Friday, February 3, 2017

Right Wing Think-Tank Cato Institute Takes Aim at Trump's Buy American Trade Policy

by Nomad


Cato, Then and Now

As a humble peasant, it always fills me with awe when billionaires with agendas begin to lob insults at one another. I don't have to particularly agree with one or the other, it's just nice to believe there are some cracks in a global conspiracy against the little guy.

If you are unfamiliar with the Cato Institute,  here's the run down for you.
Founded by Charles G. Koch and funded by the brothers Koch, Cato is a libertarian think tank headquartered in Washington. By and large, it has promoted policies that uphold "the traditional American principles of limited government, individual liberty, and peace."
The Koch family has donated more than $30 million dollars to the organization, according to the New York Times as of 2012. In March of that year, there was a falling-out when the Kochs filed a lawsuit against Cato to gain control.

The Cato Institute wields a tremendous amount of influence among conservatives. In addition to its advocacy of far right positions, it has become a substantial funder of other "like-minded" think tanks For all those reasons, Cato is an organization that any president ought to take seriously. tanks around the U.S.



Any endorsement of criticism of Mr. Trump and his policies should be understood to come solidly from the conservative right.

Refuge of Scoundrels

On many subjects, such as climate change denial, school privatization, privatization of government services and anti-taxation, the Cato Institute's position and the Trump administration's agenda seem to dovetailed pretty tightly.

That's why a recent article by Cato's Daniel Ikenson, director of Cato’s Herbert A. Stiefel Center for Trade Policy Studies, seems so counter-intuitive. Are these power-hungry Republic-destroying fat cats supposed to be working together?

Even its headline comes a bit of a surprise. "The False Promise of 'Buy American'”
 Th very first line reads:
If patriotism is the last refuge of scoundrels, where will President Trump turn when his “America First” policies lay waste to the very people he professes to be helping?
Indirectly calling Trump a "scoundrel"- no matter how accurate a depiction- is something one doesn't expect from the conservative. Especially not from a Koch-funded organization. As the article goes on, it really doesn't get any more flattering than that for Trump.  

Ikenson writes that while Trump's often-used phrase might appeal to his supporters as a campaign slogan, we shouldn't be fool by it. It is merely "a euphemism for doling political spoils, featherbedding, and protectionism."
And who's going to suffer ultimately, asks Cato? Taxpayers, workers, and businesses.

But why should that be so? Ikenson explains that limiting the $1.7 trillion U.S. government procurement market to U.S. suppliers would result in higher price tags, fewer projects funded, and fewer people hired.
In today’s globalized economy, where supply chains are transnational and direct investment crosses borders, finding products that meet the U.S.-made definition is no easy task, as many consist of components made in multiple countries. And by precluding foreign suppliers from bidding, any short-term increases in U.S. economic activity and jobs likely would be offset by lost export sales – and the jobs that go with them – on account of copycat protectionism abroad.

Washington's Cheese

It's not the first time a politician has tried to use patriotism and the "Buy American" slogan. Promoters of the idea like to cite both George Washington and Honest Abe Lincoln as examples of presidents who favored a Buy American policy.
As one site points out:
[Washington] favored American-made goods over imported products and told others about it as well. In a letter from Mount Vernon, on 29 January 1789, he wrote to the Marquis de Lafayette: “We have already been too long subject to British prejudices. I use no porter or cheese in my family, but such as is made in America; both these articles may now be purchased of an excellent quality.”
In fact, the issue of protectionism divided President Washington’s administration in the early 1790s. The debate pitted Treasury Secretary Alexander Hamilton against Secretary of State Thomas Jefferson and his congressional ally James Madison. These great minds struggled with the right approach to trade and the possible effects of one against the other. Early U.S. policymakers faced a similar dilemma as we do today.

It probably goes without saying that the US trade policy of 1789 was nothing like the one that exists in 2017. It's like saying the solution to carbon emissions is for all of us to return to riding horses. It is a simple solution, I agree. And yes, we never any complex problems like global warming150 years ago. Will this be part of Trump's second term agenda, I wonder?

Washington wore wooden teeth. Is that also an idea we are planning to return to?

Hoover Buy AmericanHoover, and Reagan

Today the United States is the 2nd largest export economy in the world and the 5th most complex economy. US trade isn't about British cheddar anymore. 

Make no mistake, the risks of an ill-conceived trade policy are enormous. For example, Trump's decision to renegotiate or withdraw from NAFTA coupled with his threat to slap tariffs of 45% on Chinese goods. These three countries do $1.9 trillion in combined trade with the U.S. each year, which is a major chunk of America's $5 trillion in global annual trade. And retaliatory measures from these three nations could shake the American economy to its core. 
Actually, we have seen these mistakes in the past.

During the Great Depression, the Buy American Act was passed by Congress and signed by President Hoover on his last full day in office (March 3, 1933). Prior to that, another Republican solution The Tariff Act of 1930 (otherwise known as Smoot–Hawley Tariff) which had raised  U.S. tariffs on over 20,000 imported goods.

Today economists agree that the combination of both of the restrictive policies had a negative impact on what was already an economic disaster. Both laws resulted in retaliatory tariffs by America's trading partners and led to a reduction in American exports and imports by more than half during the Depression.

The Cato article neglects to mention that Reagan was also a big fan of  Buy American.  However, Reagan knew better than to attempt to impose the idea as policy. He preferred to issue fairly meaningless presidential announcement instead of, as Trump prefers, decrees.

For example, in December 1986. President Reagan  declared by proclamation the month of December to be “Made in America Month.” 
It read:
“I, Ronald Reagan, President of the United States of America, do hereby proclaim December 1986 as ‘Made in America Month.’ I invite the people of the United States to observe this month with appropriate programs, ceremonies, and activities to celebrate the excellence of American products.”
That kind of cheerleading and voluntary consumer persuasion is very different that what Trump is proposing.

Basic Supply and Demand

President Trump

"Buy American" laws might sound good in theory but they also limit competition. The restrictions, mandated by these laws, apply to all government procurement of supplies and materials for use within the United States.
Under such laws, all unmanufactured products, in other words, raw materials must be mined or refined or produced inside the United States. As far as US-manufactured goods, the components at least 50 percent (by value) must be U.S.-produced.

There are, of course, waivers under specific conditions but overall, under Buy American laws, things can quickly become out of control and excessively complicated. And they can become more expensive.
H
ow so? By artificially restricting a market, you decrease the supply of a particular commodity (supplied by an American manufacturer). That, in turns, leads to an increase in the cost to the consumer, that is, the US government. that is the taxpayer.

Obviously, Trump's "Buy American" laws will come into direct conflict with one of the conservative's most treasured relics of the Reagan museum: the unrestricted market approach. The author puts in simple terms:
As individuals spending their own money, most Americans seek to maximize value. That often means shopping for groceries at a big supermarket chain instead of the gourmet market or patronizing Home Depot instead of the hardware store on Main Street. Shouldn’t we expect Washington to spend our tax dollars with a similar eye toward prudence and value?
Attempting to protect American markets might sound great in theory. However, the idea that restricting government procurement spending to American goods, services, and workers will make things better for the working class is simplistic and are poorly-thought. ("Misguided" is the word used in the Cato article.)
Only a basic understanding of supply and demand is required to see that limiting competition for procurement projects ensures one outcome: taxpayers get a smaller bang for their buck.
That's not to say that some US companies will not benefit. They will win government procurement bids, hire new workers, and generate local economic activity.  Yet, there will be downsides, says the Cato writer.
What will be less visible — but every bit as real — are the contracts denied numerous other U.S. businesses and workers because the resources have been stretched and depleted to satisfy restrictive procurement rules. Some U.S. companies and some U.S. workers may benefit, but the real value of public spending — the actual products and services procured — will decline.
Ikenson  presents two more facts that Trump, as president, must consider before issuing a Buy American decree:
  • well over 6 million Americans work for foreign-headquartered companies here in the United States. 
  • over $1.2 trillion of foreign direct investment is parked in the U.S. manufacturing, undergirding valued added activity, and supporting jobs and the tax base.
As patriotic as it might sound, Trump's protectionism would create chaos and wreak havoc on the economy. And it isn't just the Cato Institute that believes that Trump will be making a colossal mistake if he keeps this campaign promise.

Back in March 2016, when the idea that Trump would ever be president was a joke, the conservative National Review was scoffing at the idea of the candidate's "Buy America" idea. 

Whether Trump likes it or not, protectionist restrictions and tariffs have no real place in a globalized world. They didn't work in the past and they risk destabilizing the world economy. Not to mention, making lives worse for the people Trump claims he is trying to help.
Jim Geraghty, the senior political correspondent, writes:
Like Trump’s pledge to build a border wall, the tariffs’ intended effect sounds good, but there’s no acknowledgment of their exorbitant costs.
Trump's supporters might cheer at the patriotic proposal.That's natural. However, as Geraghty observes. they might not be so supportive of the president's plan when their cost of living shoots through the roof overnight.


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