Brexit Will Lead to Free Trade Agreement Between America and the UK

A British member of Parliament for the European Union said that once Brexit takes place, the United States and the United Kingdom can form a new free trade agreement based on markets.

Brexit is the name of the vote held by the U.K. on June 23, 2016, to withdraw from the European Union, which will happen by March 30, 2019.

Daniel Hannan is a member of the U.K.’s Conservative Party and is a member of the European Parliament. He is also president of the Institute for Free Trade, an organization that supports Brexit as a way to help promote free trade. He spoke Nov. 7 on the issue of Brexit and free trade at The Heritage Foundation.

Hannan said he wants to see a free trade deal between the U.S. and U.K. similar to what Australia and New Zealand has where each country accepts the other’s regulations. As an example, he said if one country approved a drug, then it should be sold in the other country too.

“If the alliance between our two nations is about anything, surely it is about raising the individual above the collective,” Hannan said.

Hannan said that back in 2001, Washington, D.C., wasn’t too kind to the thought of Brexit, and The Heritage Foundation was the only place he could get a “sympathetic hearing.”

He told a story about how discoveries took place when civilizations first started to rise, and some people found it easier to steal the crops of others. He said society then regularized the theft of crops with tolls and taxes, which then created tyranny.

Hannan said people eventually learned they were individuals and could trade with one another, which brought prosperity. After this, people could pursue trades that interested them.

“The argument for freedom and free markets is not simply that it has been a terrific instrument of poverty alleviation of social justice, but that it is about human dignity and personal autonomy,” he said.

Hannan said the case for free trade is the same as private property, and the government shouldn’t tell people what they can buy or sell. He said Great Britain got rich in the 19th century because it “reduced barriers to trade.”

He gave an example of price regulation by mentioning how the price of sugar in the U.S. is about twice the price of sugar worldwide and has been since the Revolutionary War. He said this causes candy makers to move to other countries, such as Canada and Mexico.

Hannan said Florida is an electorally important state, so people listen more to those who run the sugarcane market there. He added to this topic that distortions of trade hurt the economy.

“We have to make the argument that the best way of maximizing prosperity of this, as of any other nation, is to leave people free, to let them make their decisions, to allow capital to optimize,” Hannan said.

As for the U.K., Hannan said unemployment has fallen, and the stock market has gone up since the Brexit vote. He said the people who say Brexit will eventually hurt the U.K.’s economy are like “apocalyptic doomsday cultists.”

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Pulp Nonfiction: A Tale of Protectionism and Newsprint Producers

Which skill is more important, knowing how to run your business or knowing how to get the government to stymie your competitors? The case of a paper mill in Washington state shows the sad answer is “not clear.”

Thirty years ago, you would have been holding a newspaper in your hands while reading this commentary. The tech revolution of the ensuing decades has been great for almost everybody, but not for those making something called uncoated groundwood paper (a.k.a. “newsprint”). However, this is not a secret.

According to their online bios, none of the investment professionals or managing partners at the hedge fund One Rock Capital Partners, which owns the paper mill in question, appears to have any particular experience in the pulpwood paper business.

Even so, they must have known that the newsprint market has been in decline for decades, as physical newspapers lost out to broadcast and digital media. This market has dropped 75 percent just since 2000.

Nevertheless, there must have been reasons for One Rock’s purchase of North Pacific Paper Co., a 300-employee newsprint producer in Longview, Washington. Perhaps the financial and lean-production experience the professionals and managers do claim to have can be transferred to the paper business and help the paper company innovate its way out of a dying business.

However, it looks like until that happens, One Rock is using the other strategy—get the federal government to whack your competitors.

Since newsprint is expensive to transport, competition is primarily regional. So, a big chunk of North Pacific Paper Co.’s competition is just across the border in Canada. The company’s implements of choice in its battle against competition are the anti-dumping and countervailing duty provisions of U.S. trade policy. As with any battle, there is collateral damage.

While trying to protect their year-old investment and, we would hope, some portion of the 300 or so jobs at North Pacific Paper Co., the leaders at One Rock are putting hundreds of thousands of other U.S. jobs at risk. First in line to suffer the effects are those in the declining but still large newspaper and printing businesses. So, it is easy to understand why they strongly oppose s the paper company’s tariff request.

However, in a bit of an irony, some American producers of newsprint, and their employees, also will suffer. How can that be?

The pulp paper business in North America is highly integrated, with many producers having assets both in Canada and in the United States. Severing the supply chain connections from Canada or just taxing away a big chunk of a firm’s revenue from north of the border can significantly reduce overall profitability.

That the American Forest and Paper Products Association opposes the attempt by North Pacific Paper Co. to stifle Canadian newsprint sales is evidence of the aggregate net harm to U.S. firms.

So, how does this translate to American jobs? While the market for newsprint has been in decline, opportunities exist to offset this decline by retooling to make other products and to improve efficiency. However, this takes money. If one revenue stream is taxed away because part of your operation is in Canada, that leaves you less of the money needed for the critical changes to stay profitable and to save those U.S. jobs.

Resolute Forest Products is an example. In the past four years, the company has invested more than $600 million in its U.S. operations to adapt to a changing world.

Yes, its newsprint business is in decline. However, even though we baby boomers don’t want to think about it, the market for another pulpwood product, adult diapers, has a rosy future.

North Pacific Paper Co.’s tariff request would hobble the ability of firms such as Resolute to invest in such new and expanding markets.

To create jobs and economic vitality, companies need to have the freedom to use their own resources to get out of dying markets and into growing ones. Taxing those who are doing just that, in order to bail out investors who appear to be doubling down on the proverbial buggy whips, is not good for U.S. workers or consumers.

An “America first” policy is the one that supports the job-creating investment of a dynamic economy. Taxing newsprint is a backward-looking, America-last, investment-last, and jobs-last policy.

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4 Red Flags About Trade in Trump’s National Security Strategy

President Donald Trump’s new national security strategy is a significant and positive break with the recent past on many political and security issues. It is also relatively and appropriately conventional on some other matters—like the importance of alliances and American engagement in the world.

But the area of international trade, the strategy, which presidents are required by law to submit to Congress, raises some red flags.

Red flag 1: The use of the term “fair trade.” This is a time-honored Washington catch phrase. Sometimes it means exactly what it says. Virtually all Americans would agree that trade—as most other things in life—should be “fair.”

Most often, however, the term masks protectionism and industrial policy. Proponents of “fair” trade have used the term to justify keeping competitive products and investment out of the U.S. market, not for the benefit of American consumers and workers, but to pad the accounts of well-connected industries and their labor unions.

Red flag 2: Emphasis on bilateral trade deficits. Trade deficits are not the only way to measure economic relationships. In fact, at the end of the day, the broader account of our economic relationships balance out as foreigners invest in the United States. Sure, some of that goes into U.S. government debt, which is far too large. But that is a different problem, and one entirely under our own control. Otherwise, foreign investment in the U.S. is a good thing.

Besides, whenever deficits and imbalances are mentioned in the national security strategy, it is in the context of the deficit in goods. This does not account to the fact that the U.S. maintains a large surplus in services.

To the credit of the administration, the strategy does prioritize the negotiation of new bilateral trade agreements. This is critically important in the wake of the U.S. withdrawal from the Trans-Pacific Partnership and renegotiation of the North American Free Trade Agreement and the U.S.-Korea Free Trade Agreement. But assuming by “bilateral agreements” the administration means “free trade agreements,” it will have to take a broader view of their value if it is to find any takers.

Red flag 3: The emphasis on revitalizing the U.S. manufacturing base, strengthening the defense industrial base, defending the “national security innovation base,” and prioritizing the development of particular technologies. Like the reference to “fair” trade, these terms may hide an intention to pick winners and losers among participants in the American economy.

The administration seems to have a real weakness for the American steel industry, for example. Is the strategy really saying that industries like steel and aluminum need to be protected whatever the cost to supply chains and consumers, and regardless of the real impact of foreign supplies on U.S. national security? Will this logic apply in other areas like semiconductors, vehicles, shipbuilding, and aircraft that the administration has identified as “core industries”? What other technologies and innovations will be prioritized and to whose benefit?

Export of goods is an important part of the American economy, but so are services, imports, and foreign investment. It is not the role of government to choose the balance among these, but the market’s role.

Red flag 4: The integration of economics and China policy. The strategy rightly draws a bright new line on China. Indeed, the U.S. must face up to the challenge that China presents American interests abroad, over freedom of the seas, on Taiwan, and on trade (including its theft of intellectual property rights and protection of its own economic stakeholders).

We also must take a new look at the way China’s state-owned companies interact with free markets. Given the vast advantages of state support, does it make sense that Chinese companies are treated on the same basis as companies that do not have such support? We need to think this through.

But let’s not throw the baby out with the bathwater. China is America’s largest trading partner. And it is not a one-way street. U.S. goods exports to China have doubled over the last 10 years, growing more than twice as fast as to the rest of the world. Services exports to China have quadrupled over this period.

It is no secret that trade issues are hotly contested in this administration. And the strategy gives no indication that the debate has been settled. The references to trade could simply indicate a very robust enforcement regime—coupled with an effort to reach bilateral free trade agreements. Or they could presage an unprecedented economic nationalism that would do serious damage to the American economy.

Time will tell. In the meantime, the national security strategy helps point to where the battle must be joined.

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How Tariffs and Regressive Trade Policies Hurt the Poor

With round 5 of NAFTA negotiations behind us, Americans can begin to look forward to round 6 in Montreal in the second half of January.

While all Americans stand to benefit from free trade, we must not lose sight of who has the most to lose.

Tariffs are just taxes on Americans by another name. However, some Americans shoulder a larger burden under protectionism than others.

Unlike our progressive income tax, taxes on imports (tariffs) are regressive and take a bigger percentage of income from poor families. Lower-income individuals and families thus may bear a significant burden from tariffs, while those of more comfortable means are not as affected.

In fact, cutting tariffs could be the biggest tax cut low-income families will ever see.

It is conservatively estimated that the poorest one-fifth of American households pay roughly $95 a year in tariff taxes. Richer households pay more in absolute terms (about $500 each for the richest 10 percent), but much less as a percentage of income.

This is largely because tariffs raise the price of food and clothing, which make up a larger share of a low-income household’s budget. In 2016, Americans paid a 20 percent tariff on a variety of dairy products, up to a 34 percent tariff on canned tuna, and a massive 131.8 percent tariff on specific peanut products.

Every extra dollar spent on tariffs is a dollar that cannot be spent on other goods and services. These price hikes on daily necessities make it harder for struggling families to put food on the table and clothes on their children’s backs.

While raising tariffs hurts lower-income Americans, decreasing them can provide a breath of economic fresh air. If America were to eliminate all tariffs today, lower-income families could expect to retain more of their incomes than the 2001 and 2003 tax cuts allowed them to keep.

The future of American prosperity is intertwined with the freedom to trade. The U.S. can embrace free trade, or we can run from it. If we run, the poorest Americans will be hurt the most.

That is something to think about when the next chapter of NAFTA negotiations—round 6—begins next month.

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How Curbing Washer Imports Could Send US Jobs Down the Drain

The International Trade Commission recently announced recommendations for the U.S. to impose tariffs of up to 50 percent on washing machine imports exceeding a quota of 1.2 million units annually.

The recommendation has been passed along to President Donald Trump, giving him 60 days to reach a final decision.

This announcement comes on the heels of the trade commission-backed claim that foreign competitors, Samsung and LG, are “injuring” the domestic washing machine—specifically, Michigan-based manufacturer Whirlpool.

If Trump decides to take the commission’s recommendation, Americans will quickly begin to see fewer washing machine options and higher prices on the common household appliance.

The protectionist move against LG and Samsung comes, perversely, just as those companies are set to employ thousands of Americans in Tennessee and South Carolina.

It may also inadvertently put the final nail in the coffin of one of the longest-standing bastions of the American service industry, Sears Holdings Corp. For more than a century, Sears has employed thousands of Americans, and despite recent store closures, still employs roughly 140,000 people in the U.S. today, with more than 6,000 of those employees in service technician roles for home warranties on appliance products.

In an attempt to move in the direction of modern and high-tech washing machines, Sears recently awarded a contract to LG for the production of some of Sears’ own Kenmore brand of washers. The washers were previously supplied by Whirlpool. Disagreements over cost contributed to the change of suppliers.

Making it more expensive for LG to import the washers it produces for Kenmore, one of Sears’ most popular product lines, will jeopardize the retailer’s efforts to revitalize its brand.

American trade rules should make the process of buying and selling easier, not more difficult.

Restricting washer imports may help Whirlpool, but will hurt other American companies—and American consumers as well.

Trump should reject the remedy proposal put forth by the International Trade Commission. Doing so would keep the government’s thumb off the scale in the washer industry and allow consumers to purchase the products they prefer at the best prices possible.

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China Cutting Tariffs Just Weeks After Trump’s Asia Trip

Following President Donald Trump’s recent trip to Asia, China has released a long list of dramatic tariff cuts on a range of imported consumer goods. In fact, over 200 different products will see an average reduction of approximately 10 percent.

U.S. cheese exporters have been particularly vocal about the importance of China lowering tariffs. Demand for dairy products has been growing rapidly in China—by 100,000 metric units over the past decade—and the U.S. dairy industry could benefit from greater access to the Chinese market.

Tom Vilsack, president and chief executive of the U.S. Dairy Export Council, also highlighted the diplomatic benefits of the cuts, noting that the process will “cultivate trust and build critical relationships between the U.S. dairy industry and Chinese official institutions.”

Beyond the U.S. dairy industry, many multinational corporations with household names in America will see major financial gains.

Nestle could see an approximate sales increase of 15 percent, or $18.7 billion, as a result of the tariff cuts. Procter & Gamble Co., an American company that manufactures products for brands like Tide and Gillette, will see tariff reductions on items ranging from diapers to electronic toothbrushes.

China’s unilateral decision to cut tariffs, however modest, should prove beneficial for its major trading partners, including the United States. The cuts will also benefit the people of China, allowing them greater access to a variety of products at more competitive costs.

The Index of Economic Freedom, published annually by The Heritage Foundation, examines 12 factors of economic freedom, including trade freedom. While China’s average applied tariff rate is just 3.2 percent, import tariffs vary drastically from product to product across the Chinese economy, and often result in costly barriers for foreign companies.

Hopefully, China’s tariff reductions will be just a first step in a series of efforts to allow goods, services, and capital to flow more freely between the rest of the world and China.

To have a major impact, however, those efforts will need to include greater privatization of the state-owned enterprises that distort China’s economy, as well as significant reductions in government control of the finance and banking sectors.

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