Features
    Trade Fact Of The Week
    78 percent of U.S. imports from developing countries are duty-free.
    January 14, 2015

    THE NUMBERS: U.S. merchandise imports from developing countries, 2014* -

    TOTAL $1,130 billion
    Permanently Duty-Free $550 billion
    Duty-Free Via FTAs & Preferences $245 billion
    Tariffed $335 billion

    * Estimate based on the 11 months of data now available.

    WHAT THEY MEAN:

    Anticipating Congressional debate on the Trans-Pacific Partnership, Sen. Bernie Sanders (an independent Socialist from Vermont) took a dire view last New Year’s Eve:

    “The TPP will make the race to the bottom worse because it forces American workers to compete with desperate workers in Vietnam where the minimum wage is just 56 cents an hour.”

    This argument has a long history in American trade debates, as the rhetorical staple of a century-long line of economic nationalists from Whig Party eminences Clay and Webster, who loved to warn of the “cheap pauper labor,” and “unpaid and half-fed labor” of Britain and continental Europe in the 1830s and 1840s, through Gilded Age pols James Blaine and William McKinley, down to Jazz Age isolationists Harding, Coolidge, and Herbert Hoover, whose 1928 platform argued for tariff hikes to support “industries which cannot now successfully compete with foreign producers because of lower foreign wages and a lower standard of living abroad.”

    Is reviving their fears a useful guide for modern Americans? By way of background, the “TPP” (full name Trans-Pacific Partnership) is a 12-country trade agreement now in the late stages of negotiation, which if successful would join the U.S. with Canada, Mexico, Peru, Chile, New Zealand, Australia, Singapore, Brunei, Malaysia, Vietnam, and Japan. It is a complex agreement with features covering Internet and data flow, enforcement of rules banning trade in endangered species and limiting fishery subsidies, customs and port rules, tariff rates, new-technology approvals, automobile trade, market-opening for American products, and lots more. But as far as competition with Vietnam (and by extension lower-wage countries in general) here are the basics:

    (1) U.S and Vietnam: The modern U.S. trade relationship with Vietnam dates to the Bilateral Commercial Agreement in 2000, which ended the post-1975 trade embargo. Last year, Hanoi and Mekong Delta farms, factories, and fishing fleets shipped $30.6 billion worth of goods to the United States. This is about 1.0 percent of America’s $3.2 trillion in total imports, 3.4 percent of the $815 billion in imports from the TPP countries, and the equivalent of 30 days’ worth of U.S. imports from Canada, which are about $350 billion. Vietnam’s relatively small share of U.S. trade suggests that even a big jump in Vietnamese imports will have only minor effects on overall U.S. imports, and therefore would have only minor ‘competitive’ effects.

    (2) Do U.S. trade barriers block poor-country goods? Sen. Sanders’ implicit argument, though, seems to be against competition with developing-country workers in general, rather with Vietnamese workers per se. Setting aside the merits of this view as economics, its relevance to policy rests on a premise: the U.S. now has an effective existing set of barriers blocking poor-country goods, which TPP or other agreements will breach.

    But in fact U.S. trade barriers are generally low, mostly nonexistent, and usually ineffective where they do exist. About 78 percent of last year’s goods imports from developing countries arrived with no tariffs, quota limits, or other barriers. (Apart of course from consumer safety rules, anti-counterfeiting laws, and other limits imposed for public-good reasons.) About 5 percent did come in with high tariffs, but these often applied to goods not made in the United States. Vietnam’s trade patterns illustrate, with the $30.6 billion in imports dividing roughly into two groups:

    (a) Zero-tariff goods: For about 40 percent of Vietnamese goods, the U.S. abolished all tariffs long ago and has no other form of trade barrier apart from product-safety and food-safety rules. These include $3.5 billion worth of cell phones and personal computers, for which tariffs vanished in 1997; $500 million in coffee, which hasn’t had any tariffs since the 1920s; $3 billion in furniture, where tariffs were abolished in 1994; $1.7 billion in shrimp, catfish, and other seafood; $600 million in cashew nuts; $200 million in toys, and so on. In these categories of products, as there are no barriers to remove, TPP isn’t likely to have a competitive effect.

    (b) High-tariff goods: Vietnam is also a large supplier of high-tariff goods, mainly $14 billion worth of mass-market clothes, running shoes, handbags and luggage. These have tariffs, mostly unchanged since the 1950s, which average about 15 percent and peak at 48 percent for cheap sneakers. In many cases, however, these tariffs are entirely ineffectual. For example, about 99 percent of shoes, and all cheap sneakers, sold in the U.S. are imported anyway. In these cases, tariffs operate only as a way to tax shoppers. Overall, American employment in these high-tariff industries makes up about 1 percent of the U.S.’ 12.2 million factory workers, and 0.1 percent of the 140 million employed American workers. Vietnam’s stake in eliminating tariffs of this sort is mainly for competition with other suppliers – China in particular, but also neighboring Southeast Asian countries outside the TPP, and other suppliers with duty-free status via FTAs and preference programs.

    (3) Labor standards: Finally, an area where TPP is doing genuinely new and innovative things is in labor standards, where it will likely be the most elaborate, enforceable, and ‘liberal’ agreement the U.S. has ever concluded. Assuming U.S. negotiators are reasonably successful, this will cover laws, implementation of laws, and capacity-building programs in labor rights, child labor prevention, minimum wage policies, and workplace health and safety policies. In this sense, for those worried about the ‘desperation’ of Vietnamese workers, TPP looks more like a progressive solution than a cause to worry.

    FURTHER READING:

    TPP background & perspectives –

    The U.S. Trade Representative Office explains the TPP and the Obama administration’s hopes: http://www.ustr.gov/tpp

    Vietnamese academics Truong-Minh Vu and Nguyen Nhat-Anh look to TPP as a way for Vietnam to compete with China: http://thediplomat.com/2014/09/the-potential-of-the-tpp-for-vietnam/

    And Sen. Sanders brings the New Year’s Eve gloom: http://www.commondreams.org/views/2014/12/31/ten-reasons-why-tpp-must-be-defeated

    Some systematic analysis –

    Are Vietnamese workers ‘desperate’? The ILO’s Global Wage Report 2014/2015 (released last month) is quite optimistic, finding Vietnamese wage rates rising quickly, in part because of a shift of clothing and electronics manufacturing out of southern China, and in part due to three consecutive 10 percent increases in the national minimum wage in 2013, 2014, and 2015: http://www.ilo.org/asia/whatwedo/publications/WCMS_325219/lang–en/index.htm

    And how ‘effective’ are U.S. trade barriers?  Every two years the U.S. International Trade Commission does a check, with computer-model analysis of the effects of U.S. tariffs and other import limits. The most recent version of the report, Economic Effects of Significant U.S. Import Restraints, came out in December 2013.  It found that simply abolishing all of them (i.e. without any negotiations or reciprocal market-opening) would raise U.S. imports by about 0.2 percent above trend. In practical terms this would be an additional $5 billion or so, matched with an 0.3 percent increase in U.S. exports. In practice, then – and again setting aside the question of whether import barriers are good economics – with a few idiosyncratic exceptions, the tariff system is mostly a form of taxation, not a meaningful deterrent to imports or an effective way to block foreign competition. The study:

    And long-ago trade-policy talking points, from conservatives, liberals, and radicals -

    Sen. Sanders’ fear of low-wage competition would have been familiar a century ago, but as an argument associated with business-minded conservatives in the Webster/McKinley/Harding/Hoover tradition, rather than with liberals or radicals.

    Their proto-liberal Democratic rivals worked from a 19th-century faith in low tariffs, consumer benefit, and growth led by farm exports (Jackson and Polk before the Civil War, Cleveland and Bryan in the 1880s and 1890s), augmented by Woodrow Wilson and Louis Brandeis to encourage international agreements and address low-wage competition fears in a constructive way by inventing the International Labor Organization in 1919. TPP is a recognizable descendent of this program.  (The final piece of it, the Trade Adjustment Assistance program for dislocated American workers, came 40 years later during the Kennedy administration.)

    Radicals of the era, through the Populist Party of the late 1880s and early 1890s and the Socialist Party of the late 1890s to the 1920s, took a third approach, insisting that the R’s and D’s were both wrong (or more likely both liars). They maintained trade debates were frauds meant to distract the public from the real issues, and in the Socialist case that workers should unite across borders rather than seeing one another as rivals. A blistering sample from Eugene Debs’ 1912 Presidential campaign:

    “So long as the present system of capitalism prevails and the few are allowed to own the nation’s industries, the toiling masses will be struggling in the hell of poverty as they are today. To tell them that juggling with the tariff will change this beastly and disgraceful condition is to insult their intelligence. The professional politicians who have been harping upon this string since infant industries have become giant monopolies know better. Their stock in trade is the credulity of the masses. The exploited wage-slaves of free trade England and of the highly protected United States are the victims of the same capitalism; in England the politicians tell them they are suffering because they have no protective tariff and in the United States they tell them that the tariff is the cause of their poverty. And this is the kind of a confidence game the professional politicians have been playing with the workers of all nations all these years.”

    Some incendiary stuff from Debs (scroll to the “Capitalism and Socialism” speech from August 1912, or just search for ‘tariff’): http://www.gutenberg.org/files/34012/34012-h/34012-h.htm

    Herbert Hoover warns against low-wage competitors, 1928: http://www.presidency.ucsb.edu/ws/index.php?pid=22067&st=tariff&st1=hoover

    And Woodrow Wilson’s Fourteen Points (see #2 and #3 for trade): http://avalon.law.yale.edu/20th_century/wilson14.asp