Clark Packard

On the heels of Russia’s aggressive war against Ukraine in early 2022, the Biden administration temporarily exempted Ukrainian steel from the Trump administration’s bogus “national security” tariffs imposed under Section 232 of the Trade Expansion Act of 1962 (at the behest of the domestic steel industry). The exemption was set to expire on June 1, 2023, with tariffs snapping back to 25 percent. Last week, the White House announced it would maintain Ukraine’s exemption from tariffs and expanded it to cover Ukrainian steel processed within the European Union (EU). For free traders battered by ill‐​advised protectionism over the last two administrations, this announcement is what constitutes good news these days. As my Cato colleague Scott Lincicome rightly noted on Twitter, “… this exemption is a tacit admission that opening our markets to goods/​services from allies & other friendly nations is IN THEIR AND OUR OWN SECURITY INTERESTS, but admitting that wouldn’t be very ‘worker‐​centric’,” the latter of which has been a central talking point in the Biden administration’s protectionist trade policy. This (very) minor tariff relief is a positive relative to the status quo, but it also serves as a sad reminder of the domestic steel industry’s stranglehold on U.S. trade policy.

To recap, in 2018 despite a memorandum from his own Secretary of Defense who rightly noted that the Defense Department only needed three percent of steel produced domestically, President Trump imposed 25 percent “national security” tariffs on steel (and 10 percent tariffs on aluminum) imported from virtually every country in the world, including longstanding allies. Naturally those tariffs angered such allies and triggered predictable retaliation from trading partners. The tariffs also imposed enormous costs on downstream domestic users—raising prices of a critical input for manufacturers and builders. In 2020, economists Dr. Kadee Russ and Lydia Cox found that the steel and aluminum tariffs cost the U.S. economy about 75,000 manufacturing jobs, not including foreign retaliation. Meanwhile, the Peterson Institute for International Economics estimates that the tariffs cost consumers about $650,000 for each steel job created.

We’ve been down this road before. In 2002, President George W. Bush imposed broad based tariffs on steel under Section 201 of the Trade Act of 1974, which allows the executive branch discretion to impose temporary tariffs to counteract an alleged surge of imports. The Bush tariffs ranged from 10 to 30 percent and applied to over 170 different steel products. A very recent Cato research brief written by Drs. James Lake of the University of Tennessee and Ding Liu of the Analysis Group, which is based on a longer working paper, found that the Bush steel tariffs “had large negative short‐​term effects on local steel‐​consuming employment but no notable effects on local employment in the steel industry.” Research from the Trade Partnership found that the Bush steel tariffs cost 200,000 jobs in steel‐​consuming industries at a time when only about 187,000 people worked in the steel industry and resulted in about $4 billion lost wages between February and November of 2002—the immediate six months following the tariffs’ imposition. Angered allies led by the European Union challenged the tariffs at the World Trade Organization (WTO) on grounds that they were inconsistent with the WTO’s Agreement on Safeguards. The U.S. eventually lost the case at the WTO and quietly withdrew the tariffs but not before substantial damage was done.

Those are just the discretionary tariffs politicians in the United States have imposed in recent decades to protect the domestic steel industry. The rot is much deeper. Indeed, the United States aggressively uses anti‐​dumping (duties designed to counteract the alleged scourge of a foreign producer selling below cost) and countervailing duties (designed to counteract foreign government subsidies) (AD/CVD)—so-called “trade remedies”—under the Trade Act of 1930 (infamously known as Smoot‐​Hawley) to protect the domestic steel industry. Cato scholars have long criticized the sordid history and application of AD/CVD laws in the United States—see here, here, here, here, here, and here. Unlike the Section 232 and 201 tariffs imposed by the Trump and Bush administrations respectively, AD/CVD duties are imposed through a complicated quasi‐​judicial process involving the U.S. International Trade Commission and the Department of Commerce after a petition is filed by a domestic firm or industry group. Irrespective of the process by which they are imposed, these duties can reach astronomical levels—324 percent on steel nails from Kosteel Vina, a Vietnamese steel producer, for example. Today, there are nearly 670 AD/CVD orders on the books in the United States and some form of steel is involved in 305. In other words, nearly half of the U.S. trade remedies are protecting the domestic steel industry. Not only that, there are currently 16 AD/CVD investigations involving steel ongoing according to the International Trade Administration.

Owing to layers of protection, U.S. manufacturers and builders pay more for steel than their competitors in other countries. On May 22, 2023, for example, the benchmark price for a metric ton of hot‐​rolled steel in the United States was $1,170 compared to the world export price of $580 for a metric ton of hot‐​rolled steel. Given that steel is a vital input in the production of a wide swath of items, U.S. protectionism makes steel‐​consuming industries less competitive globally than firms in countries with cheaper access to steel.

Over the years, Washington has provided billions of dollars’ worth of protectionism and subsidies to the domestic steel industry. Despite this largess, the U.S. steel industry continues to shrink while at the same time its high‐​powered lobbyists and lawyers beg at the trough for more protectionism. Again, while the White House’s decision to extend Ukraine’s exemption from the steel tariffs is welcome news, the whole ordeal is a sad reminder that much of the domestic steel industry today defines “success” by bending government power in its favor.

Nicholas Anthony

Last week, I wrote about how there is a lack of official statistics regarding the effectiveness of the Bank Secrecy Act and how what little information exists is troubling.

However, a few folks were kind enough to point out that the Financial Crimes Enforcement Network (FinCEN) defines money laundering under a broad umbrella, so I wanted to follow up to make sure readers had the full picture available. The figure below provides the complete list of subcategories that FinCEN defines as money laundering in its suspicious activity report (SAR) statistical database.

Much like I explained last week, the vast majority of reports are not filed because Americans are suspected of crimes such as human trafficking or terrorist activity. Instead, financial institutions file most of these reports to the government because they’re not sure where a customer’s funds came from, they suspect the transactions were out of the norm for the customer, or they see that the customer used multiple accounts.

We can also add some more context to the number of IRS investigations that FinCEN cited in its report. My colleague Chris Edwards was kind enough to point out that although FinCEN only cited the percentage of IRS criminal investigations that were initiated, we can figure out the exact number by turning to the IRS Data Book. There we see that the IRS conducted 2,552 criminal investigations during the 2022 fiscal year. Therefore, 15.8 percent of that total represents 403 investigations.

In other words, despite financial institutions spending $46 billion a year complying with this regime and filing over 26 million reports, these reports only initiated 403 criminal investigations (Figure 2).

To be clear, this chart only reflects the IRS’s criminal investigations—countless other government agencies have access to these reports. So more data is certainly needed to understand the full picture here, but from what we can see, the current state of financial surveillance looks far from justified.

Gabriella Beaumont-Smith and Alfredo Carrillo Obregon

On May 31, 2023, legislation was introduced to lower U.S. barriers to imports of infant formula and infant formula base powder. As we and our colleague Scott Lincicome have explained (repeatedly), eliminating tariffs is one of several smart policy reforms that would not only help American babies and parents, but also ensure a more stable U.S. market in the future.

Unfortunately, some U.S. interest groups oppose such commonsense reforms, while their allies in Congress echo industry claims (and thus demonstrate the longstanding link between American protectionism and constituent service). As we’ll explain, however, these groups’ five main arguments are as sour as month‐​old milk.

1. Trade liberalization must always be reciprocal.

Lowering U.S. trade barriers benefits Americans. When the U.S. reduces or removes a tariff on an import, that good or service becomes cheaper. At the same time, heightened market competition encourages domestic firms to innovate and accelerates U.S. economic growth. The U.S. government should not deny its residents these and other benefits, just because our trading partners do so to their residents.

Moreover, the U.S. should not cede control of its economic policy to that of other countries. The U.S. was built on the foundation of liberty and should maintain the freedom to improve its economy without waiting for other countries to do the same. Ceding U.S. sovereignty in this way also undermines important reform. While most countries in the world have lower barriers than ever before thanks to multilateralism, the last few rounds of World Trade Organization (WTO) negotiations to continue liberalizing trade (especially in agricultural goods) have been mired as members are less willing to expend the political capital necessary to lead the way. The same idea applies to reciprocity, promising future inaction on trade reform and hence the argument’s popularity with protectionists.

In short, the U.S. should not maintain high trade barriers that impoverish Americans because other countries lack the economic insight or political strength to stop impoverishing their citizens, nor should the U.S. abandon its fundamental values and stall reforms, promoting lower standards of living.

2. Reducing tariffs on infant formula imports hurts dairy farmers.

Given the highly protected nature of the U.S. infant formula market and, more broadly, the U.S. dairy industry, it is possible that allowing more formula imports could decrease demand for some U.S. dairy products. However, it’s far from certain that liberalization would significantly harm the dairy industry.

First, formula production accounts for a small fraction of total U.S. dairy consumption. Domestic farmers would continue to service the overwhelming majority of dairy consumption in the United States, and as Figure 1 suggests, tariffs on other dairy products would remain high.

Second, and more importantly, it does not necessarily hold that trade liberalization would undermine the U.S. dairy industry. As the examples of Australia and New Zealand show, a country can liberalize its market for dairy products and host a thriving industry. Both countries not only apply low tariffs on dairy imports (see Fig. 1), but also removed farm subsidies. In response, many dairy farmers adapted their organizational structure and practices to be successful in both domestic and global markets. Given the increases in U.S. dairy farming productivity witnessed in recent years (largely due to the integration of more advanced technology in the sector), there is little to suggest that American farmers would not be able to do the same.

3. Freeing up trade in infant formula would have spillover effects for other products and expose U.S. dairy farmers to unfair trade practices.

Interest groups opposed to tariff liberalization often suggest that foreigners will respond with “tariff engineering”—physically manipulating a higher‐​tariff product in non‐​commercial ways so that it qualifies for a lower tariff under U.S. law. Some U.S. dairy farmers are reportedly concerned that this could be done with the infant formula base powder that is liberalized under the new bill, but this claim is far‐​fetched. Infant formula base powder is not a product that will be used in anything other than infant formula, and any milk solids incorporated into other products, including in U.S. infant formula, will remain protected by other dairy program provisions.

Furthermore, other U.S. laws and enforcement actions can address trade practices that might arise from eliminating basic U.S. tariffs. This includes “trade remedies”—anti-dumping and countervailing duties (AD/CVDs)—that address harms to domestic producers caused by surges of “unfairly traded” imports. As Cato scholars have long explained, the U.S. trade remedies system is flawed, but in ways that benefit domestic industries. Thus, while these laws should be reformed, their existence today would act as a check on illegally “dumped” or “subsidized” formula imports allegedly harming the U.S. dairy industry.

4. Foreign suppliers of infant formula are unreliable and make the supply chain less resilient.

There are several problems with this argument. First, there is little support for the notion that foreign suppliers are inherently unreliable. The fact that formula imports rose throughout the formula crisis in 2022, particularly after tariff‐ and non‐​tariff barriers were suspended by the federal government (see Fig. 2), shows that the U.S. market is attractive to foreign producers and they are willing to export to the United States. Moreover, amidst last year’s shortages, the country turned to suppliers from countries like Spain, Germany, the Netherlands, Australia, New Zealand, and the United Kingdom—all longstanding U.S. trading partners and countries with some of the highest health and safety standards in the world. That the federal government authorized these suppliers to ship formula without having to go through the onerous Food and Drug Administration’s (FDA) inspection and approval process is suggestive that U.S. policymakers are confident about the safety and quality of the products imported from these countries.

On a more fundamental level, both economic theory and recent events have debunked the idea that trade liberalization would undermine the resiliency of the U.S. infant formula market. While openness to trade and global markets might increase exposure to foreign competition, last year’s crisis showed how a highly concentrated and closed U.S. market—where trade barriers caused domestic suppliers to satiate 98 percent of domestic demand—turned a single domestic shock into one of the deepest and longest supply chain crises of the last decade. Since domestic production remains highly concentrated and the underlying policies remain largely unchanged, a future shock to any domestic producer would likely cause widespread shortages again. Openness to international trade, by contrast, would mitigate this risk by diversifying the pool of suppliers that can service the market, and thereby increase the resiliency of the infant formula supply chain in the face of future disruptions. Indeed, both the White House and Congress recognized this fact by lifting trade restrictions and flying in formula from overseas to alleviate the formula crisis.

5. Stock levels are almost fully recovered, if not better than before Abbott’s recall.

While the fact that stock levels are returning to pre‐​crisis levels is certainly a welcome development, it does not by itself assuage concerns that a future shock to domestic supply would again lead to nationwide shortages.

Aggregate stock levels may also obscure the fact that access to formula post‐​crisis continues to be relatively unequal. According to the latest iteration of the U.S. Census Bureau, 26 percent of households with an income below the median (i.e., $75,000) reported having difficulties in finding infant formula within the previous week, a rate slightly higher than the 20 percent of above‐​median income households that responded similarly. Moreover, 34 percent of Hispanic/​Latino and 27 percent of Black households reported such difficulties compared to only 15 percent of White households. While importing more formula alone would not solve inequality, it appears illogical to oppose trade liberalization, which would help ensure adequate levels of supply. Further, liberalizing trade guarantees a reduced risk of another crisis by providing American consumers with more options and allowing new supply and distribution relationships to develop before another crisis could occur.

Conclusion

The legislation introduced by Senators Mike Lee (R‑UT), and Bob Menendez (D‑NJ), and Representatives Adrian Smith (R‑NE), and Don Beyer (D‑VA), is a refreshing change from the seemingly ubiquitous political messages for onshoring and isolationism. Last year’s formula crisis was a glaring reminder of the risks of protectionism and American parents should not have to continue paying the price to protect a handful of dairy farmers.