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December 17, 1999

Tax-Free Online Shopping Should Not Become the Ghost of Christmas Past
Unrestricted Internet taxation would be an unfair extension of state's power

This holiday season, more consumers than ever will shop online, a reality that has prompted many state and local officials to call for broad new taxing authority. But according to a study released today by the Cato Institute, untaxed e-commerce is neither emptying state coffers nor destroying local businesses. In "Tax Bytes: A Primer on the Taxation of Electronic Commerce," trade policy analyst Aaron Lukas argues that as the birthplace of the Internet, the United States has a special role to play in ensuring that revenue-hungry state and national governments do not unjustly kill the goose that may lay the golden egg. "As Supreme Court Chief Justice John Marshall observed, the power to tax is indeed the power to destroy," he writes.

• Lukas finds that sound tax policy should continue, making sure that "states and foreign governments do not unfairly export their tax collection burdens, thereby impeding online commerce." He examines the recent history of both domestic and international e-commerce taxation. Among his findings:
• States do not need the additional revenue. The best estimates show that states "lost" about $170 million in 1998, less than one-tenth of 1 percent of total sales tax revenues. Most states are in fact running large budget surpluses right now.
• Allowing states, or foreign countries, to draft remote sellers as tax collectors violates established principles of due process and sovereignty and undermines beneficial tax competition among governments.
• E-commerce does not represent a serious threat to most traditional retailers. "Only 10 percent of American households have ever made an online purchase. And of that group, only 4 percent make more than 10 purchases a year."
• U.S. policymakers should remain alert to the privacy implications of any proposed changes to the international tax regime, as well as attempts by foreign governments to block the implementation of new technologies, like electronic cash, rather than deal with their evolving tax consequences.

Lukas reviews specific alternatives to traditional tax structures that would resolve the current problems raised by remote electronic commerce, but he concludes that the best answer lies in more responsible fiscal policy by both state and international governments. "The best course of action is for governments to embrace lower spending, if not in absolute terms, then as a decreasing share of the overall economic pie." Domestically, Lukas advocates the congressional establishment of a uniform national jurisdictional standard under which states may only tax companies that have a "substantial physical presence" in the state. Internationally, the United States should continue to stand up for important principles such as tax competition and aggressively pursue an Internet free-trade agreement in the WTO.

Trade Policy Analysis no. 9

November 4, 1999

WTO can advance benefits of free trade only with clear, concise agenda
Paper suggests fundamental change, specific reforms and areas to avoid for Seattle round

Supporters of free trade should abandon the "reciprocity" model of negotiations that treats trade barriers as valuable "bargaining chips" and instead pursue a course of "coordinated unilateralism," in which the benefits of open markets at home and abroad are clearly recognized, according to a new study released today by the Cato Institute.

In "Seattle and Beyond: A WTO Agenda for the New Millennium," authors Brink Lindsey, director of Cato's Center for Trade Policy Studies; Daniel Griswold, associate director of the center; Mark Groombridge, research fellow; and Aaron Lukas, trade policy analyst, argue that the new WTO round should be seen as a "bottom-up process in which countries liberalize, not merely to gain 'concessions' from other countries, but primarily to reap the economic rewards of their own liberalization."

Along with this fundamental shift in negotiating strategy, the authors discuss specific reforms in such areas as agriculture, services, nonagricultural tariffs, information technology and e-commerce, antidumping laws, intellectual property, foreign direct investment, labor, environment, and competition policy. Most notably, they argue for a dramatic change in the dispute settlement process that makes "additional liberalization, not trade sanctions, the chief enforcement mechanism for WTO rulings," adding that, "resort to trade sanctions perverts the dispute settlement into a process of raising trade barriers rather than eliminating them." Other suggested reforms include

• Continuing the reduction of trade barriers in agriculture and services begun in the Uruguay round; systematically reducing tariffs on nonagricultural goods, especially with regard to textiles; and "guaranteeing cyberspace as a duty-free zone."

• Tightening the WTO's antidumping code so that domestic "unfair trade" laws cannot be used as "a tool for protectionism."

• Rejecting enforcement of labor and environmental standards through trade sanctions, relying instead on trade liberalization and economic development to encourage higher standards; eliminating barriers to trade in environmental goods and services; and relying on multilateral environmental agreements and the International Labor Organization to monitor international standards.

Free traders, the authors maintain, "should focus on getting the available gains as quickly as possible and fend off efforts to clog and corrupt the agenda with illiberal initiatives." On this score, they make two important suggestions: "First, the round should have a fixed deadline of no more than three years"; second, "the idea of 'early harvests' of agreements prior to the ultimate deadline deserves support."

Trade Policy Analysis Paper No. 8

September 30, 1999

Imports benefit U.S. workers while posing little risk to job security
Cato study says technology, not imports, accounts for majority of job displacement

For the large majority of American workers, including those in manufacturing, being displaced by a rising tide of imports is a remote possibility, according to a new study released today by the Cato Institute. In Trade, Jobs, and Manufacturing: Why (Almost All) U.S. Workers Should Welcome Imports, author Dan Griswold finds that "the vast majority of Americans work in sectors of the economy that do not face significant import competition."

Griswold, associate director of Cato's Center for Trade Policy Studies, first examines the relationship between international trade and the aggregate number of jobs in U.S. economy since 1980, dispelling the myth that a rising level of imports causes a net decrease in employment. He then focuses on manufacturing--the sector thought to be hardest hit by imports--and measures the number of manufacturing jobs that are in industries in which import competition is significant. No matter the approach, Griswold concludes, "The number of workers who have reason to fear for their jobs because of imports remains relatively small by any measure." Other findings of the study include:

• About 85 percent of America's non-farm workers are employed in services, construction and government--sectors where import competition is minimal.
• Even in manufacturing, import penetration is low in most industries. "Workers in trade-sensitive manufacturing industries account for only 12 percent of total manufacturing workers and less than 2 percent of total non-farm workers."
• Import growth and total U.S. employment are positively correlated. Since 1980, the volume of imports to the United States has tripled while the number of Americans working has increased by 31 million.
• "Technology and other non-trade factors account for most workers displaced from their jobs each year." From 1995 through 1997, "three-quarters of the 8 million Americans displaced from their jobs were in sectors that by their nature are relatively insulated from import competition."

Free trade delivers lower prices and higher real wages to the great majority of American workers. "Presidential and congressional candidates who talk about 'saving jobs' by raising barriers to free trade are really talking about dragging down the real incomes of the vast majority of Americans for the temporary benefit of a small fraction of American workers," Griswold warns.

Trade Policy Briefing Paper No. 6

August 19, 1999

Trade deficit is result of "good things," Cato expert tells congressional commission
Griswold debunks myth that trade deficit reflects poor health of domestic economy

"The biggest threat to our economy is not the deficit itself, but what politicians might do in a misguided mission to shrink it," a Cato Institute expert told the U.S. Trade Deficit Review Commission today--the same day the Commerce Department released the latest deficit statistics. According to Dan Griswold, associate Director of Cato's Center for Trade Policy Studies, the trade deficit is quite misunderstood, for it is "not the cause of bad things in our economy; it is the result of good things, chief among them rising investment."

"The fundamental cause of the trade deficit in the United States today," said Griswold, "is the gap between what we save as a nation and the level of domestic investment. To cover a shortfall of savings, we offer investment opportunities to foreigners, using the surplus of incoming capital to pay for the import of goods and services over and above what we export. The result is a trade deficit." These facts debunk the myth that the trade deficit has to do with weak "competitiveness" or unfair trade barriers abroad. Historical analysis of the last 25 years exposes other facts about the deficit:

• "During years of rising deficits, the growth of real gross domestic product averaged 3.2 percent per year, compared to 2.3 percent during years of shrinking deficits."
  
• "During years of 'worsening' trade deficits, the unemployment rate has, on average fallen by 0.4 percent. During years of 'improving' deficits, the unemployment rate has risen by 0.4 percent."
  
• "During years of rising deficits, manufacturing output grew an average of 4.5 percent a year. During years of shrinking deficits the average growth rate of manufacturing output was 1.4 percent. Years of growing trade deficits saw manufacturing jobs increase by an average of 13,100 workers per year. Years of shrinking deficits were accompanied by an average annual loss of 116,700 jobs."
  
• "In years when the deficit grew, the poverty rate in America fell an average of 0.1 percentage points a year. In years when it shrank, the poverty rate rose by an average of 0.3 points."

The U.S. Trade Deficit Review Commission was created in the Omnibus Appropriations Bill signed into law on October 21, 1998 (19 U.S.C 2213). Its purpose is to "study the nature, causes, and consequences of the United States merchandise trade and current account deficits." It will hold several hearings throughout the nation and will examine and report to the President and appropriate committees of Congress on many issues relating to the trade deficit. Griswold was one of several expert panelists asked to comment on the "Causes of the U.S. Trade Deficit" before the commission.

Trade Deficit Testimony

August 16, 1999

U.S. antidumping law punishes normal behavior, not 'unfair trade,' study says
Methods are odd: government doesn't even try to measure whether prices are below cost

The U.S. antidumping law "all too frequently punishes normal marketplace behavior that has nothing to do with 'unfair trade' under any plausible definition of that term," according to a new study issued today by the Cato Institute. In "The U.S. Antidumping Law: Rhetoric versus Reality," author Brink Lindsey argues that the current law, hailed by its advocates as a bulwark against unfair trade practices abroad, "does not reliably identify either price discrimination or below-cost sales."

Lindsey, director of the Cato Institute's Center for Trade Policy Studies, reviewed all U.S. Department of Commerce final determinations through the end of 1998 in original antidumping investigations initiated since January 1, 1995--a total of 141 company-specific dumping findings in 49 different cases. In addition, for particular companies it was possible to examine highly detailed price and cost data from the confidential case record. Lindsey says that the evidence shows clearly that "there is a disconnect between the rhetoric of antidumping supporters and the reality of antidumping practice." Among his findings:

• "Of the five different calculation methodologies used by the Commerce Department to measure dumping, only one has any relevance to detecting market-distorting price discrimination; only 2 of the 107 affirmative findings reviewed in this study relied exclusively on this methodology."

• "None of the calculation methodologies measures whether sales are below cost; the one that comes closest merely determines whether profits are below an often arbitrary and inflated benchmark."

• "The law lacks any mechanism for determining whether the pricing practices it condemns as unfair have any connection to market-distorting policies abroad."

• "In actual practice, the methods of determining dumping under the law fail, repeatedly and at multiple levels, to distinguish between normal commercial pricing practices and those that reflect government-caused market distortions."

Lindsey proposes specific reforms that would eliminate the worst abuses under the current law. In its present form, however, the antidumping law cannot be justified as ensuring a "level playing field" for American companies and their foreign competitors. "On the contrary," Lindsey concludes, "the law actively discriminates against foreign goods by subjecting them to requirements not applicable to American products."

Trade Policy Analysis no. 7

July 19, 1999

Normal Trade Relations with China too valuable to revoke, experts say
Cato briefing paper outlines the social, economic and political benefits of engagement

China's opening to the West through trade and economic reforms represents "one of the most remarkable changes in history," according to Ned Graham, president of the Christian missionary group East Gates International, and one of several experts whose views appear in a new Cato Institute briefing paper released today. Trade and the Transformation of China: The Case for Normal Trade Relations outlines how U.S. engagement with China has led to immense social, economic and political gains for both countries. Other experts whose views appear in the paper include Robert Kapp, president of the U.S.-China Business Council; the Brookings Institution's Nicholas Lardy; and Daniel Griswold, associate director of Cato's Center for Trade Policy Studies.

Graham focuses on social impact: "Expanding U.S. economic ties with China will continue to benefit religious organizations working in China by encouraging China's adherence to international law and a rules-based trading system, facilitating China's civil society in developing its rule of law and expanding personal freedoms for its population."

According to Griswold, "If Normal Trade Relations with China were to be revoked, the average tariff rate on imports from China would vault from about 4 percent to more than 40 percent. The biggest economic losses would be felt not by the Chinese leadership but millions of typical Americans who would be forced to pay more for daily consumer items. Those Americans would be the first casualties if Normal Trade Relations were severed."

Kapp argues that "thoughtful members of Congress from both parties, after weighing the economic and commercial dimensions of what is at stake here . . . {have concluded that} this is in America's national interest. It's in the interest of our businesses, our producers, our consumers and very heavily in the interest of American agriculture. And we believe that we will see the United States availing itself of these tremendous benefits as China steps into the WTO."

Lardy outlines what he believes to be the steps necessary for China's entry into the WTO: "We've got to get the agriculture agreement back on track. The Chinese have to agree to implement the agreement on an expedited basis. The U.S. side should drop those outrageous demands on the protocol issues. And the Chinese should agree to keep most of the substantive details that were out there in April on the table."

Trade Policy Briefing Paper no. 5

April 16, 1999

What Crisis? Protection for steel industry unwarranted, harmful to everyone else
Cato study details the other side of the story on steel imports into the United States

"The U.S. government has already gone too far in favoring U.S. steel mills with unfair protection from imports. Further favoritism for the steel industry is completely unwarranted," according to a new Cato Institute Trade Briefing Paper released today. In "The Steel 'Crisis' and the Costs of Protectionism," authors Brink Lindsey, director of Cato's Center for Trade Policy Studies, Daniel Griswold, associate director of the center, and Aaron Lukas, trade policy analyst, argue that "there is no reason why the steel industry should receive special treatment at the expense of its customers and American consumers, just because it is experiencing temporarily unfavorable conditions."

Domestic steel companies and unions have filed antidumping, countervailing duty, and Section 201 cases against imported steel products that already threaten to drastically reduce steel imports. In March, the U.S. House passed a quota bill that would flout international law by capping steel imports, and the Senate is expected to consider its own steel import bill soon after the Easter recess.

The Cato trade experts note that the "U.S. domestic steel industry had one of its best years ever in 1998." Domestic steel shipments were at their second highest annual total in the last 25 years, and the share of world steel output captured by U.S. producers actually increased to 12.6 percent, up from 12.3 percent in 1997. They also offer insights into other less publicized realities of the steel "crisis," including:

• The 1998 import surge shows every sign of being a passing phenomenon. Total steel imports in February 1999 fell to 2.2 million net tons, far below the monthly average of 2.7 million tons imported during the last 'precrisis' quarter of April-June 1997.
• Protectionism is incapable of saving steel jobs. Employment in the steel sector has declined by more than 60 percent since 1980 largely because of rising productivity, and employment will continue to fall even if trade barriers are imposed.
• Workers in the major steel-using sectors--transportation equipment, industrial machinery, fabricated metal products, and construction--outnumber workers in the steel industry by 40 to 1.

The authors add that any legislation aimed at curbing steel imports is harmful, but the worst approach is quota-based legislation, because "quotas are one of the most damaging forms of trade restrictions. They redistribute wealth from consumers to domestic producers and to those foreign producers lucky enough to get quota rights." The authors conclude, "It is not the business of the U.S. government to intervene in the marketplace and favor one U.S. industry at the expense of other U.S. industries. Congress should reject calls for steel protection and reform the antidumping law to prevent future abuse."

Trade Policy Briefing Paper no. 4

February 3, 1999

Free trade had few real advocates in 105th Congress
Cato study finds only 37 support trade without barriers or subsidies

Only 25 House members and 12 senators fit the category of "free traders" in the Cato Institute's rating of the 105th Congress, released today. The highest marks in the House went to Reps. Philip Crane (R-IL), Tom Campbell (R-CA), J. D. Hayworth (R-AZ), Mark Sanford (R-SC) and John Shadegg (R-AZ). Speaker Dennis Hastert (R-IL) and majority leader Dick Armey (R-TX) also won ranking as free traders. In the Senate, Wayne Allard (R-CO) compiled the best free-trade record by voting against trade barriers and subsidies in all six votes studied.

In "Free Trade, Free Markets: Rating the 105th Congress," Daniel Griswold, associate director of the Cato Center for Trade Policy Studies, examined 15 key congressional votes on trade-related issues and found that members fell into four categories. They included free traders, who are pro-trade and anti-subsidies; internationalists, who are pro-trade and pro-subsidies; isolationists, who are anti-trade and anti-subsidies; and interventionists, who are anti-trade and pro-subsidies. Those who voted more than half the time for lower trade barriers and against subsidies were considered "free traders."

"Debate over America's entanglement in the global economy has been oversimplified into a battle between isolationists and free traders," Griswold observed, "whereas the ultimate struggle is between those who support a truly free market and those who favor government intervention, such as tariffs, subsidies, and bailouts in the international marketplace." A substantial majority of the House are in the "interventionist" category, favoring both trade barriers and subsidies from agencies such as the International Monetary Fund and Export-Import Bank. Most prominent among those members was minority leader Richard Gephardt (D-MO), who voted for intervention in nine of nine votes. Although opposing free trade in the aggregate, Republicans in the House were twice as likely as Democrats to oppose import barriers and subsidies. A majority of senators were in the "internationalist" camp, opposing trade barriers but supporting subsidies. Both Senate party leaders, Trent Lott (R-MS) and Tom Daschle (D-SD) were in this category.

"Members of Congress do not need to choose between the anti-trade isolationism of Pat Buchanan and the pro-subsidy internationalism of President Clinton. They can choose to vote for a coherent agenda to liberalize trade and eliminate subsidies," according to Griswold. The complete report contains detailed data on each representative and senator, their respective votes and the issues upon which they voted.

Trade Policy Analysis no. 6

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