Topic Category: Politics

If there is one thing about America that inspires the rest of the world, it is its level of economic freedom. Or at least it used to. According to the 2005 Index of Economic Freedom, published jointly by The Heritage Foundation and "The Wall Street Journal," the U.S. is no longer among the world’s 10 freest economies. In fact, the U.S. is becoming uncompetitive in economic freedom.

Reasons for Decline

One reason for this decline is a combination of onerous taxes and increasing government expenditures, which worsens the fiscal burden on businesses. Another reason is that countries like Australia, Chile and Iceland have leapfrogged past America by decisively and repeatedly cutting taxes, privatizing and deregulating, thus creating friendlier business environments. The degree of economic freedom that the U.S. had 10 years ago, when it was ranked the fifth freest economy, is clearly no longer good enough.

A Warning Is in Order

This plunge in the economic freedom ranking is a warning bell. Economic freedom is the foundation of U.S. economic strength, and economic strength is the foundation of America’s high standard of living, military power and status as a world leader. To regain its leadership in this important area, America must cut taxes and government expenditures, eliminate non-tariff barriers to trade and further deregulate some sectors of the economy. A freer U.S. economy will grow faster, and with faster growth, America will have the resources to raise its high living standard and to preserve its military power and status as a world leader.

Falling Behind

Economic freedom measures the opportunity for people to engage in all levels of economic activity—from starting a business, to opening a bank account, to using a credit card; from buying groceries, traveling and fixing their homes, to being able to obtain good health care; from buying a car, sending their children to school and finding a job, to counting on sound law enforcement and courts to protect their personal liberties and private property. The fewer obstacles to these activities, the more people can participate in the economy by working, investing, saving and consuming. The freer the economy, the more people can use their abilities to create wealth, putting money in the pockets of millions of families.

Until recently, America epitomized the benefits of living in a free society. However, in the four years since 2001, the U.S. ranking has fallen sharply from sixth place in 2001 to 12th place in 2005. Meanwhile other countries were opening their markets and improving their economic freedom. During this time, U.S. government spending ballooned, and this continuous expansion of government expenditures has seriously hurt the U.S. ranking.

The U.S. government has blamed the spending binge on the tragic events of September 11, 2001. However, according to Heritage Foundation analyst Brian Riedl, the majority of the government’s spending spree since 2001 is unrelated to 9/11 or national defense.

In other important areas of economic openness—taxes, non-tariff barriers and regulations affecting local and foreign investment—the U.S. has simply failed to keep pace with a changing world.

Should We Worry?

Should the United States, as a large economy, worry that it is losing its freedom “podium” to small economies like Chile, Iceland, New Zealand or Estonia? Absolutely. One can never overestimate the damage caused by continuously poor policymaking.

For example, in the early 1900s, Argentina was the world’s seventh wealthiest economy. Its wealth was driven largely by foreign direct investment from England and strong enforcement of property rights. It took no more than 40 years of continuously poor policymaking, starting in the 1930s, to erode this wealth. Today, with its world leadership lost, Argentina is a poor country mired in crisis, with a currency that moneychangers around the world refuse to handle. Argentina did not become poor overnight. Its road to poverty began when it became blind to the eventual implications of poor policy.

The perception of the U.S. as the most attractive place to do business is changing as the downward trend in U.S. economic freedom continues.

That perception plummets as spending swells the U.S. federal deficit, Congress threatens more trade restrictions and tariffs and passes legislation to expand underfunded transfer programs, tax rates remain among the highest in the world, the U.S. remains one of the few countries to tax the overseas earnings of its corporations, and some in the Administration support corporate welfare programs such as agricultural subsidies.

Four Reforms To Regain U.S. Leadership in Economic Freedom

It is time for America to rediscover the advantages that flow from increased economic freedom. Specifically, America needs sustained economic growth to maintain its high standard of living, military power and leadership in the world. And to foster this economic growth, the United States needs to increase economic freedom by advancing four reforms.

Reform #1: Cut Tax Rates

One area in which the top 10 economically freest countries in the world distinguish themselves is through low corporate tax rates.

The U.S. must find a way to slash its corporate tax significantly in order to be more competitive and provide businesses with better opportunities for increased production.

Reform #2: Cut Expenditures

Rising government expenditures are imposing a burden on American families and future generations that will be hard to remove. According to David Walker, Comptroller General of the United States, the official debt of the United States government today is $7 trillion.? If the “promises” that the U.S. government has made to retirees and users of government health care services are added, “the real debt is $42 trillion,” which amounts to “18 times the current federal budget, or three-and-one-half [times] the size of the current Gross Domestic Product.” In per capita terms, this obligation represents “over $140,000 for every person in America.”

Just to pay this debt, the U.S. economy would have to grow an average of 3 percent annually for the next 45 years or 6 percent annually for the next 23 years and incur no further obligations. These growth targets illustrate the extent to which current government actions have already affected the future of children born this year, who most likely will have to endure higher tax rates, higher interest rates, a much more difficult business environment, and a lower standard of living.

To reduce the unfunded debt burden on American families, the Administration should immediately advance proposals to reform Social Security, Medicare and Medicaid. Also important, the Administration should stop supporting corporate welfare programs like the farm subsidies.

Reform #3: Support Free Trade, Especially at Home.

The Bush Administration has decisively advanced free trade agreements with other countries. It should continue to do so with others.

The U.S. record is dubious, though, when it comes to removing domestic barriers to trade, such as protectionist tariffs and antidumping laws. One of the worst cases is the stubborn protectionism of U.S. sugar growers. At the current level of protection, sugar sells in U.S. supermarkets at three times the world market price. Moreover, U.S. protectionism is just as bad in other industries, such as orange juice, peanuts and dairy products.

Even worse are the U.S. antidumping laws. In principle, these laws give U.S. producers the right to request protectionist tariffs when a foreign producer sells products in the U.S. at a lower price than in the producer’s home country. In practice, this creates incentives for industries to seek ridiculous protections at the expense of taxpayers.

It all starts with the government’s requirement that 25 percent of the industry making the product must support such a claim. To assess the level of support, the Department of Commerce surveys the industry with a form that producers must complete. Here the Byrd Amendment—in effect the most distorting antidumping law—comes into play. Under the amendment, once the antidumping duty is approved, the producers that support a dumping case are eligible to receive a portion of the duties collected. This obviously creates a strong incentive to support a petition, and approval of every antidumping investigation is virtually guaranteed. A flawed methodology for identifying instances of dumping and the accompanying protection margins—a methodology that is usually biased against foreign producers—further compound the problem.

The damage does not stop there, though. With antidumping laws, producers have a mechanism for requesting protectionist tariffs where no tariff actually exists. In other words, no matter how many free trade agreements the U.S. makes or how many tariffs Congress tears down unilaterally, as long as the antidumping laws exist, U.S. producers will have an avenue they can use to pursue protectionism. Since success breeds imitation, many countries around the world now use antidumping laws as well. The U.S. government must repeal its antidumping laws, not just to preserve the interests of millions of U.S. consumers, but also to advance effectively free trade throughout the world.

Reform #4: Deregulate

The flow of new regulations continues unabated. This problem must be addressed in order to ease the regulatory burden on businesses. For example, foreigners should be allowed to invest in certain sectors that are off limits. In addition, many regulations (e.g., some health and product safety standards, food and drug labeling requirements, or corporate-governance regulations like Sarbanes-Oxley), although well-intentioned, can be particularly burdensome to small and medium-size businesses and should be removed.

Ana Isabel Eiras is Senior Policy Analyst for International Economics in the Center for International Trade and Economics at The Heritage Foundation. This article appeared in Impact Analysis, September-October 2005.
Topic: Politics
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The debate on the potential costs and benefits of the proposed Dominican Republic–Central American Free Trade Agreement (DR–CAFTA) continue. Often contentious, it has played out between those who fear the effects of freer trade on their own narrow interests and those who embrace the economic and strategic benefits the agreement will bring.

On June 30, DR-CAFTA passed in the Senate by a 54-45 vote. The House of Representatives is expected to take up the measure in mid-July. In doing so, it is essential that lawmakers separate myth from fact. The following are some common misconceptions about freeing trade between the United States and the countries of Central America.

MYTH: DR–CAFTA, like NAFTA (the North American Free Trade Agreement with Canada and Mexico), will be a disaster for the American economy.

FACT: Since the implementation of NAFTA, the U.S. economy has grown rapidly, millions of new jobs have been created, and investment has expanded.

Between 1993 and 2003, the U.S. economy added almost 18 million new jobs, grew by 38 percent, and increased exports to Mexico and Canada from $134.3 billion to $250.6 billion. And, U.S. manufacturing output rose 41 percent. Today, the U.S. economy continues to exhibit strong growth and enjoys a historically low rate of unemployment. Clearly, NAFTA did not hurt the U.S. economy.

Freer trade stimulates growth, improves investment and job opportunities, and leads to higher living standards. Under DR–CAFTA, farmers, manufacturers, banks, and other service providers will become more competitive, have access to new markets, and benefit from stronger protection of property rights.

DR–CAFTA also will help the Central American countries to develop and modernize their economies. This, in turn, will generate greater demand for U.S. goods and services. For example, Costa Rica will be seeking to renovate its telecommunications systems and financial services, creating opportunities for U.S. firms. Freeing trade generates benefits in America today by making U.S. goods more competitive and tomorrow as Central American countries develop into larger markets.

MYTH: DR–CAFTA will result in U.S. job losses.

FACT: DR–CAFTA will encourage stronger growth and new, higher-quality jobs in the United States.

As illustrated in the 2005 Index of Economic Freedom, countries adopting freer trade policies experienced higher average growth (2.8 percent) between 1995 and 2003 than countries that did nothing (2.4 percent) or that reduced their openness to trade (1.4 percent).

Since 1983, under the Caribbean Basin Initiative (CBI), the Dominican Republic and Central America have been receiving preferential trade access for most of their goods entering the U.S. Thus, any job loss associated with lowering tariffs on products from Central America already has occurred.

The agreement is actually a way to protect American jobs. For example, apparel manufacturers in Central America are required under the CBI to use U.S. fabric and yarn in their products in order to qualify for duty-free access to the U.S. market. By strengthening the relationship between U.S. textile producers and Central American apparel firms, DR–CAFTA will make the region, as a whole, better able to compete with Asia, thereby supporting continued U.S. textile exports and jobs.

DR–CAFTA will open Central America and the Dominican Republic to U.S. goods and services. It is an opportunity to gain new markets for American products and services, make investing in the U.S. more attractive, and support better, higher-paying U.S. jobs.

MYTH: DR–CAFTA will be just another excuse for outsourcing by U.S. companies, resulting in further job losses.

FACT: The U.S. is not losing net jobs to other countries, and this trend should continue under DR–CAFTA.

According to the Organization for International Investment, the number of manufacturing jobs insourced to the U.S. grew by 82 percent the past 15 years. During that same time period, the number of jobs lost as a result of outsourcing grew by only 23 percent.

The size of the U.S. market, a highly skilled workforce, and relatively low international trade barriers combine to serve as a beacon for attracting foreign investment into the American economy and generating new, better-paying jobs.

Although South Carolina has lost some textile jobs as a result of technological advancement and trade adjustment, it has gained higher-paying jobs at new factories, such as BMW, Daimler–Chrysler, and China’s leading electronics manufacturer.

The biggest reason for outsourcing is not free trade, but the tax and regulatory burdens faced by companies operating within the United States. If these burdens are reduced, firms in the U.S. will be more competitive and less likely to move their business elsewhere.

MYTH: DR–CAFTA will make the trade deficit bigger, hurting the U.S. economy.

FACT: A growing trade deficit is an indication of strong inflows of foreign investment and domestic economic growth, which results in higher living standards for Americans.

Between 1980 and 2004, in those years where the current account deficit increased, the U.S. grew an average of 3.5 percent. The economy grew only 1.9 percent in years when the current account deficit shrank.

By definition, a trade deficit indicates an inflow of foreign capital. The U.S. trade deficit reflects too little domestic savings to satisfy all of the investment opportunities in this country. This shortfall is remedied by a net inflow of foreign investment.

As investment and the economy grow, new jobs are created and the demand for all goods, including imports, rises. A growing trade deficit is generally a sign of a healthy, expanding economy.

MYTH: DR–CAFTA leaves foreign workers unprotected.

FACT: DR–CAFTA will enable the Central American countries to enforce labor standards.

DR–CAFTA countries have adopted the core labor standards of the International Labor Organization. DR–CAFTA also requires effective enforcement of labor regulations. Failure to comply would lead to monetary fines and/or the loss of preferential trade benefits.

Programs have been designed to assist these countries in strengthening their institutional capacity to administer labor regulations effectively.

Data indicate that the more flexible a country’s labor laws, the higher the level of a country’s per capita GDP and the greater the benefit to each household. Thus, caution should be used when demanding that the Central American countries adopt additional regulations that may reduce the ability of their workforce to adjust to economic change.

Historically, as prosperity increases, the desire and ability to implement labor protections and expend resources on their enforcement become stronger. This natural evolution toward protecting workers has been demonstrated in the U.S., Britain, and other developed countries.

MYTH: DR–CAFTA will encourage greater immigration from Central America to the United States.

FACT: New economic opportunities and growing living standards will work to stem the tide of immigration.

Recent studies show that areas in Mexico that benefited from NAFTA had higher wages and lower levels of emigration. Areas that did not experience increased economic activity as a result of NAFTA saw a decline in wages and remain the main source of immigration from Mexico into the U.S.

DR–CAFTA would help to generate the economic growth and stability that bring new opportunities, more jobs, and improved living standards to the people of Central America. With the agreement in place, the decision to emigrate to the United States would become one driven by choice rather than necessity.

Although the myths about DR–CAFTA might make for interesting media fodder, it is the facts that should rule the debate within Congress. Overall, the facts are clear: DR–CAFTA will improve U.S. economic performance, support American jobs, improve regional competitiveness against China, and promote economic freedom and prosperity across the region.

Daniella Markheim is a Senior Policy Analyst in the Center for International Trade and Economics at The Heritage Foundation. This article appeared in Impact Analysis, July-August 2005.
Topic: Politics
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China’s practice of pegging its currency, the yuan (also known as the renminbi), to the U.S. dollar has created much speculation in corporate board rooms and controversy among policymakers. Unpegging the yuan from the dollar, a solution advocated by many, may not be so easy. And, it may not achieve what it is intended to do. What’s worse, it could have some unintended consequences.

Will It Rise or Fall?

Congressional sources have declared the yuan to be considerably undervalued, which in turn, make Chinese exports more attractive worldwide. In response, some U.S. politicians and various organizations suggest that China should allow the yuan to float freely, assuming it will rise to a higher level.

On the other hand, some economists believe that if this were to occur, the currency may become volatile due to China’s weak financial sector, instability associated with the country’s transition to a market economy and difficult economic adjustments associated with WTO-mandated reforms. In turn, a widely fluctuating yuan could have a destabilizing effect and fall well below current levels. In this less likely scenario, a falling yuan could lead to a financial crisis.

The Outcome Is Unclear

Regardless of these arguments, a revaluation of the yuan is likely to have little impact on the U.S. trade deficit. Why? If the yuan were to rise in value, U.S. companies would continue to seek low cost imports from other developing countries.

In his June 23, 2005 testimony before the U.S. Senate Committee on Finance, Federal Reserve Chairman Alan Greenspan said, “An increase in the exchange rate of the renminbi, relative to the dollar, would likely redirect trade within Asia, reversing to some extent the patterns that have emerged during the past half century. However, a revaluation of the renminbi would have limited consequences for overall U.S. imports, as well as for U.S. exports that compete with Chinese products for third markets.”

If China were to revalue its currency, other Asian countries would become more comfortable in allowing their currencies to appreciate against the dollar, according to the Deloitte Research report, China at a Crossroads: Seven Risks of Doing Business. The result: the U.S. would ultimately experience an improvement in its current account balance. How much? Economists suggest it would be minimal.

The Other Impact on China

Although the full impact of a floating yuan is uncertain, many analysts agree it is increasingly likely that China will allow the yuan to appreciate against the dollar. They also agree that continued pegging of the yuan to the dollar negatively impacts China.

In a May 2005 report to Congress, the U.S. Treasury Department said the yuan’s peg “blocks the transmission of critical price signals, impedes needed adjustment of international imbalances, attracts speculative capital flows and is a large and increasing risk to the Chinese economy.”

It also is widely agreed that the pegging policy hurts low-cost global producers who compete with China for global market share.

Market Forces Should Dictate

The yuan-dollar pegging policy originally began when the dollar was strong and China was considered an economy in need of development aid. Now that China has become a strong international player, especially in the manufacturing sector, and one that is seeking higher technologies, many argue that China is ready to implement a more flexible exchange rate.

To play fair on the world stage, China should take steps to achieve currency convertibility based on market forces. When, not if, may be the more appropriate question.

This article appeared in Impact Analysis, July-August 2005.
Topic: Politics
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Increasing economic opportunity and strengthening homeland security are the two major goals of the U.S. government. Advancing free trade is essential to reaching both of these goals. Hence, the Bush Administration and Congress should be praised for significantly advancing free trade with Australia, Morocco, Chile and Singapore.

The U.S. now has an even more important opportunity to expand trade with countries right on its doorstep through DR–CAFTA, a free trade agreement with the Dominican Republic, Costa Rica, Guatemala, Honduras, El Salvador, and Nicaragua. The Administration should push Congress to approve this free trade agreement promptly.

Topic: Politics
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International trade is a primary generator of business growth in the U.S. And millions of higher-paying, higher-skilled jobs are dependent on it. Importantly, companies that export grow faster and fail less often than companies that don’t. What’s more, their workers and communities are better off.

Unfortunately, many Members of Congress have made trade the scapegoat of virtually all America’s economic problems. Although their intentions are good, their trade policy recommendations, if implemented, would be disastrous.

If anti-trade policymakers had their way, they would raise import barriers in an attempt to isolate producers from foreign competition. In response, foreign countries would retaliate by keeping U.S. products out. This would have an enormously negative impact on U.S. industry. In addition, America would lose more jobs than it would gain.

If we did the exact opposite—and eliminated all barriers to trade—we would generate a net increase in jobs! According to the U.S. International Trade Commission, if all U.S. trade barriers had been eliminated in 1999, more jobs would have been gained than lost—a number representing only one one-hundreth of 1 percent of the labor force. Plus, total output would have increased by $60 billion.

Furthermore, if U.S. tariffs were raised, imported consumer products would become much more expensive, hurting U.S. families. In turn, less disposable income would be available for education, health care, rent or mortgages. And factories that incorporate foreign components in their producbarrts would have to raise prices or absorb the difference.

New technologies and innovation, which have significantly boosted productivity, are primarily responsible for the loss of manufacturing jobs—not trade. As a result, fewer workers can produce much more than ever before. Surprising to many, U.S. manufacturing production has rapidly increased, not decreased, over the last 50 years, according to the Federal Reserve.

Consider this: would we have wanted to stop rising productivity in the U.S. agricultural industry that caused the number of farm jobs to fall from 9.5 million in 1940 to 2.2 million today? Currently, U.S. agricultural output can virtually feed the world. America did not “lose” 7.3 million farm jobs: they shifted to emerging industries. As a result, we became more efficient and prosperous.

Would we want to go back and save buggy maker jobs at the expense of auto workers, dump ATMs because they eliminated bank teller positions or destroy voice mail because it replaced receptionists?

Since 1970, the U.S. economy generated 60 million net new jobs. What’s more, the Department of Labor projects a net increase of another 21.3 million from 2002 through 2012, with 96 percent in the service sector.

How well do service jobs pay? Over the last decade, the U.S. service industry has become highly sophisticated. In turn, average hourly earnings for service production workers have already caught up to those in manufacturing, according to the Bureau of Labor Statistics.

In an attempt to remedy several U.S. economic problems, many Members of Congress apply old-era solutions to today’s challenges. This is part of the problem.

Today, technological advances, the fall of Communism and globalization are shaping a new world. In response, we can elect representatives who recognize this and take actions to improve the country’s competitiveness or chose policymakers who hope the world of yesterday returns.

Trade is not the cause of American economic ills. It’s one of our bright spots on our economic horizon.

This article appeared in Impact Analysis, May-June 2005.
Topic: Politics
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Jack Davis, the isolationist who attempted to unseat Rep. Tom Reynolds last November, blames trade for virtually all our economic problems. Although his intentions are good, his trade policy recommendations, if implemented, would be disastrous.

In attempt to isolate producers from foreign competition, Mr. Davis would raise import barriers. In response, foreign countries would retaliate by keeping U.S. products out. This would significantly damage the transportation equipment industry, Buffalo-Niagara's largest manufacturing employer that heavily relies on sales to Ontario auto factories.

Other important industries would also suffer. Why? Buffalo-Niagara's largest manufacturing sectors are among the state's top export industries. And trade in New York, the third largest exporting state, directly supports more than 280,000 higher-paying jobs, according to the Census Bureau. Plus, a tremendous number of jobs are dependent on service exports. If state exports decline, local jobs will be lost.

Higher tariffs would also hurt local families by making imported consumer products more expensive. In turn, less income would be available for education, health care, rent or mortgages. And local factories that incorporate foreign components in their products would have to raise prices or absorb the difference.

Lowering tariffs, on the other hand, would actually help. According to the U.S. International Trade Commission, if all U.S. trade barriers had been eliminated in 1999, more jobs would be gained than lost—a number representing only one one-hundreth of 1 percent of the labor force. Plus, total output would have increased by $60 billion.

New technologies and innovation, which have significantly boosted productivity, are primarily responsible for the loss of manufacturing jobs—not trade. As a result, fewer workers can produce much more than ever before. Surprising to many, manufacturing production has rapidly increased, not decreased, over the last 50 years, according to the Federal Reserve.

Consider this: would we have wanted to stop rising productivity in the U.S. agricultural industry that caused the number of farm jobs to fall from 9.5 million in 1940 to 2.2 million today? Would we want to go back and save buggy maker jobs at the expense of auto workers, dump ATMs because they eliminated bank teller positions or destroy voice mail because it replaced receptionists?

Since 1970, the U.S. economy produced 60 million net new jobs. And from 2002 through 2012, the Labor Department projects a net increase of another 21.3 million, with 96 percent in the service sector. Surprising to many, average hourly earnings for service production workers have already caught up to those in manufacturing, according to the Bureau of Labor Statistics.

In his December 2004 op-ed entitled, What Would John Wayne Do?, Jack Davis applies John Wayne-era solutions to today's challenges. This is part of the problem.

Today, technological advances, the fall of Communism and globalization are shaping a new world. In response, we can elect representatives who recognize this and take actions to improve the region's competitiveness or chose policymakers who hope the world of John Wayne returns.

Trade is not the cause of our economic ills. It's one of the few bright spots on our economic horizon.

This article appeared in Business First, February 18, 2005.
Topic: Politics
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International trade is a primary generator of business growth in Western New York. And a tremendous number of jobs are dependent on it.

How do we know this?

New York State is the third largest exporter of manufactured goods compared to all other states. Based on U.S. Census Bureau calculations, more than 280,000 of New York's higher-paying jobs are dependent on it. And a huge number of jobs are supported by New York's service exports. Trade, no doubt, is very important to New York!

Trade is also essential to our region.

In the Buffalo-Niagara Falls metropolitan area, the manufacturing sectors with the largest employment are also among the state's top merchandise export industries. What does this mean?

Take the local transportation equipment industry for instance. It is Buffalo-Niagara's largest manufacturing employer and New York's second largest merchandise export. It stands to reason: as Ontario auto producers (one of our principal customers) buy more auto parts from local manufacturers, we benefit.

Jack Davis, the outspoken trade protectionist who attempted to unseat Rep. Tom Reynolds in the 26th Congressional district last November, has made trade the scapegoat of virtually all our economic problems. Although his intentions are good, his trade policy recommendations, if implemented, would be disastrous for Buffalo-Niagara.

If Mr. Davis had his way, he would raise import barriers in an attempt to isolate producers from foreign competition. In response, foreign countries would retaliate by keeping U.S. products out. This would have an enormously negative impact on New York State, especially local auto parts producers who heavily rely on Ontario auto factory orders.

Overall, we would lose more jobs than gained. In fact, if we did the exact opposite—and eliminated all barriers to trade—we would create jobs! According to the U.S. International Trade Commission, if all U.S. trade barriers had been eliminated in 1999, more jobs would be gained than lost—a number representing only one one-hundredth of 1 percent of the labor force. Plus, total output would have increased by $60 billion.

Furthermore, if U.S. tariffs were raised, imported consumer products would become much more expensive, hurting local families. In turn, less disposable income would be available for education, health care, rent or the mortgage. And local factories that incorporate foreign components in their products would have to raise prices or absorb the difference.

New technologies and innovation, which have significantly boosted productivity, are primarily responsible for the loss of manufacturing jobs—not trade. As a result, fewer workers can produce much more than ever before. Surprising to many, U.S. manufacturing production has rapidly increased, not decreased, over the last 50 years, according to the Federal Reserve.

Consider this: would we have wanted to stop rising productivity in the U.S. agricultural industry that caused the number of farm jobs to fall from 9.5 million in 1940 to 2.2 million today? Currently, U.S. agricultural output can virtually feed the world. America did not “lose” 7.3 million farm jobs: they shifted to emerging industries. As a result, we became more efficient and prosperous.

Would we want to go back and save buggy maker jobs at the expense of auto workers, dump ATMs because they eliminated bank teller positions or destroy voice mail because it replaced receptionists?

Since 1970, the U.S. economy generated 60 million net new jobs. What's more, the Department of Labor projects a net increase of another 21.3 million from 2002 through 2012, with 96 percent in the service sector.

How well do service jobs pay? Over the last decade, the U.S. service industry has become highly sophisticated. In turn, average hourly earnings for service production workers have already caught up to those in manufacturing, according to the Bureau of Labor Statistics.

In his December 2004 op-ed entitled, What Would John Wayne Do?, Jack Davis applies John Wayne-era solutions to today's challenges. This is part of the problem.

Today, technological advances, the fall of Communism and globalization are shaping a new world. In response, we can elect representatives who recognize this and take actions to improve the region's competitiveness or chose policymakers who hope the world of John Wayne returns.

Trade is not the cause of local economic ills. It's one of the few bright spots on our economic horizon.

This article appeared in the Tonawanda News, February 17, 2005
Topic: Politics
Comment (0) Hits: 2231



FAQ: How have the World Trade Organization and its predecessor, the General Agreement on Tariffs and Trade, impacted trade?

Talking Points:

The General Agreement on Tariffs and Trade (GATT), established in 1947 in Geneva, Switzerland, was responsible for governing approximately 90 percent of world trade. It sought to liberalize trade and thereby improve the world trading system through a code of rules and a forum at which negotiations and other trade discussions took place. Importantly, it played a major role in the settlement of trade disagreements among member countries. The founders of GATT believed that increased international trade would promote an economic interdependence between countries, making wars between trading partners unthinkable.

GATT was responsible for reducing the international tariff average from 40 percent in 1947 to 5 percent in 1990. These reductions permitted international trade to expand tremendously, national incomes to increase substantially, and international competition to flourish, resulting in higher quality, lower priced goods. The organization was very successful at reducing international trade barriers. However, many analysts argued that it was not very successful at remedying less apparent forms of protection, such as non-tariff barriers. New protectionist tools, such as abusive uses of dumping legislation, labor and other issues, were recognized as the new non-tariff barriers. It was widely held that GATT would not be able to contain this.

In the early 1990s, GATT’s inability to eliminate non-tariff barriers put the organization in jeopardy. Its incapacity to successfully remedy the U.S.-European Community disagreement over agricultural subsidies created doubt as to the organization’s ability to meet future challenges. Furthermore, the decreasing level of world confidence in GATT contributed to the speed at which countries formed trading blocs. Since the successful conclusion of the GATT Uruguay Round Agreements, the degree of confidence in its successor organization, the World Trade organization(WTO), has risen significantly.

Established on January 1, 1995, the WTO deals with agriculture, textiles and clothing, banking, telecommunications, government purchases, industrial standards and product safety, food sanitation regulations, intellectual property and much more. By June 2005, the number of WTO members had reached 148 (in 1948 the GATT had 23 contracting parties). The WTO is a democratic organization whose agreements are adopted by consensus. Consequently, each country decides according to its legislative process whether or not it will be bound by WTO agreements.

FAQ: How did the Multifiber Arrangement emerge and what is its impact on textile and apparel?

Talking Points:

During the 1960s and 1970s, worldwide growth in the number of textile and apparel producers led to production overcapacity. As a result, the global supply of textiles and apparel exceeded the growth in demand. Competition intensified. As producers in developed countries attempted to protect their markets from imports originating in low-wage countries, bilateral trade policies emerged under an international framework.

The Arrangement Regarding International Trade in Textiles, more commonly known as the Multifiber Arrangement (MFA), was finalized at the end of 1973 and enacted in January 1974. Approximately 50 countries signed the original agreement, which was established and managed under the auspices of the General Agreement on Tariffs and Trade, the predecessor to the WTO. The MFA was considered general and became an umbrella arrangement under which bilateral agreements could be conducted, typically involving the implementation of import quotas. These agreements and quotas were necessary because importing countries, primarily developed countries, believed specific textile and apparel products imported from developing countries were disrupting their markets. As part of the new arrangement, provisions were included that monitored the implementation of the MFA, defined strict rules for determining market disruption, and permitted quotas to grow by 6 percent annually.

The original MFA was renegotiated in 1977 (MFA II, 1977-81). Although the United States was the leader in pursuing the original multilateral agreement, the European Community took the lead this time and pressed for an increasingly restrictive MFA. The 6-percent annual growth rate for quotas permitted in the first MFA was of particular concern to European Community (EC) representatives. Manufacturers argued that it was unfair for imports to increase by 6 percent a year when their own share of the domestic market was increasing at rates as slow as 1 percent. As a result, industry leaders sought to have the import growth rate tied to the domestic rate. Under the new Multifiber Arrangement, a less severe clause was added that allowed the EC to reduce certain quota growth rates below 6 percent.

The 1981 negotiations for renewal of the MFA (MFA III, 1981-86) were particularly difficult. From the perspective of both the EC and U.S. textile and apparel industries, MFA II—despite its increasingly restrictive features—was not effective in slowing the tide of imports. Developing countries became increasingly organized in pressing for their interests, however, and in the end they succeeded in implementing a less-restrictive “anti-surge” provision, which provided for special restraints in the event of “sharp and substantial increases” in imports of the most sensitive products. MFA III also tightened the definition of market disruption by requiring proof of a decline in the growth rate of per capita consumption.

U.S. officials went into the 1986 MFA renewal negotiations under heavy pressure from the domestic textile industry to provide increased protection from low-wage imports. During this period, EC industries were affected less by imports, enjoying a relatively healthy economic period. The EC, however, joined the United States and Canada in presenting a joint statement for the 1986 renewal (MFA IV, 1986-91). Although exporting countries were even more organized than in the past, their diverse composition continued to prevent full unity. In addition, they still lacked the bargaining power sufficient to counter the strength of the developed countries. Because quotas were based on past performance, smaller suppliers, usually from the least developed countries, had little opportunity to obtain substantial quota increases. In an effort to improve the exporting nations’ bargaining position, the International Textiles and Clothing Bureau (ITCB) was established to represent their interests more effectively.

Throughout the GATT negotiations, textile and apparel trade provoked one controversy after another. By December 1988, ministers from 19 developing countries asserted their unwillingness to continue in the broader talks unless problems related to the Multifiber Arrangement were addressed. They requested a clear timetable for phaseout of the MFA. Representatives from developed countries found it hard to agree to the demands. As the GATT talks dragged on, various countries offered proposals for bringing textile trade back under mainstream GATT regulations. In 1990, U.S. officials offered a plan that provided quota allocations for each country which would be eliminated gradually, and an overall global quota, but the U.S. proposal encountered strong opposition from exporting nations. U.S. retailers and importers also believed the plan would be detrimental to their interests.

After GATT talks resumed in Brussels in December 1990, the new Agreements on Textiles and Clothing, which became known as the Brussels Draft, called for textile products to be integrated into GATT, eliminating quota restrictions in three stages. A year later, however, textile negotiations reached an impasse over certain issues related to phasing out the MFA. In December 1993, the Uruguay Round talks resumed, and after seven years of bitter deliberation, a GATT accord was finalized. The MFA was officially replaced by the Uruguay Round’s final Agreements on Textiles and Clothing, which was enacted on January 1, 1995 as part of the WTO, the successor to GATT. Despite heavy developed country opposition to a 10-year phaseout of quotas, the agreement provided for the elimination of quotas on textiles and apparel over the decade ending January 1, 2005. After this date, only tariffs should remain.

As a result of the abolished quotas, prices are anticipated to fall and major Western buyers are expected to narrow their sources to large vertically integrated Asian suppliers. China, in particular, is expected to gain an increasingly large share of textile and clothing production.

As stated earlier, the WTO estimates that the U.S. quota on Chinese imports of apparel had the equivalent effect of a 34 percent tax on Chinese imports. By eliminating this tax, absent offsetting trade barriers or currency changes, China’s share of U.S. imports is projected to rise from 16 percent to 50 percent; its share of the U.S. apparel market is estimated to rise from 5.4 percent to 22.5 percent. Much of this will be at the expense of past suppliers, including Bangladesh and the Philippines.

This section appeared in Part III: Frequently Asked Questions and Talking Points of the book Grasping Globalization: Its Impact and Your Corporate Response, 2005.
Topic: Politics
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FAQ: What are the costs of protectionism?

Talking Points:

Although in some instances protectionism may help fledgling industries for limited periods of time, current and decades-old studies indicate that protectionism actually has severe negative consequences. Reducing the number of imports through the use of trade barriers only raises the costs of goods and services to consumers and results in net job losses.

According to the 2002 U.S. International Trade Commission report, The Economic Effects of Significant U.S. Import Restraints, if all U.S. trade barriers had been simultaneously eliminated in 1999, 175,000 full-time workers would have been displaced, with the textile and apparel sector incurring nearly 90 percent of that loss. This would have represented only one one-hundredth of 1 percent of the 1999 labor force of 122.1 million. However, the report indicates, 192,400 full-time jobs would have been created, resulting in a net gain of nearly 17,400 jobs. In addition, total output would have increased by $58.8 billion.

The WTO determined in 1988 that $3 billion was added annually to grocery bills of U.S. consumers to support sugar import restrictions. In the late 1980s, U.S. trade barriers on textile and clothing imports raised the cost of these goods to consumers by 58 percent. And when the U.S. limited Japanese car imports in the early 1980s, car prices rose by 41 percent between 1981 and 1984. The objective was to save American jobs. However, in the end, more jobs were lost due to a reduction in the sale of U.S.-made automobiles, according to the WTO.

Additionally, the report Trade, Jobs and Manufacturing contends that if import barriers on sugar products were eliminated, imports would surge by almost 50 percent and domestic production would fall by 7.2 percent. The resulting job losses in sugar-related industries would total 2,290 out of 16,400 full-time industry jobs—a small number compared to an average of 235,000 net new jobs the U.S. economy created each month leading up to 1999, the year the report was released.

In December 2003, President George W. Bush announced his decision to remove the steel tariffs he had imposed 21 months earlier. Nevertheless, the damage was done. U.S. steel users incurred massive price increases as well as major supply disruptions, according to William Gaskin, president of the Precision Metaforming Association, as reported in a June 2004 CATO report. The higher prices caused many steel-consuming industries to shrink. In the end, more jobs were likely lost than gained.

Commenting on the costs of protectionism to consumers, Peter Sutherland, former Director General of General Agreement on Tariffs and Trade (GATT), now the World Trade Organization (WTO), said, “It is high time that governments made clear to consumers just how much they pay—in the shops and as taxpayers—for decisions to protect domestic industries from import competition. Virtually all protection means higher prices. And someone has to pay, either the consumer or, in the case of intermediate goods, another producer. The result is a drop in real income and an inability to buy other products and services.”

FAQ: Does protectionism effectively save jobs in failing industries over the long term?

Talking Points:

No, it does not. Scholars and leaders of industry alike agree that even if a greater level of protectionism were implemented, low-technology jobs would still be replaced by technology or shifted to lower-wage locations over time. Robert Reich, former U.S. Secretary of Labor, stated that “Even if millions of workers in developing nations were not eager to do these [low-technology] jobs at a fraction of the wages of U.S. workers, such jobs would still be vanishing. Domestic competition would drive companies to cut costs by installing robots, computer integrated manufacturing systems or other means of replacing the work of unskilled Americans with machinery that can be programmed to do much the same thing.”

There are many examples of technology raising worker productivity and business efficiency, where output increased or remained the same while utilizing fewer, higher-paid workers. According to Trade, Jobs and Manufacturing, a 1999 CATO study by Daniel Griswold, “In the last two decades, tens of thousands of telephone operators and bank tellers have been displaced from their jobs, not by imports, but by computerized switching and automated teller machines.”

On this point, Sutherland says, “Maybe consumers would feel better about paying higher prices if they could be assured it was an effective way of maintaining employment. Unfortunately, the reality is that the cost of saving a job, in terms of higher prices and taxes, is frequently far higher than the wage paid to the workers concerned. In the end, in any case, the job often disappears as the protected companies either introduce new labor-saving technology or become less competitive. A far better approach would be to use the money to pay adjustment costs, like retraining programs and the provision of infrastructure.”

In the early 19th century, the English Luddites attempted to destroy textile machines because they replaced weavers. Modern-day “Luddites” want to do essentially the same thing—but they have mistakenly attacked trade instead of technology. Explaining the impact of technology and its relationship with protectionism, Michael Licata, a senior economic development executive, tells the following story:

Each day, 10 fishermen ventured to the ocean to catch their family’s food requirements. The task lasted all day. However, on one particular day, a fisherman brought a net he created by twining vines together. And in just six hours, he caught enough fish to supply all 10 families. Amazed, the other fishermen marveled over the new invention. One asked, “What are you going to do with all that fish? Your family can’t eat all of them.” “I guess you’re right,” said the net man. “I’ll tell you what,” said another, “I’ll keep your roof from leaking if you give me enough fish to feed my family.” Another said, “My wife has a garden, so I’ll trade you vegetables for fish.” And a third said, “I hate fishing. If you catch my fish from now on, I’ll hunt game and gather your firewood in the forest.” When the net man returned each day with his large catch of fish, he saw his wood chopped, vegetables near his door, and a brace of rabbits hanging on his fence. He even was able to sleep better since his roof no longer leaked during rainy nights. Others, too, benefited from various trades and ventured into other businesses. For example, one man learned to play an instrument he made out of wood and entertained villagers at night in exchange for goods and services. Another experimented with herbs and began curing certain illnesses. However, as specialization occurred and life improved for all 10 families, the fishing pole maker was not happy. His business worsened since fewer men now fished. Enraged, one night he sneaked over to the net man’s hut and destroyed the invention. In the morning, the disaster was discovered and the day’s allotment of fish went unmet. The next day all 10 original fishermen returned to their boats to fish. Leaky roofs went unfixed, firewood uncut, game uncaught, illnesses uncured and evening entertainment ceased. But, the fishing pole maker was happy at the expense of many.

FAQ: What is the protectionist worst case scenario?

Talking Points:

In the 1930s U.S. industrial production began to fall and U.S. farmers felt the effects of foreign agricultural competition. European agricultural recovery after World War I resulted in overproduction. As a result, international agricultural prices fell. The solution: on June 17, 1930, President Hoover signed the Smoot-Hawley Act that raised tariffs nearly 60 percent over their existing high rate of 44 percent. Although the act seemed like a good idea at the time, it effectively killed international trade. Within two years following the act’s implementation, U.S. exports decreased by nearly two-thirds.

In anticipation of Smoot-Hawley’s passage, France, Italy, India and Australia passed their own protectionist legislation. Others, such as Spain, Switzerland and Canada, followed suit. The result: export markets dried up and domestic industries slowed down. For the next eight years international trade declined. The unemployment rate in the United States rose to 25 percent in 1933. What began as a sincere attempt to aid U.S. industry made an international crisis of the highest order more severe.

Today, the potential negative impact of protectionism is no less severe. Larry Davidson, professor of Business Economics and Public Policy at the Indiana University Kelley School of Business finds that manufactured exports have been extremely important to economic vitality, manufacturing output and employment in 10 Northeast states analyzed in his recent report, Exports of the Northeast Region 1996 to 2004, prepared for the Council of State Governments Eastern Region. The report, co-authored by Benjamin Warolin and Lan Zhang, cites considerable strength in export growth from 1996 to 2004 of chemicals and pharmaceuticals to Germany and the Netherlands, and ever stronger gains of machinery sales to China and Mexico. When it comes to identifying hot spots of export growth in 2004, the report identifies reliable partners like Japan, the United Kingdom, Germany and the Netherlands, as well as newcomers like China and South Korea. “Clearly, if the U.S. and its key industrial regions are to continue to benefit from export growth to Europe and Asia, they cannot hope to do this while at the same time protecting their industries from imports from these countries,” said Davidson. As stated earlier, international trade has become an integral part of everyday life, accounting for 25 percent of U.S. economic growth in 2004. If the United States takes protectionist actions, our trading partners are sure to do the same.

FAQ: How do tariffs and non-tariff barriers operate?

Talking Points:

Tariff barriers—taxes or duties levied on imports of foreign products—originally were established to provide revenue for the federal government, predating income or property taxes. Today, however, they are viewed differently. In effect, tariffs increase the product price which discourages its demand and thereby insulates, to a degree, domestic producers from foreign competition. Each country places higher tariffs on goods determined to be import sensitive.

The most common form of duty or tariff is the ad valorem: a tax assessed on merchandise value. In addition, other types exist. Specific duties are those charged by weight, volume, length or any other unit (e.g., charging 10 cents per square yard on fabric). Compound duties call for both an ad valorem and a specific duty on the same product. Alternative duties are those in which the custom official calculates the ad valorem duty and the specific duty and applies whichever is higher. In addition to the above fees, an import processing fee, harbor tax, and other taxes, if further assessed, increase the exporter’s costs.

Non-tariff barriers, on the other hand, are often hidden, and are not necessarily quantifiable or measurable. They typically include quotas, boycotts, licenses, health standards, local content requirements, restrictions on foreign investment, domestic government purchasing policies, exchange controls and subsidies, as well as formal and non-formal bureaucratic red tape. Like tariff barriers, non-tariff barriers often are used to inhibit the importation of products. In many sectors, environmental, labor and investment issues increasingly are being used in an abusive manner to discourage trade.

At times when it appears that foreign government subsidies for industry are decreasing, assistance by other means may be increasing. Many analysts believe the Europeans, Japanese, and even the emerging markets are investing more and more of their resources to do battle with U.S. companies. In a sampling of about 200 overseas competitive projects tracked during an eight year period, it was estimated that U.S. firms lost approximately one-half of these due in part to government pressure—a hidden and non-quantifiable barrier to trade.

FAQ: How do global trade disputes, which often arise out of an attempt to protect an industry, affect U.S. companies and workers?

Talking Points:

The United States always has been a leading proponent of free trade. However, many now believe this leadership position is at stake—especially since U.S. willingness to accept WTO rulings is questioned. For example, both WTO and NAFTA committees have ruled that Canadian lumber subsidization evidence is insufficient. Nevertheless, the U.S. continues to impose tariffs on Canadian softwood lumber exports to the U.S. This dispute has been unresolved since 1982.

The U.S. is not alone in terms of non-compliance with international trade rulings. And, if the number of global trade disputes is any indication of unfair play, the U.S., EU and several other countries share company. Since 1995, the year the WTO was established, the international body has accepted about 30 trade dispute cases annually. As of April 6, 2005, the U.S. alone has been charged with 86 trade disputes; the EU or member states have been charged with 54, according to the Progressive Policy Institute.

In today’s competitive world, national tax laws and subsidies have become extremely complex, resulting in numerous unintended consequences—including multiple trade disputes. For example, for decades, EU industries, such as aerospace and telecommunications, have been subsidized. This has boosted their international strength or shielded them from global competition. In addition, the EU has exempted its exporters from paying a value added tax, which, in effect, has reduced their tax burden.

Although Europe’s tax loopholes and subsidies distort trade by artificially increasing the attractiveness of its exports, its indirect tax system is technically WTO-compliant. To counter this, the U.S. crafted the Foreign Sales Corporation (FSC) tax code in 1984. This was designed to help U.S. exporters compete more fairly with EU companies, as well as others around the world. Many U.S. companies claimed it was a success. In fact, a National Foreign Trade Council report stated that 3.5 million U.S. export-related jobs benefited from FSC tax incentives in 1999. However, the EU challenged the FSC rule through the WTO, and won in 2000. To appease the EU and global trade body, the U.S. repealed the law. In its place, the U.S. Congress created the Extraterritorial Income Exclusion (ETI) Act of 2000. But this law still didn’t satisfy the EU. Consequently, the EU challenged it through the WTO and won.

To remedy the situation, on October 22, 2004, President George W. Bush signed legislation repealing ETI. The bill also reduced corporate tax rates for domestic manufacturers and simplified tax rules on overseas profits. Without this, it was argued prior to repealing ETI that approximately 6,000 U.S. exporters, who relied on ETI to compete, would have been hurt. Several years ago Boeing estimated that repealing ETI without a suitable replacement would result in the loss of nearly 10,000 of its high-tech jobs, as well as 23,000 more jobs with its suppliers. Why? In 2002, Boeing’s heavily subsidized European rival, Airbus, was estimated to have received more than $30 billion in EU financial support. Boeing claimed this gave the EU conglomerate an unfair advantage. Furthermore, analysts believed this affected the entire U.S. aerospace industry that employed nearly 800,000 highly skilled workers in 2002. Nevertheless, for over a decade the Boeing-Airbus fight has continued to rage without a solution in sight. In fact, the heat was elevated in May 2005 when Airbus requested $1.7 billion subsidy in launch aid for its new A350 mid-range jetliner.

Should the number of trade disputes continue to climb resulting in retaliation, American exporters stand to suffer losses. Retaliatory actions, which typically come in the form of increased tariffs, raise the cost of American products in foreign markets. Often leading to decreased sales for U.S. companies, this can translate to fewer jobs for American workers. As a result, it is in the interest of the U.S., the EU and others to swiftly remedy disputes and focus on more profitable long-term trade relations.

This section appeared in Part III: Frequently Asked Questions and Talking Points of the book, Grasping Globalization: Its Impact and Your Corporate Response, 2005.
Topic: Politics
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It’s daybreak at a major Asian seaport and there’s a dirty bomb in a shipping container. The sealed container looks exactly like the thousands of worn boxes that move in and out of the port each day on truck and train. And aside from a single lead-lined crate that conceals the deadly explosive, there is nothing sinister about this container’s contents: name-brand consumer electronics and spare parts destined for Los Angeles. The container’s ship, in fact, loads later this morning.

Security precautions among Pacific Rim trading partners have become tighter in recent months. Even a U.S. senator, during a photo-op at the same Asian port the week before, praised new efforts to safeguard supply chains. And yet, a huge cash bribe had been too much to resist for one truck driver on the mainland. Two days earlier he had turned a blind eye at a dark roadside stop as three men opened the container, loaded the crate from an adjacent truck, and resealed the container with a state-of-the-art mechanical seal. Within 10 minutes they had disappeared into the night and the container had resumed its journey to the busy port. Now a bomb sits in line for the gantry crane, undetected by overworked customs officers.

The bomb’s detonator, assembled 10 months ago, waits patiently in an operative’s apartment in Long Beach ….

This frightening scenario, completely fictional and yet all too plausible, is exactly the kind of nightmare that has weighed heavily on lawmakers, customs officials, and the global trading community since September 11th. It isn’t difficult to see why intermodal trade is so appealing to the terrorist mind. For an enemy with the express goal of crippling Western economies, what better target than the very bloodstream of those economies? Ninety percent of the world’s cargo moves by shipping container. More than nine million containers arrive by sea in the United States each year, carrying more than 95 percent of the nation’s non-North American trade by weight. The ubiquity of these identical containers that makes modern trade so efficient and cost-effective also makes it ripe for exploit. And a strike at the heart of the system would have disastrous consequences.

In a 2002 war game involving government and industry leaders, a dirty bomb scenario similar to the one above prompted decisions to close two U.S. ports for three days and all U.S. ports for nine days thereafter. During the first three weeks of the imaginary crisis, major stock indices plummeted, trading halted, gas prices spiked, and more than half of the Fortune 500 firms issued earnings warnings. As the game played out, it took three months to clear the container backlog resulting from the closings, with a total cost to the U.S. economy of $58 billion. (1)? Another study estimates that costs following a detonated weapon of mass destruction shipped by container could reach $1 trillion. (2)? “A successful attack would make us all victims,” says Christopher Koch, president and CEO of the World Shipping Council. “It would affect every supply chain, every carrier, every port, and every nation’s trade and economy.” (3)

In the days following 9/11, the U.S. Customs Service—reorganized in 2003 as U.S. Customs and Border Protection (CBP)—began to implement a host of trade security initiatives with its government partners and its new parent organization, the Department of Homeland Security (DHS). Those initiatives continue to expand in scope and authority more than three years after 9/11, in harmony with similar safeguards around the world. In general, security measures are designed to impede the two most-feared terrorist approaches to supply chains: 1) the “hijack” scenario, like the one above, in which terrorists intercept a legitimate shipment and tamper with it; and 2) the “Trojan horse” scenario, in which a terrorist organization usurps or develops a legitimate trading identity to ship dangerous cargo. (4)? Yet, because there is no single system that governs the global movement of containers—it is instead an amalgam of thousands of business and government entities—developing a seamless defense is impossible without bringing trade to a grinding halt. The approach must instead be one of prioritizing risks and managing them with finite resources.

The Department of Homeland Security’s “layered” approach to supply chain security is a combination of programs and initiatives spearheaded by CBP and related agencies. Implemented at different times, with different methodologies, and with different goals, the measures often overlap one another in their attempt to protect a vast, multifaceted industry. One of the earliest such efforts following 9/11 was the formation of a system that could target U.S.-bound maritime shipping containers posing a terrorist threat. In effect, by pushing the U.S. border across the oceans, CBP could inspect high-risk containers before they departed for America, where traditional dockside inspection of a dangerous shipment might be too little, too late.

Gradual implementation of these targeting and prescreening efforts, as follows, laid the groundwork for the familiar system in place today.

  • November 2001: CBP establishes the National Targeting Center (NTC) in Washington, D.C., to conduct cargo targeting in coordination with the intelligence community.
  • January 2002: CBP announces the Container Security Initiative (CSI), a program designed to identify and examine high-risk containers at foreign ports with the cooperation of foreign customs agencies.
  • June 2002: The Public Health Security and Bioterrorism Preparedness and Response Act of 2002 becomes law to protect food and drug imports. Administered by the Food and Drug Administration (FDA) and jointly enforced by CBP, the Act requires that advance notice be given to the FDA prior to all food imports. (5)
  • August 2002: As part of its Sea Cargo Targeting Initiative, CBP modifies its Automated Targeting System (ATS) computer model. Originally designed to identify illegal narcotics in container shipments, ATS incorporates terrorism-related targeting tools to look for red flags in shipping manifests, combined with intelligence, suspicious trading patterns, and warnings from other government agencies. CBP also standardizes procedures for handling high-risk shipments.
  • December 2002: To make shipment data available to CSI inspectors overseas in time to prescreen cargo before departure, CBP implements the “24-Hour Rule.” (6)? Sea carriers and/or automated non-vessel-operating common carriers (NVOCCs) begin submitting vessel manifests to CBP 24 hours before lading at foreign ports. Enforcement begins in February 2003. Generic cargo descriptions on manifests are prohibited, and carriers whose descriptions are found to be inaccurate are held liable.
  • May 2003: CBP begins sending “Do Not Load” orders in response to invalid cargo descriptions. CBP ports are authorized to issue monetary penalties for 24-Hour Rule violations.
  • January 2004: The Required Advance Electronic Presentation of Cargo Information rule, pursuant to the Trade Act of 2002, extends the advance manifest filing requirement to incoming and outgoing trade by air, truck, and rail carriers, though the advance notice for these other modes of delivery is only a matter of hours prior to arrival in the United States.
  • March 2004: Sea carriers and/or automated NVOCCs are required to submit an electronic cargo declaration using the Sea Automated Manifest System. Full enforcement begins in July 2004, including denial of preliminary entry, issuance of penalties at each port of arrival, and denial of unlading.

CBP and its partners have little choice but to use such high-tech methods to find the poisoned needle in the haystack, since the enormous volume of maritime imports coupled with the agency’s limited resources make it impossible to inspect each arriving container manually. Although, at present, CBP inspects only 5 percent of imported maritime containers, the agency insists that it prescreens 100 percent of the manifests of incoming vessels and thus, somewhat indirectly, the contents of each container before lading overseas. Meanwhile, in the United States, the agency is providing all ports of entry with radiation-detection portals, through which each inbound container moves before leaving the port for U.S. destinations. Inspectors may also carry detection devices as a second way to discover smuggled radioactive material, though neither method is foolproof. (7)? U.S. and foreign customs officers may employ similar technologies overseas, though the rate of implementation is slower than it is in the United States.

If at any point officials decide a container warrants further attention, they might first use non-intrusive inspection equipment such as the Vehicle and Cargo Inspection System (VACIS) to look for any visual anomalies without opening the container. (Such systems, which employ x-ray or gamma ray radiation, are not perfect, either.) Whether or not inspectors first use a VACIS-like system, they can choose to open a container and examine it manually if prescreening has aroused suspicion. Such an inspection could delay a shipment by one day or more.

But does this system of targeting and prescreening as it stands today actually work? The fact that three years have elapsed since 9/11 without a trade-related terrorist incident is not enough, by itself, to prove the system is effective, especially given the patience and advance planning of enemies like al-Qaeda. CBP has done an admirable job of converting customs methods to today’s threat of global terrorism in a relatively short time; yet to achieve measurable improvements in targeting, further changes in the overall CBP strategy must occur. For example, a 2004 report by the Government Accountability Office (GAO) ?states that the current CBP strategy does not fully incorporate all necessary elements of a risk management framework needed if the agency is to achieve optimum results with limited resources. (8) In addition, the report says, the CBP strategy and ATS are not fully consistent with recognized modeling practices, such as the incorporation of additional trade documentation and the widespread use of random inspections. (9)

The bottom line for supply chain managers, therefore, is that CBP and international efforts are only beginning, and the evolution of cargo targeting will have serious and costly implications for all businesses engaged in world trade in the future. Already the 24-Hour Rule (“the Rule”) and container targeting in general have added significant new costs throughout supply chains, such as investments in information infrastructure, new personnel hiring and training, delays due to inspection, container backlogs at departure ports, documentation fees, liabilities and fines, increased lead times, and increased inventories. These costs are likely to continue and expand as the Rule changes over time. According to one study, the estimated annual cost of the Rule could range from $280 million up to $10 billion. (10)? Tempering this amount are the cost benefits that some firms will realize from reduced cargo theft and pilferage, which total in the billions of dollars annually, as well as significant increases in supply chain visibility and logistics efficiency.

Meanwhile, government costs also are expanding, as is the debate concerning the appropriate level of federal spending for supply chain security. The 9/11 Commission has pointed out, for example, how more than 90 percent of the government’s annual $5 billion investment in the Transportation Security Administration goes toward passenger aviation—“to fight the last war,” despite the reality that “opportunities to do harm are as great, or greater, in maritime or surface transportation.” (11) Others have criticized a lack of long-term funding strategies for such essential programs as CSI, while ports continue to shoulder the burden of what they call an unfunded port security mandate. Such debate over federal funding may continue, ironically, as long as world commerce eludes a direct terrorist attack, since loose purse strings in Congress have proven to be largely behind the curve when it comes to homeland security. (12)

The purpose of this report, however, is not to critique the approach of the Department of Homeland Security and its agencies toward supply chain security, to evaluate its spending priorities, or to determine the effectiveness of security initiatives. Nor is its purpose to explain the day-to-day workings of the now familiar 24-Hour Rule, in operation since December 2002. It is instead designed to provoke discussion about how and why maritime cargo targeting, in particular, will evolve over time due to 1) economic, geographic, and political forces of the next decade and beyond, and 2) CBP measures to strengthen inherent weaknesses in the system as it stands today. Accompanying this evolution will be profound changes in the two burdens that targeting places on business: the 24-Hour Rule on the front end of shipments, and cargo inspections on the back end. Only by considering these changes will supply chain managers be able to plan effectively for safe and efficient trade in the coming years.

Footnotes:

  1. Mark Gerencser, Jim Weinberg, and Don Vincent, Port Security War Game: Implications for U.S. Supply Chains (McLean, Va.: Booz Allen Hamilton, 2002), p. 3.
  2. Michael E. O’Hanlon et al., Protecting the American Homeland: A Preliminary Analysis (Washington, D.C.: Brookings Institution Press, 2002), p. 7.
  3. Testimony of Christopher Koch, Senate Committee on Commerce, Science, and Transportation, The State of Maritime Security, 108th Congress, March 24, 2004, p. 5.
  4. Organisation for Economic Co-operation and Development, Report on Container Transport Security Across Modes, Executive Summary and Conclusions (Paris: OECD, 2004), p. 2.
  5. While the Bioterrorism Act is a crucial part of protecting the nation’s food supply, its enforcement is beyond the scope of this report. For more information, see www.fda.gov/oc/bioterrorism /bioact.html.
  6. The final 24-Hour Rule, officially titled “Presentation of Vessel Cargo Declaration to Customs Before Cargo Is Laden Aboard Vessel at Foreign Port for Transport to the United States,” was published in the Federal Register in October 2002, with an effective date of December 2, 2002. For text of the final rule and CBP commentary, see Federal Register Vol. 67, No. 211 (October 31, 2002), pp. 66318-66333.
  7. Government Accountability Office, Container Security: Current Efforts to Detect Nuclear Materials, New Initiatives, and Challenges, GAO-03-297T (Washington, D.C.: GAO, November 18, 2002), pp. 4-5.
  8. In July 2004, the General Accounting Office changed its name to the Government Accountability Office.
  9. Government Accountability Office, Homeland Security: Summary of Challenges Faced in Targeting Oceangoing Cargo Containers for Inspection, GAO-04-557T (Washington, D.C.: GAO, March 31, 2004), p. 5, pp. 9-10.
  10. Philippe Crist, Security in Maritime Transport: Risk Factors and Economic Impact (Paris: Organisation for Economic Co-operation and Development, 2003), p. 57.
  11. The 9/11 Commission, Final Report of the National Commission on Terrorist Attacks Upon the United States (Washington, D.C.: U.S. Government Printing Office, 2004), p. 391.
  12. Take, for example, the overwhelming attention paid to aviation security only after 9/11, or the overnight surge of interest in rail security following the March 2004 train bombings in Madrid. In the days following the train bombings, Congress drafted the Rail Security Act of 2004 and proposed expenditures of more than $1 billion on U.S. rail security.
This section appeared in Manzella Trade Communications' report Averting Disaster: The Future of Cargo Security and How Supply Chain Managers Must Prepare, 2005.
Topic: Politics
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