Ed Gerwin

Volkswagen GTI is turbocharged with room for…tariffs?

The Volkswagen Golf GTI is a perennial winner of Car and Driver’s 10Best award. The German-built sport hatchback combines “speed, handling, build quality, an attractive interior, and room for the family,” all for under $30,000. Car and Driver raves about the GTI’s turbocharged engine and notes it’s a formidable challenger to competing “hot hatches.”

Apparently, the U.S. Department of Commerce believes that the GTI poses another challenge — maybe a turbocharged threat to America’s national security.

In a still-confidential 2019 report, the Department reportedly found that imported autos like the GTI “threaten to impair the national security” and recommended that the president impose tariffs as high as 25 percent.

All revved up

The president would enact these tariffs under Section 232 of the Trade Expansion Act of 1962. As TradeVistas’ Andrea Durkin has detailed, Section 232 is a little-used Cold War-era law under which Congress delegated broad authority to the president to restrict imports for national security reasons. The law is also the basis for current controversial duties on steel and aluminum.

The proposed tariffs have generated opposition from vehicle manufacturers, suppliers, economic analysts and members of Congress. The Alliance of Automotive Manufacturers notes that a 25 percent tariff on autos and parts would raise the price of an average imported car by an estimated $6,000 (and add $2,000 to a U.S.-built car) while potentially leading to the loss of over 600,000 American jobs. The Association of Global Automakers (now merged with the Auto Alliance to form the Alliance for Automotive Innovation) questions how passenger cars and light trucks are relevant to national security, suggesting that “America does not go to war in a Ford Fiesta.” Statements from Administration officials suggest that the “national security” justification for auto tariffs may be a pretext to gain negotiating leverage in other contexts.

Congress may put the brakes on Presidential tariffs

With the possible exception of avid inventor Ben Franklin, America’s founders would be astounded by the GTI. They might be equally astonished, however, by the Trump Administration’s assertion of broad authority to impose tariffs. After fighting a revolution against “taxation without representation,” the founders believed it was vital to entrust the power to impose tariffs and other taxes to the people’s representatives. Specifically, Article I, Section 8 of the Constitution vests Congress with the “power to lay and collect taxes [and] duties.”

Since 1934, after its disastrous experience with the Smoot-Hawley tariffs, Congress has increasingly delegated specific trade and tariff powers to the president, subject to a variety of limitations. Presidents have generally used these powers judiciously and to reduce tariffs to expand trade. For example, when President Kennedy signed the 1962 Trade Expansion Act (which enacted Section 232), he emphasized the importance of opening trade and reducing trade barriers and warned against “stagnating behind tariff walls.”

President Trump has taken a maximalist approach to his delegated powers to impose tariffs, particularly for “national security” reasons. In response, Congressional critics from both parties point out that under the Constitution, Congress should be the ultimate driver of tariffs, not the president.

Other concerns with the Administration’s application of national security tariffs include a lack of transparency in determining tariffs and administering tariff exclusions, its use of an overly broad definition of national security, and the cascading impacts on U.S. producers from higher metal prices. Legal experts are also concerned that the Administration did not follow the law when it imposed new tariffs on derivative steel products (including nails and bumpers) and when it extended its review of auto tariffs when time limits under Section 232 have likely expired.

Time for a trade law tune-up?

Congress could rein in presidential national security tariffs by simply repealing Section 232. However, even critics of current tariffs recognize that there are circumstances where the president might need authority to adjust trade in response to national security threats. Accordingly, Congress has focused instead on bipartisan proposals to place additional limits on the president’s ability to employ Section 232.

The Trade Security Act of 2019, introduced by Senator Rob Portman (R-OH) and Representative Ron Kind (D-WI), would bifurcate the Section 232 process. The Department of Defense (DoD) would first investigate whether there is a national security basis for restricting imports of an article. If DoD finds that an article poses a security threat and the president decides to act, the Commerce Department would then recommend tariffs or other measures to address the threat. The Portman-Kind bill would also enable Congress to disapprove any Section 232 trade restriction imposed by the president through a resolution of disapproval that would itself be subject to a veto by the president. This legislation would not impact current Section 232 tariffs on steel and aluminum.

The Bicameral Congressional Trade Authority Act of 2019, introduced by Senator Pat Toomey (R-PA) and Representative Mike Gallagher (R-WI) would also require DoD to take the lead in investigating whether an article poses a national security threat, while also adopting a tighter definition of national security. Notably, under this legislation, no proposed Section 232 action by the president could take effect unless Congress first passes a resolution of approval. The Toomey-Gallagher bill would also (i) repeal current steel and aluminum duties unless Congress passes an expedited resolution of approval, (ii) direct the independent U.S. International Trade Commission to report to Congress on the economic impacts of Section 232 actions, and (iii) require that the USITC administer the tariff exclusion process for future Section 232 actions.

Getting out of neutral

For the past year, Senate Finance Committee Chairman Chuck Grassley (R-IA) has been attempting to meld the Portman and Toomey bills into a compromise measure that would attract veto-proof majorities in Congress. Despite considerable bipartisan support, Grassley notes that this effort has faced two challenges. First, there’s opposition from Republicans who see the legislation as a rebuke of President Trump. Second — as any student of U.S. trade history could have predicted —interests that benefit from new national security tariffs are now lobbying intensely to retain these tariffs. Despite this opposition, Grassley has vowed to continue efforts to enact Section 232 reform in 2020.

More potholes ahead?

Meanwhile, Volkswagen’s GTI and other imported autos will continue to face the threat of national security tariffs. And that threat won’t necessarily subside if a Democratic president takes office next year. Some Democrats have already proposed using the Trump Administration’s expansive reading of Section 232 to advance their own policy goals — particularly to address the climate crisis. Carbon-emitting autos like the GTI would be a prime target for new tariffs.

The GTI was designed for Germany’s smooth, high-speed autobahns. When it comes to U.S. national security tariffs, however, the GTI’s road ahead may continue to be full of potholes.

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Ed Gerwin is a lawyer, trade consultant, and President of Trade Guru LLC.

This article originally appeared on TradeVistas.org. Republished with permission.

Pining for Simpler Times

Pencils remind us of simpler times, when writing was an adventure and erasing life’s mistakes was easy.

In the classic 1958 essay I, Pencil, Leonard Read opened a window for readers into the surprisingly complex global supply chain of something everyone holds in their hand, the pencil. Read helps us realize that countless individuals are involved in logging, mining, processing, transporting, and manufacturing the California cedar, Sri Lankan graphite, Mississippi clay, and foreign and domestic copper, zinc, wax, and coatings combined to produce an elegantly simple pencil.

To Read, a pencil is a miracle. No single individual could make one and no “master mind” directs its production. Pencils are made nonetheless because of the “invisible hand” of free markets. In the decades since Read’s essay, commentators have observed that pencil making is not entirely the result of free-market activity. Governments, too, support pencil production by managing forests, educating workers, and building ports and roads.

The question of where and how pencils are made has resurfaced in the current debate over American trade policy. In a recent campaign video by Senator Elizabeth Warren, she criticizes “giant ‘American’ companies” and their U.S. and foreign shareholders for “hollowing out” American communities. Warren offers as a proof point that “the maker of the famous no. 2 pencil” now largely imports pencils made in China and Mexico.

With pencils in the spotlight, we revisit what can they teach us about the complexity and nuances of modern American trade.

Is Trade Erasing U.S. Manufacturing?

American pencil production has plummeted over the last 25 years. According to the U.S. International Trade Commission (USITC), the number of U.S. pencil manufacturers fell from 11 in 1993 to four in 2016.

Dixon Ticonderoga — maker of the iconic green-banded yellow pencil — shuttered plants in Ohio and Missouri in the early 2000s, shedding hundreds of jobs. With the end of production by Sanford L.P. in 2014, U.S. production and capacity plunged further — by more than half. During this period, the domestic share of America’s $557 million pencil market declined markedly, while imports from China, Brazil, Mexico, and elsewhere more than quadrupled, growing from 6.7 million gross in 1993 to 28.8 million gross in 2016. (A gross is 144 pencils.)

What’s at the Core?

There has been a significant “hollowing out” of American pencil manufacturing. But is the pencil industry representative of U.S. manufacturing and trade generally? The data suggest it’s not.

America has lost five million manufacturing jobs since the mid-1980s. During this period, however, U.S. manufacturing output has doubled. America is making more stuff with fewer workers largely because U.S. factories are more efficient. Studies show that the loss of American manufacturing jobs is due primarily to improved technology, not trade. Economists at Ball State estimate that, overall, 87 percent of U.S. manufacturing job losses between 2000 and 2010 were due to automation, while 13 percent resulted from trade. (Automation was by far the predominant cause of job loss for 15 of the 18 manufacturing sectors studied.)

There are, however, certain largely lower-tech U.S. manufacturing sectors where trade has had a much greater impact. Foremost among these are furniture and apparel (Senator Warren’s video also highlights foreign production of Levi’s jeans) where economists estimate that trade accounted for some 40 percent of job losses. Pencil manufacturing is an example of a “mature” industry where there’s little room for manufacturing innovation but space for makers of high quality products for niche markets. Indeed, for American specialty manufacturers like New Jersey-based General Pencil, the process and equipment used to make pencils has hardly changed from over a century ago.

Can Protection Sharpen U.S. Production?

Policymakers often try to revive trade-impacted low-tech sectors through trade protection. The pencil industry’s experience highlights the difficulties of this approach.

In 1994, the United States imposed antidumping duties on pencils from China, after finding that sales of Chinese imports at “less than fair value” were injuring U.S. manufacturers. Imports of pencils from China fell sharply in 1995. By 1998, however, the volume of “subject imports” from China (six million gross) actually exceeded the volume during the original investigation.

The antidumping duty order was continued in 2000, 2005, 2011, and 2016 after the USITC found that revoking the order would cause further injury to U.S. pencil makers. However, despite duties as high as 114.90 percent imposed on “unfair” imports, subject imports continued to grow to 9.2 million gross in 2004 and 10.5 million gross in 2009, and were 8.5 million gross in 2016.

The pencil industry isn’t the only manufacturing sector where efforts at protection have seemingly failed. Over 97 percent of clothing and footwear sold in America is made overseas, despite the fact that America has, for decades, imposed tariffs on these imports that often exceed 30 percent.

Back to School – With Trade, the Consumer Wins

Is “Big Pencil” to blame for the loss in U.S. manufacturing jobs? Or, are big retailers who seek lower-cost pencils from overseas? While Dixon Ticonderoga isn’t a large company, it’s now owned by a larger Italian firm and imports most of its pencils. And, according to the USITC, there has been increasing consolidation among U.S. wholesale purchasers of pencils. Office Depot and Office Max have merged and big box stores like Target and Walmart are buying larger volumes and seeking low prices.

These retailers are responding to demand for lower-cost imported pencils — in no small part from America’s parents.

Although there has been a resurgence in demand for high-quality, specialty pencils like the Palomino Blackwing and coloring pencils for stressed-out Boomers, most “commodity” pencils are sold during the “back to school” season. In recent years, schools are increasingly requiring parents to buy student supplies like pencils.

In 2018, American parents paid an estimated $941 for school supplies and fees for each middle school child. These costs can be a significant burden, especially for low-income parents. Imported pencils — and binders and backpacks — can help moderate these costs. Studies show that middle-income, and especially lower-income Americans, gain significant buying power, stretching their dollars further, from imports.

Pop Quiz

The pencil has a storied history. According to pencils.com, Ancient Roman scribes introduced the use of thin metal rods as a stylus. In the 1800s, the best graphite was sourced from China. Although the first mass-produced pencils were unpainted to show off high-quality wood casings, pencil makers later painted them yellow, a regal color in China, to demonstrate the quality of the graphite within.

The simple pencil continues to both transcribe and itself illustrate complex stories, including the growth and effects of global trade. It can also evoke fond memories like the time mine saved me on a pop history quiz in the 5th grade:

Question 3: Name three Colonial forts.

My answer: Fort Pitt, Fort William Henry, and . . . uh . . .oh yeah! Fort (Dixon) Ticonderoga!

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