Did you know that you can’t dump a service?

The Supreme Court said Monday it will rule on a case that could make it harder for U.S. companies to obtain protective tariffs on low-priced foreign goods.

The dispute centers on whether uranium that U.S. utilities send to France for enrichment and then import for use in nuclear power plants qualifies as a ‘good’ or ‘service.’ The question is critical because only manufactured goods, not services, are subject to U.S. laws that can add punitive tariffs to cheap imports.

New evidence isn’t friendly to Grossman & Helpman’s “Protection for Sale” (AER, 1994):

Unlike existing methods in the literature, our approach does not require any data on political organizations. We formally show that the PFS model predicts that the quantile regression of the protection measure on the inverse import penetration ratio divided by the import demand elasticity, should yield a positive coefficient for quantiles close to one. We test this prediction using the data from Gawande and Bandyopadhyay (2000). The results do not provide any evidence favoring the PFS model.

That’s Susumu Imai, Hajime Katayama, and Kala Krishna in NBER WP 13900. They argue that the past literature testing PFS doesn’t cut it:

In sum, we argue that if we are to structurally estimate the PFS model using the data used by Goldberg and Maggi (1999) and Gawande and Bandyopadhyay (2000), we should not use an arbitrary classification scheme along with the campaign contributions to generate political organization dummies. The structural estimation and testing of the PFS model would require treatment of the political organization dummies to be fully consistent with the prediction of the
PFS model. To our knowledge, this has not been done in the literature.

Of course, the old literature on testing the PFS model of trade protection produced the (puzzling) result that governments cared much more about consumer welfare than contributions. But this attack on the relationship between protection, demand elasticity, and import penetration is even more fundamental.

Robert Lighthizer’s protectionist NYT oped was so bad that I don’t mind piling on a week later. Here are two letters from professors of economics.

First, Dartmouth’s Doug Irwin writes:

Robert Lighthizer’s “Grand Old Protectionists” (March 6) is riddled with distortions and errors that one hopes is not representative of all trade lawyers who represent special interests seeking protection. Let’s just take two claims: first, that “free traders . . . . allow no room for practicality, nuance or flexibility. . . even when it means bowing to the whims of anti-American bureaucrats at the World Trade Organization.” The WTO agreements were largely written by the United States, are riddled with exceptions and escape clauses, and there is no evidence that the dispute settlement system is biased. The United States wins just about every case it brings before the body, just as other countries tend to win cases brought against the United States – simply because countries only bother to bring strong cases to the WTO. Second, Lighthizer argues that temporary import protection during the Reagan administration, such as that granted to Harley-Davidson, “worked.” In fact, Japanese firms already produced heavyweight motorcycles like Harley’s in the United States. And the import quota on 700cc and above motorcycles was completely evaded by Japanese exporters when they started producing a 699cc version that was not affected by the trade restriction. The recovery from the 1981-82 recession, not trade protection, allowed Harley to rebound.

Douglas Irwin
Hanover, NH

George Mason’s Don Boudreaux writes:

Among Robert Lighthizer’s objections to principled free-traders is their opposition to protectionism “no matter how many jobs are lost” (“Grand Old Protectionists,” March 6).

If Mr. Lighthizer is referring to overall employment, his facts are wrong. Free trade does not reduce net employment. But perhaps he’s talking about specific jobs, such as those lost in Carolina textile mills when Americans buy more textiles from abroad. The argument seems to be that practical statecraft often justifies protecting such jobs even if doing so prevents the creation of other jobs in their place. If this is Mr. Lighthizer’s point, he’s too modest when calling for trade policies that allow for “practicality, nuance or flexibility.” Because technology destroys far more jobs than does trade, Mr. Lighthizer should endorse also a “pragmatic” approach to innovation – empowering government with the flexibly and nuance to block firms’ introduction of efficiency-enhancing production techniques that displace workers. Surely, according to Mr. Lighthizer’s practical logic, we must reject the “dogma” that tolerates “unbridled” improvements in firms’ operating efficiencies.

Sincerely,
Donald J. Boudreaux

For more criticisms see here and here. The only person I could find applauding the op-ed was “The National Conservative.”

(This post is the first in a week because I am on holiday. Posting will continue to be light for the next two weeks.)

Barack Obama’s plan to give tax breaks to companies that don’t decrease their American to foreign employment ratio is “remarkably stupid,” says Clive Crook. Democratic economists tend to agree.

Barack Obama’s plan to give tax breaks to companies that don’t decrease their American to foreign employment ratio is “remarkably stupid,” says Clive Crook. Democratic economists tend to agree.

NAFTA prevails:

The sugar industry announced Friday it was abandoning efforts to insert a provision in the federal farm bill that would renew restrictions on the sugar trade between the United States and Mexico.

The decision came in the face of staunch opposition from the Bush administration, the corn sweetener industry and industrial sugar users.

Nothing surprising here, but it’s worth keeping an eye on protectionism. Cato’s Dan Griswold summarizes the Bush administration’s latest protectionist indulgences:

Under a provision of the Central American Free Trade Agreement approved by Congress in 2005, the Bush administration is weighing whether to impose special duties on socks imported from Honduras. According to today’s Wall Street Journal, the move would placate a particular lawmaker in Alabama with several sock factories in his district and a few other, mostly southern lawmakers whose votes may be necessary for upcoming trade deals the administration wants.

Has U.S. trade policy come to this? For the sake of a domestic sock industry that, by its own count, employs only 20,000 workers, the U.S. government would impose a temporary 13.5 percent tariff on the 8.3 percent of imported socks that come from the small neighboring democracy of Honduras—a country that entered into a free trade agreement with the United States only two years ago.

Promising lede from Bloomberg:

Mexico and the U.S. are about to eliminate the last tariffs on goods they trade, prompting opposition by lawmakers and farmers in both countries who anticipate a flood of cheap imports.

In Mexico, farmers plan nationwide protests over what will be the final step in implementing the North American Free Trade Agreement on Jan. 1 and eliminating tariffs on American-grown beans and corn. The U.S. will drop tariffs on flip-flops, glassware and sugar, the most price-sensitive import.

“Back in 1993 when Nafta was negotiated, 15 years was a lifetime away,” said Daniel Erikson, a senior associate at the non-partisan Inter-American Dialogue in Washington. “But now this is really affecting the most sensitive products.”

Disappointing details:

Trade groups representing food makers and the Bush administration are among those who warn that unlimited sugar imports from Mexico could force the U.S. government to pay as much as $3 billion in loans over 10 years as prices fall.

Still, the imports could be checked given that Mexican prices for sugar have stayed above those in the U.S. for much of the last seven years.

“This is not just a threat to American sugar producers,” said Jack Roney, director of policy analysis with the Washington-based American Sugar Alliance. “There’s also an opportunity for us to actually export to Mexico.”

At the urging of Roney’s group, Congress adopted a measure opposed by Bush to force the U.S. to buy any surplus sugar and use it to make ethanol.

If the United States government is committed to providing expensive bailouts, then reducing tariffs and quotas isn’t much of an improvement.

Paul Krugman calls for a bit of respect:

I am arguing for an end to the finger-wagging, the accusation either of not understanding economics or of kowtowing to special interests that tends to be the editorial response to politicians who express skepticism about the benefits of free-trade agreements.

It’s often claimed that limits on trade benefit only a small number of Americans, while hurting the vast majority. That’s still true of things like the import quota on sugar. But when it comes to manufactured goods, it’s at least arguable that the reverse is true. The highly educated workers who clearly benefit from growing trade with third-world economies are a minority, greatly outnumbered by those who probably lose.

As I said, I’m not a protectionist. For the sake of the world as a whole, I hope that we respond to the trouble with trade not by shutting trade down, but by doing things like strengthening the social safety net. But those who are worried about trade have a point, and deserve some respect.