CEI Adjunct Fellow Fran Smith talks about the EU-Korea free-trade agreement that takes effect next year, and why the U.S.-Korea FTA stalled, to the economy’s detriment. Fran also talks about NAFTA’s impact on jobs, and why imports are a good thing.
Trade
As the European Union signs a trade pact with South Korea, U.S. manufacturers are calling on policymakers to approve the U.S.-Korea Free Trade Agreement or risk losing a greater share of that lucrative export market to its competitors. U.S. goods producers note that already the EU is ahead of the U.S. in exports to Korea, and the EU trade agreement will heighten that disparity unless the U.S. ratifies its own trade pact:
The European Union (EU) will implement its FTA with Korea early next year. As a result, European manufacturers will see tariffs removed on nearly every product they export to Korea – while American manufacturers continue to face tariffs averaging nearly 12 percent. This will be a significant blow to American manufacturers — one that we can ill-afford in this economic climate. This is not an idle threat – the EU is not only a significant competitor to the United States in manufactured goods exports to Korea, they are actually ahead of us. (See chart.) With this FTA, they will reap the benefits of zero tariffs, stronger protection for investments, and the removal of myriad non-tariff barriers.
President Obama has promised to push for the U.S.-Korea FTA in mid-November. With all the talk about doubling exports in 5 years, the Korea trade pact should be on the top of his action list.
With so much focus on “unfair” trade vis-à-vis U.S. trade partners, especially China, it’s sometimes sobering to look at protectionist U.S. policies that restrict imported goods and services by slapping them with high tariffs. The Business Insider provides a good start in its focus on 25 imported products that have the biggest U.S. tariffs. Take a look at the highlighted tariffs that range from 20 percent on some dairy products to 37.5 percent for leather shoes, then 163.8 percent on unshelled peanuts up to a whopping 350 percent for imported tobacco.
But what do these tariffs mean for consumers? Obviously, they raise their costs. Ed Gresser of the Progressive Policy Institute has written extensively on how U.S. tariffs are really regressive — they hurt the poor the most by increasing the costs of needed goods, such as shoes and clothes. Here’s what Gresser says:
Though the tariff system is smaller than other taxes, it is far more regressive. This is because poor people spend a greater share of their income on clothes and shoes than do wealthy or middle-class people. The cheap and simple goods made in poor countries and bought by low-income Americans are subject to far higher tariffs than luxury goods. An acrylic sweater attracts a 32 percent tariff, while a cashmere sweater gets only 4 percent; a polyester bra is tagged with a 17 percent tariff, while one made of silk gets less than three percent; and a cheap stainless steel fork is hit with a 19 percent tariff, while a silver-plated spoon has none at all.
Since the Business Insider feature only looked at tariffs, it missed some of the most egregious protectionist programs in the U.S. — the U.S. sugar program that guarantees sugar producers a certain price by restricting domestic supply as well as sugar imports. Or take the U.S. cotton program that subsidizes a small number of cotton producers at taxpayer expense and makes it uncompetitive for many poor countries to export their cotton to the U.S. As with these and other protectionist policies, they generally help a small group of producers by restricting competition, but the costs are borne by consumers in terms of fewer choices and higher prices.
No wonder people are confused about the trade issue when they read mercantilist articles like the front-pager by Howard Schneider in the Washington Post today – “Economic growth slowed by trade gap.”
According to this article’s premise, it sounds like we would all be better off if we just exported and didn’t import any goods and services. Here’s the article’s lead sentence:
A widening U.S. trade deficit has become a substantial drag on economic growth as the country’s exports struggle to keep pace with the swelling sums that Americans are again spending on imported goods.
And then it goes on to say:
But the spike does raise fresh concerns about whether some of the same factors that led to the economic crisis, including U.S. overconsumption, are beginning to reemerge. The yawning deficit may also prove frustrating for the Obama administration as it seeks to create jobs by boosting U.S. exports.
But what about choices? Does the U.S. produce everything we consumers – and producers — want and need at prices we can afford? Of course not. And therein lies the confusion, as with this assertion:
At a basic level, trade deficits represent a loss of wealth for a country – money flowing abroad for goods and services produced elsewhere, supporting businesses and workers in other countries.
I would offer that the lack of imports would also “represent a loss of wealth” for consumers and producers.
Cato’s Dan Griswold points out a major oversight of the Post writer – he ignores the fact that many of those “overconsumed” imports actually provide inputs for producers to use to produce goods for export!
That view neglects the supply-side role of imports. More than half of what we import consists of goods consumed by producers-capital machinery, raw materials, parts and other intermediate inputs. Those imports help us produce more, not less. The Keynesian view also confuses cause and effect: Imports usually grow in response to RISING domestic demand. Consumers more eager to spend “swelling sums” on imports typically buy more domestically produced goods as well.
Imports, when they represent less expensive alternatives, also may put more discretionary funds in the hands of consumers to purchase other goods or services, to save, or to invest.
Maybe some Post editor noticed some of the problems with that article – a different trade article with a coauthor is on the front page of the online edition.
Economic reality is beginning to take the place of anti-trade rhetoric on the U.S.-South Korea Free Trade Agreement, which has been on hold since it was signed three years ago. Today, the Wall Street Journal reported that President Obama has said he will resolve issues relating to beef and autos for the November G-20 meeting in Seoul and then push for ratification of the FTA soon after.
According to the U.S. Trade Representative, that would be good news for the still-faltering economy. It is estimated that Korea under the FTA would be reducing tariffs and quotas on goods and services, with goods alone adding “$10 billion to $12 billion to annual U.S. Gross Domestic Product and around $10 billion to annual merchandise exports to Korea.”
The pressure is on from other countries pursuing trade agreements with Korea. Last fall the European Union and Korea signed a trade pact, which has to be voted on by Members of the European Parliament. Canada too has a pending trade agreement with Korea.
Check out CEI’s Issue Analysis on why the U.S. should move ahead on the FTA.
Sometimes, the fastest, most effective way to explain economics is to tell a story. One of the best-done examples is in Steven Landsburg’s book The Armchair Economist, where he tells David Friedman’s “Iowa Car Crop” story to get readers to think about trade (see pp. 197-99).
[T]here are two technologies for producing automobiles in America. One is to manufacture them in Detroit, and the other is to grow them in Iowa.
Okay… how does that work?
First you plant seeds, which are the raw material from which automobiles are constructed. You wait a few months until wheat appears. Then you harvest the wheat, load it onto ships, and sail the ships eastward into the Pacific Ocean. After a few months, the ships reappear with Toyotas on them.
Sounds almost magical. But it happens millions of times every day. The lesson is that trade is about specialization. A farmer doesn’t know how to build a car. But he can still have one by sticking to his specialty–growing wheat. He can trade his surplus to other people who do nothing but specialize in building cars.
This cuts both ways. Most factory workers don’t know a thing about farming. But by concentrating on building cars, they eat far better than if they grew their own wheat. The nature of trade is that everyone wins when they specialize. The only limit on specialization is the size of the market.
Restrictions on trade–tariffs, quotas, antidumping duties–shrink that market. And by shrinking the market, they limit specialization, which is the source of all prosperity. It’s good to grow cars in Iowa.
The lesson doesn’t apply to just wheat and cars. It applies to everything. Tom Palmer from the Atlas Economic Research Foundation makes that clear as day in this excellent video. If you want to learn the meaning of free trade in under three minutes, this is as good as it gets.
Legislators in Maryland have disappointed the state’s wine lovers yet again by failing to pass a bill that would have allowed residents to receive wine via the mail. Sadly, the bill gained a sizable majority of the members (12-8) in the House Economic Matters Committee, but it was just shy of the 13 votes required (a majority of committee’s 26 members) before it could go for a full House vote. According to a memo produced by Marylanders for Better Wine and Beer Laws posted by wine writer Rob Garretson, three members were excused from voting, one because of religious views regarding alcohol and two others for unknown reasons. Something seems fishy here.
Staff at Marylanders for Better Wine and Beer Laws are optimistic that the state could open in 2011. This year, the legislature passed Maryland Winery Modernization Act, which Marylanders for Better Wine Laws says reduces regulation on Maryland wineries and allows wineries to open for the first time in Prince George’s County. In addition, the new law funded a study that could help build the case for direct shipping.
Nonetheless, such trade restrictions are just one problem with the prohibition-inspired, state-level regulatory morass. Some states have opened up, but problems abound. Even where shipping is allowed, myriad regulations and taxes needlessly burden consumers. The advocates of regulation make a host of arguments, some of which are quite similar to those made by the temperance movement to advance prohibition. Surely, responsible alcohol use is in order, but government bans and regulations are not necessary to protect us from ourselves. And the massive regulatory bureaucracy is not necessary to ensure simple ID checks to protect children. Instead, it largely serves politically organized players and government budgets.
The federal government is loosening its restrictions on importing pork rinds from Brazil. Rudolph Foods, Inc., an Ohio company, owns a factory in Brazil, and stands to benefit from the ruling.
Competitors are up in arms. Citing exotic illnesses like foot-and-mouth disease, one competitor told The Wall Street Journal, “It just takes one pig” that is infected to spread a disease… “The risk is low, but the consequences are really high.”
If that is his strongest argument, then the case against liberalization is as weak as it gets. Instead of using the power of government to hobble its rivals, this company should go out and improve its product. Make its pork rind recipe even tastier. And cheaper. Use the import liberalization to its own advantage if possible.
Haggis is the national dish of Scotland. It has also been banned in the United States since 1989. Some of its ingredients are illegal for humans to consume in the U.S.
I won’t list what those ingredients are; they’re a bit hard to stomach (that would also be one of the ingredients). But having tried a small amount of haggis while in Scotland, I can testify that it doesn’t taste as bad as it sounds.
Fortunately, the haggis ban may soon be reversed. There has been no evidence of harm from eating offal ingredients. People have been eating haggis for centuries and been just fine. American shores may soon be teeming with the latest Scottish culinary innovations, including haggis nachos and haggis pizza.
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