is seems ridiculous to take any pains to prove it; nor could it ever have been called in question, had not the interested sophistry of merchants and manufacturers confounded the common sense of mankind.  Their interest is, in this respect, directly opposite to that of the great body of the people."

-          Adam Smith, The Wealth of Nations

 

Background

On September 11, 2009, President Obama announced his decision to raise tariffs by 35 percent on imports of Chinese tires.  The next day, China responded by announcing investigations into U.S. poultry exports and reportedly U.S. auto parts exports.  This trade dispute threatens to raise costs for consumers and the Obama Administration's pursuit of a trade policy that benefits trade unions at the expense of national consumers threatens the economy.

Protectionist policies in the U.S. contributed greatly to the Great Depression of the 1930s.  In an attempt to shelter domestic producers against market competition from foreign producers, President Hoover enacted the Smoot-Hawley Tariff Act in 1930, severely restricting trade by raising tariffs on foreign made goods to historic levels.  The results of the policy were disastrous.  The increased tariffs incited retaliatory action by U.S. trading partners in Europe.  Between 1929 and 1932, U.S. exports to Europe fell from $2.34 billion to just $784 million.  The precipitous decline in trade crushed the already hobbled economy and contributed to unemployment skyrocketing from 8.9 percent in 1930 to 24.9 percent in 1933.

As G-20 leaders meet in Pittsburgh this week, the House Republican Conference has compiled a list of trade issues in the 111th Congress on which Congressional Democrats or the Administration has acted in a protectionist manner or has failed to act on market-opening, job-creating initiatives.  While Members may differ on the merits of each, the sum of these decisions reveal the Democrats' clear and increasing bent towards protectionism.

Issues

Chinese Tires:  On September 11, 2009, President Obama imposed a 35 percent tariff on imported Chinese tires.  In response, China challenged the tariffs in the WTO and has announced antidumping proceedings into U.S. poultry and reportedly U.S. auto parts imported into China.  Chinese tires occupy 17 percent of the U.S. market but serve a different segment of the market than tires produced in the United States, which are high-end.  In 2000, Congress passed a law allowing the President to impose tariffs if a surge of imports disrupts a U.S. industry, even if there is no allegation of unfair trading, but also gave the President the authority to decline the tariff increase if the costs of that relief would not be in the national economic interest.  China agreed to this provision while negotiating to join the WTO.  This provision has never been used to impose tariffs before. The United Steelworkers union brought the trade complaint and pressured the White House to impose the sanction.  Not a single U.S. tire producer supported it, and many U.S. tire distributors opposed the action because it would increase prices.  Members may be concerned that the President's decision to impose the tariff will increase U.S. prices without helping the U.S. industry, instead causing an increase in imports from other countries.  In addition, the President's action might encourage other domestic industries to bring similar complaints, increasing prices for U.S. consumers for other vital products.

Pending Free Trade Agreements (FTAs):   Congress has yet to consider legislation to implement three FTAs negotiated and signed by the Bush Administration with Colombia, Panama, and South Korea.   The deals are being held up by Democrats due to the concerns of labor unions and others, despite the fact that they were renegotiated to include binding international labor and environmental standards and other major changes requested by Democrats. 

Opponents of the South Korea agreement, including the U.S. auto industry, argue that the U.S. should return to the negotiating table for a "fairer" agreement.  However, the Administration has declined to take the lead, allowing this agreement to languish.  In the meantime, the EU has concluded negotiations with South Korea on its own agreement, which threatens U.S. competitiveness in South Korea.  If implemented, the U.S. deal would add an estimated $10 billion to $12 billion to GDP, according to the Heritage Foundation.

The Colombia agreement is opposed by domestic trade unions which allege that a history of violence against leaders of Colombian trade unions should disqualify Colombia from further consideration for a trade pact with the U.S.  However, this argument ignores the considerable progress the Colombian government has made in reducing such violence, and the fact that the Colombia FTA itself would improve labor conditions, boost U.S. exports, and solidify market-based democracy and security in Colombia.  It also ignores the foreign policy implications of the agreement as the Colombian government is one of our strongest allies in Latin America.

The Panama FTA is stalled due to Democrat allegations that the country is a haven for tax evaders with insufficient labor laws.  Approving this deal would give U.S. businesses and farmers greater access to the Panamanian market without much cost because most Panamanian goods already enter the U.S. duty-free.

Buy American in "Stimulus":  Congress included a new Buy American requirement in the "stimulus" bill.  The $787 billion stimulus bill generally requires that all of the iron, steel, and other manufactured goods used in the program (including $48 billion for transportation projects) be made in the U.S.  After the House attached this amendment to the stimulus package, and in response to concerns about sending a protectionist message, the Senate amended the bill to specify that these provisions, "shall be applied in a manner consistent with United States obligations under international agreements."  That language remained in the final bill that President Obama signed into law, although many remained concerned that the language still sets a bad example for other countries.  Members may be concerned that credible reports are surfacing that this legislation is causing project delays and costing domestic jobs and sales as U.S. companies and their employees are excluded from projects, particularly at the State and local level, if they source globally.  Many of these delays are on projects that were in the works prior to passage of the "stimulus" bill, resulting in the Buy American provisions having a clogging, rather than priming, effect on the U.S. economy.  Other countries, including Canada and the European Union, have warned of possible retaliation for such "Buy American" provisions.

Climate Tariffs:  The cap-and-tax legislation (H.R. 2454) contained a climate change border measure to which key trading partners have responded that they will not negotiate emissions reductions under threat of unilateral action.  While doing nothing to incentivize foreign nations to cap their own emissions, the bill would instead establish a border adjustment program to require foreign manufacturers and importers to purchase emission allowances to "cover" the carbon emitted in the production of U.S. bound products-an attempt to deal with U.S. manufacturers who find themselves on unequal ground with their foreign counterparts as a result of government-mandated higher energy costs.  Many of these energy-intensive goods and sectors include iron, steel, aluminum, cement, glass, pulp, paper, chemicals, and industrial ceramics.  The cost to foreign producers would be passed on to U.S. consumers.  Not only would domestic products be more expensive, but foreign goods would as well, and it would likely have devastating effects on free trade and foreign relationships. 

Mexican Trucks:  President Obama signed into law on March 11, 2009, the FY2009 omnibus appropriations bill that included a provision to deny access to the U.S. market for Mexican trucking firms in direct contradiction of the terms of NAFTA.  The bill stated that, "None of the funds appropriated or otherwise made available under this Act may be used, directly or indirectly, to establish, implement, continue, promote, or in any way permit a cross-border motor carrier demonstration program to allow Mexican- domiciled motor carriers to operate beyond the commercial zones along the international border between the United States and Mexico."  Mexico subsequently retaliated by increasing tariffs on 90 U.S. products from some 40 cities, including on fruit, wine, and washing machines.  Members may be concerned that ending the NAFTA trucks pilot program immediately sparked an expensive retaliation against U.S. farmers, companies, and their employees.  A U.S. Chamber of Commerce study concluded that the U.S. failure to implement NAFTA's cross-border trucking provisions has resulted in the loss of 25,000 U.S. jobs, $2.2 billion in higher costs for U.S. families and companies, and another $2.6 billion in lost U.S. exports.  

Catfish:  Catfish have been a source of trade dispute for years.  Vietnam is a major exporter of basa catfish.  Vietnamese exports of these fish have recently secured a growing share of the U.S. market.  Over the last 10 years, the U.S. has taken several actions designed to restrict the import of Vietnamese catfish, including the passage of legislation that prohibits referring to basa as catfish in stores and the imposition of antidumping duties on "certain frozen fish fillets from Vietnam," including these fish.  The Vietnamese government argues these U.S. responses to the growth of Vietnam's catfish exports are designed to shelter domestic catfish producers from legitimate competition.  The ongoing tensions around catfish trade were recently heightened with the passage of the 2008 Farm Bill, which transferred regulatory oversight of the import of catfish and "any additional species of farm-raised fish" to the Department of Agriculture to develop regulatory procedures for examining and inspecting imported catfish.  There have been reports that draft USDA regulations may redefine Vietnamese basa fish back to catfish at the request of the U.S. catfish industry, making them subject to the stricter USDA regulations.  In other words, the Vietnamese version will be labeled as catfish if it means more regulatory burden but cannot use that terminology on the grocery shelves, where it could lower the cost of fish for many consumers.

Buy American in the Water Quality Improvement Act of 2009:  On March 12, 2009, the House passed the Water Quality Improvement Act of 2009 (H.R. 1262).  This legislation appropriates over $15 billion over five years for investment projects in improving water quality.  The bill specifies that none of the funds made available by a State water pollution control revolving fund may be used for the construction of treatment works unless the steel, iron, and manufactured goods used in such treatment works are produced in the U.S.  Members may be concerned that this provision may cause U.S. companies to lose eligibility for projects if they source globally and may cause retaliation by trading partners.  The Senate Environmental and Public Works Committee did not include a similar Buy American in its version of the bill, which is awaiting consideration by the full Senate.

Buy American in the 21st Century Green High-Performing Public School Facilities Act:  On May 14, 2009, the House passed the 21st Century Green High-Performing Public School Facilities Act (H.R. 2187).  The bill provides $7 billion in grants to States and local school districts for the improvement of public school facilities.  It requires the use of U.S. iron, steel and manufactured goods in the modernization, renovation and repair of public school facilities.   Members may be concerned that this provision may cause U.S. companies to lose eligibility for projects if they source globally and may cause retaliation by trading partners.

Chinese Poultry Imports:  The FY2009 omnibus appropriations bill also included a ban on the importation of poultry from China.  China is a major market for U.S. poultry producers.  Members may be concerned that the ban has caused China to bring a case against the U.S. through the World Trade Organization (WTO).  Furthermore, this legislative provision was unnecessary, as the U.S. does not import Chinese chicken because of health protections already in place. 

Pakistan and Afghanistan "ROZ":  On June 11, 2009, the House passed H.R. 1886, offering duty-free treatment for certain goods from "Reconstruction Opportunity Zones" in Pakistan.  This section is meant to stimulate economic development in the border region of Pakistan.  However, the bill calls for intrusive, impractical, and arbitrary labor requirements that could exceed U.S. law.  Specifically, this legislation requires the Secretary of Labor to designate any entity to conduct firm-level inspections in Afghanistan and Pakistan to ensure compliance with "core labor standards."  In addition, this provision would have limited, if any, commercial benefit because it limits product eligibility and excludes many of the products which Pakistan actually produces.  Members may be concerned that this legislation creates a bad precedent for labor standards and product carve-outs. 

Expiring Programs for Developing Countries:  Three trade preference programs are scheduled to expire during the 111th Congress.  It is not clear whether the Democrats will seek to add onerous labor requirements when and if they are renewed.

Ø  Andean Trade Promotion and Drug Eradication Act (involving Bolivia, Colombia, Ecuador, and Peru) expires December 31, 2009;

Ø  Caribbean Basin Trade Partnership Act (tariff preferences for eight Caribbean countries) expires September 30, 2010; and the

Ø  Generalized System of Preferences (preferential treatment for 131 developing countries) expires December 31, 2009

Clove Cigarettes:  The recently enacted tobacco bill contains a ban on clove cigarettes, which are imported, but no ban on menthol cigarettes, which are domestically produced.  Indonesia, which manufactures clove cigarettes, has warned that this provision violates U.S. WTO obligations and thus could subject U.S. companies and workers to trade sanctions.  Last year, then-Health and Human Services Secretary Mike Leavitt pointed out that this provision-by prohibiting the sale of clove and other flavored cigarettes manufactured overseas, while permitting the continued sale of menthol cigarettes manufactured in the United States-could violate international trade commitments, potentially sparking trade disputes and retaliatory action during a recession.  "The government of Indonesia has repeatedly objected to the bill on the ground that this disparate treatment is unjustified and incompatible with W.T.O. trade rules," Mr. Leavitt wrote last year.