Tuesday, January 09, 2007

Protectionism in Disguise

The U.S. Congress -- now controlled by Democrats -- looks poised to approve legislation that would require virtually universal inspection of shipping containers bound for the United States. The stated purpose of the proposal is to protect American port cities from terrorist attack in the form of biological, chemical, or nuclear weapons hidden in one of the hundreds of thousands of containers that arrive in this country each year.

As indicated by the title of a 2006 book by Marc Levinson, The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger, the shipping container -- which came on the scene in its modern version only 50 years ago -- revolutionized international trade. As The Economist noted in a review of the book last March:

Consider the economics. Loading loose cargo, a back-breaking, laborious business, onto a medium-sized ship cost $5.83 a ton in 1956. McLean calculated that loading the Ideal-X cost less than $0.16 a ton. All of a sudden, the cost of shipping products to another destination was no longer prohibitively expensive.

This opened up all sorts of possibilities. Instead of manufacturing goods locally, a company could afford to replace its overcrowded multi-storey factory in Brooklyn with one in Pennsylvania, where taxes, electricity and other costs were lower, and then ship its goods to New York in a container. Later the factory might move to Mexico; it is now probably in China.

The ubiquitous box changed the heart of many of the world's great maritime cities. Mr Levinson details the battle for New York's ports and the longshoremen's struggles to preserve their jobs. The new container terminals in Newark eventually won, leaving older berths and warehouses empty in New York City.

Similar transformations took place in other countries, where unions refused to handle containers, or in ports that could not modernise because they lacked the space to store thousands of containers and handle the fleets of trucks and trains that were needed to move them. The demolition of Rotterdam by German bombers in 1940 gave the Dutch a chance to rebuild the port with containerisation in mind. Similarly, Felixstowe's growth came about with the demise of Liverpool and the collapse of the London docks.

The proposal for universal screening will substantially increase the cost of shipping. The U.S. House of Representatives, which passed the bill (designated H.R. 1 to indicate its priority in the Democrats' 100 hours program) today by a vote of 299 to 128, ignored the analysis of economists and business leaders that indicated how trade could suffer if the plan is implemented. Spencer Hsu writes in The Washington Post:
...critics questioned the cost and feasibility of new cargo requirements -- raising issues that helped stall action by the previous, Republican-controlled Congress -- and industry and the Department of Homeland Security added their opposition. The greatest skepticism focused on requirements in the House bill that airlines be able to physically inspect 100 percent of cargo put aboard passenger planes within three years and that shippers scan 100 percent of U.S.-bound cargo for radiation at overseas ports in five years.
The potential costs are significant. Hsu continues:
... the Homeland Security and Energy departments last month announced a congressionally required pilot program to spend $60 million to scan 7 percent of U.S.-bound cargo originating from six ports by year's end. The program would start with ports in Pakistan, South Korea and Britain, with a goal of eventually expanding to 30 percent of U.S.-bound cargo. Scanning 100 percent of cargo would involve about 700 ports worldwide.

Other provisions of the House bill also carry a big price tag, which House Speaker Nancy Pelosi (D-Calif.) has said she expects airlines and shippers to help fund. For example, inspecting all cargo placed aboard passenger aircraft by 2009 could cost $3.6 billion to $6 billion for equipment, installation and screening personnel, the Congressional Research Service and the Transportation Security Administration estimate, House Republican officials said.

Heritage Foundation analyst James Carafano calls H.R. 1 "feel-good security," noting that these particular aspects of the bill will do little to protect Americans but will cost much:
To deter terrorists from exploiting international trade, the U.S. currently relies on counterterrorism and intelligence programs combined with risk assessments, random checks, and the inspection of suspicious high-risk cargo. The House bill would replace that system with one that mandates "strip searching" every package and container coming from overseas. The bill expects the private sector and foreign countries, as well as the U.S. government, to spend billions of dollars on these inspections even though they would likely be no more effective than current programs and, in fact, could be much more easily circumvented by terrorists. Diverting energy and resources into mass screening is a poor strategy that is likely to make Americans less, not more, safe.
In addition to "feel-good security," I would call it something else: Protectionism disguised as protection.

These rules create a substantial (though not insurmountable) non-tariff barrier to trade with the United States. Producers, shippers, and port operators will have to figure the new costs into their prices, which will all be passed along to purchasers in the United States.

By artificially inflating the costs of goods imported into the United States, this bill will ill-serve American consumers, who will end up paying higher prices at Wal-Mart and most other retail stores. This conveniently fits the Democrats' general antipathy toward free trade (the exchange of goods and services by consenting adults without the interference of government) and will undoubtedly meet with the approval of labor unions in the domestic manufacturing sector (however few workers in that sector are now unionized).

I agree with Carafano's suggestion about H.R. 1:

To avoid damaging U.S. homeland security operations and wasting taxpayers' money, Congress should strip the most troubling provisions from this legislation.

Let's start by being more sensible about the economic consequences of a bill like this.


NoVA Scout said...

Thanks for a timely post. What the Dems are doing on this, Rick, is worse than protectionism. It's a knowingly destructive measure the result of which is national economic collapse. Most of the Members of Congress who are flogging this thing are smart enough to know the peril they are risking, but are doing it anyway because they sense it will have resonance with voters who do not understand the dependence of the economy on the efficient flow of goods to and from overseas locations.

James Jay Carafano said...

Thanks to your comments and thoughtful analysis