This is a story with a good beginning, if not — so far at least — a happy ending. The good beginning stems from an obviously sensible economic idea aimed at creating and preserving American jobs. That it has been shot down — again, at least for now — illustrates the enduring power of entrenched lobbies in Washington, D.C., where politics so often trumps economics. For Obama watchers (and who isn’t, these days?), the story is especially revealing.
Let’s take it from the top.
Last year Rep. Bill Pascrell, a Democrat from New Jersey who sits on the Ways & Means Committee, enthusiastically sponsored legislation to help safeguard American jobs by liberalizing trade. Pascrell’s so-called Trade Agreement Parity bill was aimed at giving US-based manufacturers that operate in so-called “foreign trade zones” within the US the same zero-duty economic benefits — that’s the “parity” part — now enjoyed by manufacturers that make their widgets in countries that have preferential trade agreements with the US. For example, thanks to the North American Free Trade Agreement, manufacturers that set up shop in Mexico can import all the components they need to make their widgets without paying tariffs, and then can export their finished goods duty-free to the United States.
Pascrell’s legislative proposal — called by its acronym, TAP — was based on creating the same economic incentive to keep manufacturing operations in foreign trade zones within the US. Such zones — there are now nearly 500 of them, involving roughly 2,600 US-based manufacturers in all 50 states, according to the most recent publicly available figures — date to the 1930s Depression era. Then, lawmakers looked for ways to keep Americans working by getting around the crippling Smoot-Hawley tariffs that hovered in the 50-plus percent range. The manufacturers inside these zones are allowed to import their raw materials into the US duty free: think of components that go into electronic products made by companies like Intel and Hewlett-Packard; or drugs made from chemicals imported by companies like Merck; or refined oil products made by crude-oil importers like Exxon and Chevron. The finished products can then be “exported” from within the duty-free zone into the US proper. Instead of paying US Customs officials the higher duty of the imported raw materials, the manufacturers pay only the lower duty that is assigned to the finished product. Some of those final products like electronics and pharmaceuticals aren’t subject to US tariffs, so are not taxed at all when they officially enter the US. Other manufactured products, automobiles, for example, still are subject to US tariffs. A US automaker that operates inside a foreign trade zone can import various parts — screws, for example, which would otherwise be subject to a 7% tariff — without paying the duties. As it passes through US Customs, the finished US-made automobile is subject to a duty of only 2.5%.
That’s a pretty good deal — but remember, thanks to Nafta, a car that is made in Mexico can enter the US duty free, which gives the Nafta-made car a 2.5% price advantage. Pascrell’s legislation was simply aimed at keeping jobs in the United States by giving the US-based manufacturers that operate in foreign trade zones the same duty-free privileges as their competitors that operate in places like Mexico. “This is all about keeping American jobs in America” explains Will Berry, the president of the National Association of Foreign Trade Zones, which strongly supported Pascrell’s bill. In a July 12, 2008 editorial, the Wall Street Journal enthusiastically agreed. The editorial — headlined “A Democrat’s Good Idea — praised Pascrell for his good economic sense to propose cutting tariffs by way of “boosting US competitiveness and creating American jobs.”
That was last year.
This year, Pascrell has not re-introduced his proposal, and declined to be interviewed on it for this article. No other lawmaker has yet stepped forth to take Pascrell’s place. And even the Obama administration — famously headed by a new president who has vowed that he will do everything he can to keep American jobs at home — has shown no interest in doing anything to help preserve these particular American jobs.
Pascrell’s TAP proposal was referred to the House Ways & Means subcommittee on trade last year. There it died, after the panel’s chairman, Rep. Sandy Levin (D-Mich), refused to give it a hearing. Nobody from the Obama administration has shown the least interest in pressing Congress to revive the tariff-cutting proposal.
Obama’s chief trade negotiator, Ron Kirk, has been ducking questions inquiring whether the administration agrees that cutting tariffs in foreign trade zones would give US-based manufacturers an incentive to remain in the US, instead of moving to countries like Mexico. When I pressed the point, a Kirk spokeswoman said she was authorized to say only that Kirk is “certainly aware” of the TAP idea. But the spokeswoman added that the Obama administration’s position was “that it it will be up to the committee of jurisdiction in the House to decide whether and when to move it forward.”
Kirk doesn’t have to look far to find a man who knows the politics. The USTR’s new general counsel, Tim Reif, was recommended to the Obama administration by his former boss, Rep. Sandy Levin, the man who killed the Pascrell bill last year.
Nor does Kirk have to look far to see the benefits of foreign trade zones. The former Dallas mayor has only to pick up the phone and call the Dallas-Ft. Worth International Airport, which is just one of the Texas-based locations of a foreign trade zone. Or he could call other foreign trade zones in Texas, including those in Galveston, El Paso, Beaumont, Laredo, McAllen, Brownsville, the port of Houston, and the port of Corpus Christi. Kirk should be an enthusiast of foreign trade zones — and probably is.
If he were not employed by Barack Obama, would it be like pulling teeth to persuade Ron Kirk to say something about the benefits to his home state of such operations? It is doubtful.
Why would lawmakers like Levin, for whom keeping American jobs at home is a political mantra, hate the idea of putting US-based manufacturers on the same proverbial “level playing field” as competitors that manufacture in places like Mexico? And why would President Obama and his economic advisers be so cool to an obviously economically beneficial idea aimed at keeping jobs in America, one of the administration’s top declared priorities?
The answer is quickly gleaned by looking at some of the US-based manufacturers who would stand to benefit from the TAP legislation.
BMW makes cars in a free-trade zone in South Carolina. Toyota of America builds cars in a free-trade zone in Kentucky. Mercedes is in Alabama, as is Hyundai. Honda is in Ohio. Nissan is in Tennessee. These automakers all see an important part of their future in making their cars in the US; not every one of their American factories is inside a foreign trade zone, but many are. Besides Kentucky, Toyota also has facilities in Indiana, Texas, Alabama, and West Virginia. While Toyota has one factory south of the US border in Baja California, Mexico, the company has clearly staked the future of its US operations inside the United States.
By contrast, the Detroit Big Three automakers, or whatever Ford, Chrysler and GM call themselves these days, have in the past operated from foreign trade zones within US borders, but now have little interest in them. Thanks to Nafta, GM Mexico moved many of its manufacturing operations south of the border, exporting a range of its automobiles to the US, duty free: Cavaliers, Sunfires, Silverados, Suburban. GM, thanks to Nafta, became Mexico’s largest single employer.
GM’s position on the TAP legislative proposal, along with that of Ford and Chrysler, is simple: Why should we support any measure that would give competitors like Toyota of America that operate in the US the same tariff break that we have gotten by shifting production to Mexico? Stephen Collins, the president of the Automotive Trade Policy Council, the lobby that advocates international economic, trade, and investment policies on behalf of Ford, Chrysler, and GM, declined to respond to an e-mail asking if he would care to further elaborate.
The United Autoworkers of America is also against the idea of saving American jobs through TAP’s proposed tariff cuts. The foreign auto transplants in the US may employ Americans, but these aren’t union jobs — and thus aren’t real American jobs, in the UAW’s view. UAW lobbyist Doug Meyer declined to respond to an e-mail asking directly if the UAW would support legislation aimed at preserving the jobs of Americans who aren’t union members. If you want us to support the legislation, first unionize, the UAW insists.
The UAW and the Automotive Trade Policy Council worked behind the scenes with the Congressional Research Service to try to shoot down a study that was done for the National Association of Foreign Trade Zones that explained the benefits of the TAP proposal. In March, 2008, respected economists Gary Hufbauer and Dean DeRosa had estimated that the gains from the Pascrell bill would give the US economy a $530 million boost, and could create nearly 100,000 American jobs. Forget the numbers — as another prominent economist, Jagdish Bhagwati, observes, it is “utterly ridiculous” to pretend that liberalizing trade by cutting tariffs is a bad idea.
But such sensible economic advice apparently didn’t carry much weight with the Congressional Research Service. Basically, the politically compliant CRS was happy to oblige another member of the Detroit auto lobby, Sen. Debbie Stabenow (D-Mich.), who wanted to have her own study to waive around. On Sept. 29, 2008, CRS weighed in with a 26-page report that gave the Michigan auto lobby what it wanted.
“The primary beneficiaries of TAP appear to be foreign multinational corporations (especially motor vehicle producers) that source components from non-FTA countries (China, Japan and the European Union), and some oil companies that operate U.S. refineries,” the congressional study concluded. Referring specifically to economics, the CRS study said that “the primary benefit of TAP would be tariff benefits for corporations that source components from third countries” — an “economic” observation that is ignorant of the realities (and benefits) associated with modern global supply chains.
Of course, the UAW and the old-line Detroit auto lobby have only been advocating their narrow self-interest as they see it. But what about the Obama administration? Here, the questions become more intriguing.
Now that President Obama’s administration owns GM, will the president see his obligations to advance the company’s interests the same way as GM lobbyists have traditionally done — using available government levers to put the foreign competition at a price disadvantage whenever possible? Will Obama, as a GM owner and as a political ally of the UAW, see competitors like Toyota and BMW which have factories in the US as the enemy? What does the president have to say to the 360,000-some Americans who work in foreign trade zones?
That for the new president and his aides such questions are the cause of political anguish reveals something about business-as-usual in Washington, D.C.