FACT: Kung Fu Panda 4’s Chinese box office earnings are down 65% from the Kung Fu Panda 3 record.

THE NUMBERS: Kung Fu Panda series box office –

	World	U.S.	China
KFP1:	$632 million	$215 million	$26 million
KFP2:	$665 million	$165 million	$92 million
KFP3:	$520 million	$143 million	$154 million
KFP4:	$544 million	$193 million	$50 million*

* As of end-June 2024. 

WHAT THEY MEAN:

Here’s the Smithsonian’s National Zoo happily joining First Lady Dr. Jill Biden last May to announce the coming arrival of a new pair of giant pandas — Bao Li and Qing Bao — this fall.  As the bears prepared for the flight east from their suburban Sichuan home to Connecticut Avenue NW, their cartoon cousin Po from the Kung Fu Panda series’ fourth installment was crossing the Pacific in the other direction. His reception in China was a bit lukewarm though, with box office down nearly two-thirds from the third KFP film. Why the drop? Some possibilities …but some background [minor spoiler alert] first:

Set in an animated version of ancient China, DreamWorks Animation’s 4-film Kung Fu Panda series centers on martial arts enthusiast panda Po. Something of a bumbler as KFP1 opens, Po to everyone’s surprise turns out to be an incarnation of the legendary “Dragon Warrior.” Trained by elderly Master Shifu, Po leads other martial arts adepts to defeat evil, foil villains, and emerge as hero of the Valley of Peace and leader of the Panda Village. KFP’s first installment drew its largest audience in the United States. Chinese interest, with the incorporation of traditional wuxia storylines and qi themes, escalated over the first three films to the point at which KFP3’s $154 million Chinese box office was nearly a third of global revenue and outdid U.S. sales by $11 million. But eight years later, interest seems off.  What happened?

1. Reviews not so good: One very simple explanation: Chinese viewers liked the earlier movies more.  The major fan-sites rated each of the first three KPF’s above 70% (“enjoyable and well-made”), while KFP4 dropped to about 60% (“average and passable”).  Among more formal reviewers, China Youth groans — “how surprised the audience was 16 years ago, how disappointed they are now” — and Xinhua concurs: “[T]he movie’s absorption and application of Chinese elements seems to have reached the end of its rope. … Po’s adventures have become less exciting.”

2. Growing preference for local films: There’s also a bigger picture, with Chinese-made films in general gaining relative to foreign productions. Chinese box-office revenue is up from $6.6 billion in 2016 to $7.3 billion in 2023, and from 17% to 23% of global box office. As the audience has grown, viewers’ tastes have changed noticeably though not drastically. While foreign films continue to draw, local productions have caught up over the past decade. Among the 423 films China screened in 2016, the 31 U.S. productions averaged $79 million, five times the $15.6 million average for Chinese-made films. By 2023, the Chinese-film average had jumped to $28 million, and the U.S. average dropped to an equal $28 million. From this perspective, KFP4’s lower earnings might illustrate local films’ rising entertainment value, and consequently diminishing passion for foreign movies. A table has the figures:

Year	# of movies shown in China	Total box office	Average box office per movie	# of U.S. movies*	Average box office per U.S. movie
2016	423	$6.6 billion	$15.6 million	31	$79 million
2023	510	$7.3 billion	$14.3 million	35	$25 million
2024 YTD	104	$3.0 billion	$28.0 million	10	$28 million

3.  Co-production and Cultural Match: A third explanation looks to some unique advantages for KFP3 as a U.S.-China co-production by DreamWorks and its joint venture with the China Film Group Corporation. (Oddly named Oriental DreamWorks; since updated to Pearl Studio after a buyout by the Chinese partner.) This appears to have given KFP3 special technical and cultural cachet, through work by the Chinese partner’s staff on costumes, hairstyles, etiquette, and lip-movement. One example is the female panda and ribbon dancer Mei Mei, for whom the Shanghai animation team corrected dynastic inconsistencies in clothing articles.  Another is the production of a Mandarin version with new lip animation synchronized with Chinese words, to avoid ‘uncanny valley’ and dubbing issues and improve viewing. This anecdote got picked up by the U.S.-China Economics and Security Review Commission, as a relatively unobjectionable case of “Directed by Hollywood, Edited by China (as opposed to a more political “Made in Hollywood, Censored by Beijing”).

4. Co-production and Policy Advantage: Maybe a bit less subtly, official co-production status gave KFP3 a boost KFP4 lacked, with a prized launch-date and avoidance of revenue-sharing systems imposed on foreign content. The Chinese government now allows 34 foreign films in per year — up under WTO rules from quotas of 10 in 1994 and 20 in 2002 — and also regulates release dates.  KFP3 got a great opening night during the blackout period before Chinese New Year and the subsequent Golden Week.  (Lunar New Year often falls in February, and the vacation week afterwards means February often gets China’s largest box office.)  Foreign films rarely if ever get this window; KFP4’s March 22, for example, wasn’t nearly so good.

So: Some mixed reviews, some changing tastes, some particularly good animation quality in KFP3, and some policy favoritism. All this noted, KFP4 still drew double the box office for this year’s Chinese films and topped all others during its opening weekend. So, not a rapturous but still a polite Chinese reception for animated Po, and by no means a bomb. Bao Li and Qing Bao will probably do better this fall at the Zoo, though.

Special Note: Research and drafting for this week’s Trade Fact by Ruowei Yu, a Google Public Policy Fellow with PPI this summer. Ms. Yu is a junior at Georgetown University, concentrating in Government and Economics.

FURTHER READING

Intros & credits:

The National Zoo announces an arrival this November: Bao Li and Qing Bao

WSJ (subscription required) on Hollywood, the animated pandas, and the Chinese media empire.

Georgetown expert Amb. Barbara Bodine on “panda diplomacy.”

And Chinese journalists, unhappy with American portrayals of the previous two pandas’ departure as ‘ankling’, call out “false narratives.”

Dolly back: Hollywood, China, & “Sino-American relations”:

The 2012 agreement to increase market access for U.S. movies.

The U.S.-China Security and Economic Commission’s Directed by Hollywood, Edited by China looks from Hollywood to Beijing and back, & asks who is changing whom?

From PEN International, an essay on artistic freedom, political censorship, and the choices they entail: “Made in Hollywood, Censored by Beijing.”

Fade to black?

Looking at 2023 global box office, trade journal Deadline feels pessimistic about future foreign-film growth in China.

And some prequels: 

Three book recommendations on Chinese & American high and pop culture, film and TV, and their past collisions:

Jianying Zha’s China Pop (2000); a bit dated but lots of insight and human detail on high-end Chinese cinema, popular culture, and politics in the 1990s.

A little later, Rachel DeWoskin’s Foreign Babes in Beijing (2006) on expatriate life in the boom era, a well-deserved plug for the 1st-century BCE classic Biographies of Famous Women, and DeWoskin’s own experience starring in a “blonde home wrecker” role in a mass-market Chinese TV soap-opera.

And Yunte Huang’s Charlie Chan: The Untold Story of the Honorable Detective (2011) looks back at the Chan character’s long career, from the original real-world model (1890s Honolulu policeman Chang Apana) to the 1920s novels, the 1930s films and their reception in Nationalist China, Asian roles in old Hollywood, and more recent Asian-American community intellectual debate.

ABOUT ED

Ed Gresser is Vice President and Director for Trade and Global Markets at PPI.

Ed returns to PPI after working for the think tank from 2001-2011. He most recently served as the Assistant U.S. Trade Representative for Trade Policy and Economics at the Office of the United States Trade Representative (USTR). In this position, he led USTR’s economic research unit from 2015-2021, and chaired the 21-agency Trade Policy Staff Committee.

Ed began his career on Capitol Hill before serving USTR as Policy Advisor to USTR Charlene Barshefsky from 1998 to 2001. He then led PPI’s Trade and Global Markets Project from 2001 to 2011. After PPI, he co-founded and directed the independent think tank ProgressiveEconomy until rejoining USTR in 2015. In 2013, the Washington International Trade Association presented him with its Lighthouse Award, awarded annually to an individual or group for significant contributions to trade policy.

Ed is the author of Freedom from Want: American Liberalism and the Global Economy (2007). He has published in a variety of journals and newspapers, and his research has been cited by leading academics and international organizations including the WTO, World Bank, and International Monetary Fund. He is a graduate of Stanford University and holds a Master’s Degree in International Affairs from Columbia Universities and a certificate from the Averell Harriman Institute for Advanced Study of the Soviet Union.

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FACT: Panama Canal worker mortality down 99.9% from the 1906-1914 project to the 2006-2016 expansion.

THE NUMBERS: Panama Canal shipping –

	Ship Transits	Cargo
2023	14,080	511 million tons
2015	13,874	331 million tons
1965	11,834	71 million tons
1915	969	5 million tons

 

WHAT THEY MEAN:

To build the Panama Canal, 56,000 workers dug a trench 41 feet deep across 48 miles of peninsula, including a rock ridge 275 feet high and 8 miles across. Over eight years, they moved 177 million cubic meters of earth and rock weighing half a billion tons. When it opened at the end of June 1914, the Gatun Locks — the largest concrete structures ever built until the 1930s — could lift and float ships up to 965 feet long and 106 feet wide.  This meant nearly all world shipping, and transit time from New York to San Francisco fell by half.  As a quick table shows, the Canal opening by itself equaled the logistical effect of replacing sailing ships with steam a generation earlier, and maritime technology has needed a century to halve passage time again:

Clipper ship record, 1854	89 days
Pre-Canal steamship record, 1900	59 days
Panama Canal average, 1920s	30 days
Current	15 days

A century later, with the Canal grew too narrow and shallow to accommodate for the world’s largest ships, the Panamanian government’s $5.2 billion expansion project moved another 52 million cubic meters of earth and stone.  Its conclusion at the end of June in 2016 deepened the navigation channels and opened new locks on the Pacific and Atlantic (180 feet wide and 60 feet deep, as compared to Gatun’s 110 and 42). The result hasn’t had quite the epochal shipping impact of the original, but has raised cargo volume by about 60%, from about 300 million tons of cargo a year in the early 2010s to 510 million tons a year since 2016. Before the re-digging, the largest ship the Canal could handle was a “Panamax” vessel of 52,500 deadweight tons; now it’s able to handle LNG tankers en route to Asia, and 14,000-TEU container ships coming east.

Another aspect of the two excavations, and the century separating them, illustrates not only logistical progress and engineering achievement but human progress.

Visionary 19th and early 20th-century projects took a large toll. The initial French attempt to build the Canal in the 1880s, before the discovery of the mosquito vector for yellow fever, proved beyond the reach of 19th-century technology and failed at the cost of 22,000 lives. The successful early 20th-century American effort wasn’t much safer: 5,609 of the 56,000 workers — mostly recruited from Barbados, Jamaica, and other Caribbean islands — died over the eight years of construction. The Canal Commission’s 1910 report, as a typical example, records 548 employee deaths, including 376 from disease (especially yellow fever and malaria, despite energetic efforts to control mosquito breeding), and 164 from industrial accidents including dynamite explosions, railroad accidents, electrocutions, drownings, and “accidental traumatisms, various.”

The expansion program’s record, telescoping a century’s worth of public health and worker-safety policy development, is a remarkable change.  We haven’t found a detailed worker mortality report of this type for the last decade’s expansion program, but (a) an online source of uncertain reliability, quoting an official at the 2016 conclusion ceremony, says there were seven, and (b) an ILO workplace death and injury table suggests that the whole of Panama averages 4 to 6 workplace deaths a year among its 2 million workers. Sometimes things do get better.

* TEU: “twenty-foot equivalent unit,” the acronym used to describe the number of twenty-foot shipping containers a vessel can carry.

FURTHER READING

Today:

The Panama Canal Authority has current cargo statistics.

… and an explanation of the expansion project eight years later.

Perspective from the U.S. Embassy/Panama City.

And live camera at the five Locks.

Looking back, with a human perspective:

The Canal Commission’s massive labor recruitment on Barbados is said to have brought 40 percent of the island’s working-age men to Panama, and cut the population from 200,000 in 1900 to 172,000 in 1910. The total workforce added 12,000 from the United States, 16,000 from other Caribbean islands, and 8,000 from Europe and Latin America to the 20,000 Barbadians.  A tenth of them died during construction – 5,609 people, including 4,290 Caribbean workers – of yellow fever, malaria, landslides, explosions, railway accidents, and other illnesses and workplace injuries.  By country, the Canal Commission’s 1910 death toll included 167 workers from Barbados, 113 from Jamaica, 49 from Martinique and Guadeloupe, 60 from other Caribbean islands, 48 from Spain, 36 from Colombia and Panama, and 31 from the United States.

“We Were Giants” — Barbados remembers the 20,000 at the 2014 Canal centennial.

Perspective from Smithsonian Magazine on labor recruitment, segregation in the Canal project , and health policies.

NIH reflects on the achievements and flaws of the Canal builders’ yellow fever and malaria control program.

And as a primary source, the Isthmian Canal Commission’s 1910 report; see Appendix P for statistics on worker health, mortality, and disease control.

ABOUT ED

Ed Gresser is Vice President and Director for Trade and Global Markets at PPI.

Ed returns to PPI after working for the think tank from 2001-2011. He most recently served as the Assistant U.S. Trade Representative for Trade Policy and Economics at the Office of the United States Trade Representative (USTR). In this position, he led USTR’s economic research unit from 2015-2021, and chaired the 21-agency Trade Policy Staff Committee.

Ed began his career on Capitol Hill before serving USTR as Policy Advisor to USTR Charlene Barshefsky from 1998 to 2001. He then led PPI’s Trade and Global Markets Project from 2001 to 2011. After PPI, he co-founded and directed the independent think tank ProgressiveEconomy until rejoining USTR in 2015. In 2013, the Washington International Trade Association presented him with its Lighthouse Award, awarded annually to an individual or group for significant contributions to trade policy.

Ed is the author of Freedom from Want: American Liberalism and the Global Economy (2007). He has published in a variety of journals and newspapers, and his research has been cited by leading academics and international organizations including the WTO, World Bank, and International Monetary Fund. He is a graduate of Stanford University and holds a Master’s Degree in International Affairs from Columbia Universities and a certificate from the Averell Harriman Institute for Advanced Study of the Soviet Union.

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FACT: The Trump campaign is proposing a higher tea tax than George III.

THE NUMBERS: Tea taxes – 

Current U.S. “MFN” tariff on black and green tea	0%
Current “301” tariff (applied to Chinese tea only)	7.5%
“Tea Act” 1773*	~8%
Trump campaign proposal	10%

*3 pence per pound of tea; ad valorem equivalent varied with price.

WHAT THEY MEAN:

Parliament intended the “Tea Act” of May 1773 mainly as an emergency bailout of the “East India Company.” In modern terms, the EIC was a “state enterprise” (though one with a military arm) launched in 1600 and, by the late 18th century, governed parts of India. Its conquest of Bengal in the 1760s had left the company nearly bankrupt. To rebuild its finances, the Tea Act authorized the Company to ship a 250-ton stockpile of unwanted tea (bought a year earlier in Guangzhou) to Britain’s Atlantic colonies with the regular 25% export tax waived and a refund for the tariffs it had paid bringing the stockpile into London. The Tea Act left in place an existing 3-pence-per-pound tariff to be paid by colonial buyers, and by requiring export licenses for overseas tea sales, also confirmed that only the EIC was allowed to sell tea to colonial customers.  Two often missed details about this very tediously written law:

(1) The 3 pence per pound tea tax wasn’t especially high. Here’s the arithmetic:

Tea cost 3 to 4 shillings per pound in the 1770s.  (Prices varied a bit each year.)  In Britain’s confusing 18th-century currency system — golden guineas, pounds sterling, shillings, pence, and farthings — one shilling equaled twelve pence.  So “3 pence per pound” meant a tariff varying in a range from about 8% in low-price years to 6% in high-price years. To put this in context, the “301” tariff the Trump administration imposed on Chinese tea in 2019 is 7.5%, essentially identical to the Tea Act level, and the 10% tariff the Trump campaign has pitched is well above the George III rate.  (The permanent U.S. tariff on tea is zero for black and green, but 6.4% for some flavored varieties.) Of course, at the time, nobody in Parliament or the Ministry pretended the Chinese tea-growers would somehow pay it; everyone knew colonial consumers would do that.

(2) The tea tax wasn’t new.

Parliament had launched it in 1767 as part of the larger “Townshend Revenue Acts”, which also had imposed tariffs on colonial purchases of molasses, sugar, tea, glass, and some other products. These had all been canceled after colonial protest — no taxation without representation – except for the tea tax. Parliament’s hope in dropping the export tax (apart from rebuilding the EIC’s finances) was that tea prices would fall, inducing the colonists to stop buying tea from other sellers.

Why then did the Tea Act arouse such emotion? Here we can look to the two global-economy grievances cited in the Declaration:

Grievance #16: “For cutting off our trade with all parts of the world” refers most immediately to the blockade of the Port of Boston, begun in mid-1774 in retaliation for the previous December’s Tea Party.  (See below for the startling trade data.) The longer-term issue were laws called “Navigation Acts” passed between 1651 and 1696, which (a) banned colonial imports of anything except British-made goods or products such as the EIC tea shipped via British ports, (b) prohibited exports of colonial products to anyone but British buyers, and (c) required use of British-owned ships, with crews of at least 75% British or colonial sailors, to carry goods.  The colonists had mostly ignored these rules up to the 1750s, except for the security-sensitive case of timber exports reserved for Royal Navy shipyards. They resented renewed enforcement in the 1760s and 1770s as having financially damaged some of them and eroded everyone’s freedom to buy what they liked, and saw the Tea Act’s attempt to reinforce the EIC’s tea monopoly as escalation.

Grievance #17: “For imposing taxes on us without our consent”, is, of course, the famous “taxation without representation” dispute about the imposition of tariffs (and earlier, stamp taxes) without approval by colonial legislatures.  Even at relatively low rates, the Tea Act re-ignited the whole 10-year-old argument by confirming a tax at any level. As with Navigation Act enforcement, the Tea Act’s declaration that Parliament retained its right to impose new ones also seemed to promise lots more to come.

With that, the links between the Declaration’s opening abstract discussion of government principles (“deriving their just powers from the consent of the governed”), the references to specific grievances such as those caused by the Navigation Acts, Tea Act, and Boston Port Act, and the risks the signatories are willing to take to redress them (“we mutually pledge our Lives, our Fortunes, and our sacred Honor”) link up. A bit more below for those interested in whether the tea controversy of 1773 and 1774 has any modern relevance.  Either way, PPI trade staff wish readers and friends a happy Fourth.

*By tonnage, Argentina is the top source of U.S. tea at 43 million kilos, or nearly half the 104 million-kilo total in 2023. Traditional growers India, China, Vietnam, and Sri Lanka come next by tonnage; Japan, however, earns the most money selling tea to Americans, with their 3,500 tons of high-end sencha and matcha bringing in $105 million of the U.S.’ $493 million worth of imports last year. 

FURTHER READING

250 years later, is the tea tax controversy relevant for anything but historical interest?  If the main question is whether a tax is “legitimately” imposed, here’s the catalogue of current tea policy and proposals:

*    The modern zero-tariff rates for black tea and green tea, and the 6.4% for flavored teas, may be good policy or not depending on one’s point of view, but are the result of old tariff bills passed and trade agreements ratified by Congress.  So from the ‘representation’ perspective, no problem.

*    The 7.5% tariff imposed on Chinese tea during the Trump administration is open to question.  It avoided Congressional action and seems at face value in tension with the Constitution’s Article II, Section 8: “Congress shall have power to lay and collect Taxes, Duties, Imposts and Excises.” It still, however, came through a Congressional law (“Section 301”) ceding some Congressional control over tariff policy in cases when administrations want to use tariffs as negotiating leverage.

*    The 10% tariff on all tea the campaign has proposed — Sri Lankan, Argentine, Japanese, Chinese, whatever — seems, if imposed by decree, to evade Congressional tax powers altogether.

Data:

Census’ 1975 collection of trade data from the Colonial era and the early republic:

“Cutting off our trade with all countries of the world”: Boston in 1772 — a town of 15,520 by the 1765 census — was getting about 850 ship arrivals a year, and receiving about a fifth of all U.S. trade.  After the blockade began this all stopped, and other colonies began refusing British goods in protest.  Here are the colonies-UK trade data:

	Colonial exports	Colonial imports
1776	£0.11 million	£0.06 million
1775	£1.92 million	£0.19 million
1774	£1.37 million	£2.59 million
1773	£1.37 million	£2.08 million

Background and documents:

The U.S. National Archives’ official text of the Declaration.

… and discussion from the Monticello Foundation.

The UK National Archives explains 18th-century British currency (four farthings per pence, 12 pence per shilling, 20 shillings per pound sterling, and 21 shillings per golden guinea).

… and reprints British government reaction to the Tea Party.

… and Yale Law School reprints the text of the verbose Boston Port Act which followed.

And a book recommendation:

The Smithsonian’s essay collection The American Revolution: A World War looks at the Revolution from abroad, with appearances by French admirals, Chinese tea merchants, Spanish viceroys, German warlords, Dutch gun-runners, and the intrepid Sultan Haidar Ali of Mysore, admired by the colonists as a fellow enemy of the East India Company and namesake of one of the Continental Navy’s 65 ships, the 40-ton Hyder-Ally.

ABOUT ED

Ed Gresser is Vice President and Director for Trade and Global Markets at PPI.

Ed returns to PPI after working for the think tank from 2001-2011. He most recently served as the Assistant U.S. Trade Representative for Trade Policy and Economics at the Office of the United States Trade Representative (USTR). In this position, he led USTR’s economic research unit from 2015-2021, and chaired the 21-agency Trade Policy Staff Committee.

Ed began his career on Capitol Hill before serving USTR as Policy Advisor to USTR Charlene Barshefsky from 1998 to 2001. He then led PPI’s Trade and Global Markets Project from 2001 to 2011. After PPI, he co-founded and directed the independent think tank ProgressiveEconomy until rejoining USTR in 2015. In 2013, the Washington International Trade Association presented him with its Lighthouse Award, awarded annually to an individual or group for significant contributions to trade policy.

Ed is the author of Freedom from Want: American Liberalism and the Global Economy (2007). He has published in a variety of journals and newspapers, and his research has been cited by leading academics and international organizations including the WTO, World Bank, and International Monetary Fund. He is a graduate of Stanford University and holds a Master’s Degree in International Affairs from Columbia Universities and a certificate from the Averell Harriman Institute for Advanced Study of the Soviet Union.

Read the full email and sign up for the Trade Fact of the Week.

FACT: The U.S. digital economy, on its own, would be the world’s eighth-largest economy.

THE NUMBERS: “GDP,” 2022* – 

World:	$100.66 trillion
1. U.S.	$25.74 trillion
… [China 2, Japan 3, Germany 4, India 5]
6.  U.K.	$3.10 trillion
7.  France	$2.78 trillion
U.S. digital economy	$2.57 trillion
8.  Russia	$2.27 trillion
9.  Canada	$2.16 trillion

* IMF for world and countries; Bureau of Economic Analysis estimate for U.S. digital economy.

 

WHAT THEY MEAN:

Last December the Commerce Department’s Bureau of Economic Analysis statisticians ventured an estimate of the size of the American “digital economy.” After sifting the “digital” bytes and pixels out of the big manufacturing, services, mining, information, and other “sectors,” they then summed up the software, hardware, e-commerce, computer systems design, gaming, and other online (or online capable) industries. The arithmetic yielded a figure of $2.57 trillion for American digital “GDP” in 2022 — exactly a tenth of that year’s $25.7 trillion U.S. economy, and 2.5% of the $100.7 trillion world economy. Were the U.S. digital economy an independent country, it would have ranked eighth in the world, $200 billion below France and $300 billion above pre-war Russia.

Whether compared to the overall U.S. economy, the world, or other countries, the American digital economy has some distinctive features. First, it is fast-growing.  In 2022, it grew by 6.5%, nearly double the world economy’s 3.5% growth rate.  From 2017 to 2022 the gap was even larger, with the digital economy averaging 7.1% annual growth and world GDP 2.7%. Second, its population is modest: BEA estimates a total of 8.9 million U.S. digital-economy workers, slightly less than a third of the 28 million French workers for nearly the same “GDP” value.  (Alternatively, the Netherlands — a high-income country with 9.6 million workers, close to the U.S. digital-worker total — had a GDP of $1.01 trillion.) Third, it is affluent – U.S. digital-economy workers earn $2,195 per week on average, about 33% more than the $1,650 average for U.S. workers in general.  And finally, it is trade-reliant, earning 28% of its money from exports. This is about twice the U.S.’ overall 13% export reliance, and about equal to the world average.

For more on this last point, over to a smaller and equally cerebral agency — the White House’s Council of Economic Advisers, on the top floor of the Eisenhower Executive Office Building — whose data-heavy blogs serenely survey the U.S. and world economic landscapes each week. The latest, out last Tuesday, examines the interface between this U.S. digital economy and the outside world. Some of its findings:

Scale: As of 2022, digitally delivered services exports came to $719 billion, a quarter of the U.S. $3.02 trillion in total exports. This included $93 billion in exports of “ICT” services (telecommunications, computer services, and software licensing payments) plus $626 billion in “digitally deliverable” services, such as financial wires, telemedicine diagnoses, music downloads, Chatbot fails, memes, distance education, and so forth. The U.S. is easily the world’s largest supplier of these things — as an index, the WTO’s somewhat different overall “commercial services” total for the U.S. was $900 billion in 2022, about an eighth of the world’s $7.04 trillion total, and just about equal to the $492 billion of second-place U.K. and $422 billion of third-place China put together.

Exporters: The largest U.S. digital exporters are financial services providers, with 29% of the 2022 total. They aren’t far above labs and factories, though: manufacturers ranked second with 24%, much of it through revenue from “rights to use their patents, industrial processes, or software licenses abroad.” A 24% share of $719 billion is about $172 billion, so given 2022’s $1.6 trillion in exports of physical manufactured goods, U.S. manufacturers earn a tenth of their export money through digital services.  (And to complicate things a little, the physical goods themselves often incorporate digital trade — agricultural machinery communicates with its makers to analyze soil and water conditions, medical devices send data for analysis and return it to physicians, automobiles exchange data with headquarters to report signs of wear and signal drivers of the danger of collision.)  Information industries — Hollywood studios, software designers, gamers and influencers, social media and internet platforms, news and media — receive 23% of digital exports; a lengthy spectrum of service providers — architects, R&D scientists, hospitals, universities, advertisers, etc. — combine for the other 27%.

Trade Balance: As CEA notes, the U.S. is more of a seller than a buyer of digital things.  ICT services imports in 2022 were $63 billion and ICT-enabled imports were $370 billion, yielding a digital trade surplus of about $285 billion.

Future: Based purely on physical investment, digital trade seems likely to keep growing fast. Digital services move through space as radio waves via satellite beam, and along the sea-bottoms as pulses of light through fiber-optic cable. The more satellites and cables there are, and the more sophisticated they are, the more services can move, and deployment of both is fast. Last year alone saw 2,664 satellite launches. Cable-watcher TeleGeography reported 550 active and planned submarine cables in June 2023, and expects another 78 to go live by the end of 2025.  That all suggests a continuing boom.  On the other hand, as CEA concludes, growth opportunities also require openness and policy:

“The United States is poised to lead the growth in intangible flows given that the digitally-enabled services sector is one of the highest-paying and innovative segments of the economy.  The rapid growth of digital services will require careful consideration in both domestic and international regulatory regimes. While the United States ranks fifth among fifty countries in terms of having the least restrictive barriers to digital trade, African countries have the highest levels of restrictions, followed by the Asia-Pacific region. Continued consideration and consultation will be necessary to support a thriving digitally-enabled services sector in the United States.”

FURTHER READING

BEA on the U.S. digital economy.

And CEA on American digital trade.

Data:

The OECD tries to compare size and growth rates of digital sectors in Europe, Latin America, Canada, and the U.S.

Perspectives:

Geneva-based trade scholar Richard Baldwin looks at the growth of services trade and decides “peak globalization” is a myth.

Labor:

PPI’s poll of less-than-college Americans last fall finds respondents viewing ‘tech-sector’ jobs as the next generation’s best career options.

And last, on metal birds and glass wires:

Up above: Our World in Data counts last year’s 2,664 satellite launches.

Down below: Telegeography maps the world’s 600 submarine cables, and predicts 75 more lighting up over the next year.

ABOUT ED

Ed Gresser is Vice President and Director for Trade and Global Markets at PPI.

Ed returns to PPI after working for the think tank from 2001-2011. He most recently served as the Assistant U.S. Trade Representative for Trade Policy and Economics at the Office of the United States Trade Representative (USTR). In this position, he led USTR’s economic research unit from 2015-2021, and chaired the 21-agency Trade Policy Staff Committee.

Ed began his career on Capitol Hill before serving USTR as Policy Advisor to USTR Charlene Barshefsky from 1998 to 2001. He then led PPI’s Trade and Global Markets Project from 2001 to 2011. After PPI, he co-founded and directed the independent think tank ProgressiveEconomy until rejoining USTR in 2015. In 2013, the Washington International Trade Association presented him with its Lighthouse Award, awarded annually to an individual or group for significant contributions to trade policy.

Ed is the author of Freedom from Want: American Liberalism and the Global Economy (2007). He has published in a variety of journals and newspapers, and his research has been cited by leading academics and international organizations including the WTO, World Bank, and International Monetary Fund. He is a graduate of Stanford University and holds a Master’s Degree in International Affairs from Columbia Universities and a certificate from the Averell Harriman Institute for Advanced Study of the Soviet Union.

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FACT: The U.S. manufacturing trade deficit rose by over 60% from 2016 to 2021.

THE NUMBERS: Manufacturing sector share of U.S. GDP – 

2023:	10.3%
2018:	10.9%

 

WHAT THEY MEAN:

This fall’s core choice is more basic than a policy question: Can a person who has attempted to overthrow a settled election, and called for the “termination” of unspecified parts of the Constitution, keep an oath to “faithfully execute the office of President of the United States” and “preserve, protect, and defend the Constitution”?  But policy issues, even if they’re secondary this year, still have human consequences. Here’s a look at one:

The Trump campaign pitches a 10% tariff worldwide plus a 60% tariff on Chinese-made goods  — which as we’ve noted before, would be the highest U.S. tariff rate since the Depression. (Last week’s float of replacing the $2.2 trillion income tax with tariffs probably isn’t serious; for those interested in it, a bit more below.) The claim is that the higher prices tariff hikes bring are worth it because they will (a) lower the U.S. trade deficit, (b) put more people in factory jobs as opposed to the health, transport, construction, etc. jobs they now have, and (c) increase U.S. manufacturing output.

The smaller first-term tariffs imposed on steel, aluminum, and most Chinese-made goods in 2018 and 2019 provide some real-world experience for this. What’s happened since then is mostly the opposite of these claims: trade deficits have sharply risen, and grown fastest in manufacturing; U.S. manufacturing job growth has slowed, though not stopped; and the manufacturing share of U.S. GDP has fallen. The data:

1. Trade balance: In the 2017 edition of the “President’s Trade Agenda” (an annual report by the U.S. Trade Representative Office) the then-incoming Trump officials argued that a rise in the trade deficit* over time showed earlier administrations had got things wrong:

“In 2000, the U.S. trade deficit in manufactured goods was $317 billion. Last year [i.e. 2016] it was $648 billion — an increase of 100 percent.”

Economists argue among themselves as to whether trade balances matter much. But nobody disputes what happened after 2018. Tariff rates rose, and the U.S. trade deficit got both bigger in general and more concentrated in manufactured goods. Between 2018 and 2021, the “trade-weighted” U.S. tariff rate doubled from 1.4% to 3.0%, and actual tariff payments rose from $33 billion to $83 billion. Meanwhile, by 2021 the “manufacturing-only” trade deficit figure cited in the 2017 report had soared to $1.06 trillion — about 60% above the 2016 figure — and the overall U.S. goods/service deficit from $479 billion to $842 billion.**

The experience affirms the Econ 1 axiom: a country’s trade balance equals the difference between its savings and its investment. As a form of tax increase, higher tariffs (all else equal) should reduce government-sector “dissaving,” and so should reduce a deficit slightly. If accompanied by larger reductions in other taxes, though, “all else” isn’t equal, and government “dissavings” rise despite the tariff increase. Unless for some reason families and businesses decide to save more, trade deficits will rise. That’s what happened after 2017 (and also after the 1981 and 2001 tax bills).

The especially sharp rise in manufacturing deficits was less predictable. Here the 2018/2019 tariffs are likely a cause. Manufacturers import goods so as to turn them into other goods, and are big tariff payers. About 45% of all U.S. imports (per a San Francisco Fed paper) are this type of industrial input, or “intermediate good.” The permanent “MFN” tariff system mainly taxes consumer goods; the Trump tariffs more often tax industrial inputs. So the tariffs raised the costs of industries like automobiles, machinery, and toolmaking; they faced a bit more challenges competing against imports and succeeding as exporters; and the overall goods/services deficit grew more concentrated in manufacturing.

2. Manufacturing employment: Since 2018, manufacturing employment has continued to grow, but more slowly than before. Looking back to the Obama administration, the BLS’ count of factory jobs grew from 11.5 million in early 2010 to 12.4 million in January 2017, or by 900,000.  Since then, it’s grown to 13 million, i.e. by 600,000. On average, manufacturing employment rose an average of 105,000 a year from 2013 to 2018; since then, with tariffs up, it has continued to rise but by an average of only 50,000 per year. To take a broader view, manufacturing jobs now make up 8.2% of the 158 million non-agricultural U.S. jobs, down from 8.5% in late 2017.  Again, no reason to expect a bigger tariff experiment to fare better.

3. Manufacturing output: Job totals and employment growth, of course, don’t always directly relate to the health of “manufacturing” as such.  By adding computers, robots, and other productivity-boosting technology, some factories can raise output while employing fewer people.  In practice, though, U.S. manufacturing trends since 2018 seem to have paralleled those in employment: growth slower than before, and manufacturing output (though not down in actual dollars) reduced as a share of GDP. The Bureau of Economic Analysis reports that the manufacturing sector grew by $183 billion from 2013 to 2018 (from $2.03 trillion to $2.21 trillion) and accounted for 10.9% of U.S. GDP in pre-tariff 2018.  Output in 2023 was $2.29 trillion, meaning $78 billion in growth from 2018 to 2023, with a GDP share of 10.3%. Sectors that buy fewer goods, and so are less burdened by tariffs, grew noticeably faster — real estate from 7.0% to 7.6% of GDP, information from 5.0% to 5.4%, and professional and business services from 12.5% to 13.0%.

So:  Again, this fall’s policy debates aren’t as important as the constitutional and rule-of-law questions. But for those tracking policy, the 2017 assertions that tariffs would reduce trade deficits and pump up the manufacturing sector have gotten a fair test and proven wrong, and the 2024 claims shouldn’t get much credence.

* Use of nominal dollars, not inflation-adjusted “constant” dollars, is unsound. A better comparison, of the trade balance to GDP, shows a decline from the 3.7% of GDP deficit in 2000 to a 2.7% deficit in 2016.

** Since then it’s drifted back down a bit, to $773 billion in 2023, or more meaningfully from 3.6% to 2.9% of GDP.

FURTHER READING

Data:

The Census Bureau’s U.S. monthly trade data.

…  and for the big picture, U.S. exports, imports, and balances from 1960-2020 on one convenient page.

BEA’s GDP and GDP-by-Industry databases have the stats on trade balance/GDP, manufacturing/GDP, etc.

OMB’s Historical Tables tell you where the money comes from, and where it goes. Use Tables 2.1 and 2.5 for personal income tax and tariff revenue respectively.

San Francisco Fed staff explain intermediate imports.

Left/center/right on Trump campaign tariff proposals:

Brendan Duke of the Center for American Progress sees a $1500-per-family price hike.

Kimberly Clausing & Mary Lovely of Peterson Institute for International Economics estimate $1,700.

And Bryan Riley of the National Taxpayer’s Union evaluates the idea from a low-tax, small-government perspective.

A look back:

The 2017 President’s Trade Agenda report.

And just for the record:

Last week’s Trump campaign float of replacing the income tax with tariff money probably wasn’t a serious idea.  More likely, it was a partially successful effort to move press coverage of the candidate’s Washington visit to something other than the Jan. 6 attack and the recent New York state court criminal proceedings. For the record, though, the concept is financially unworkable, and liable to induce fiscal crisis and rationing if tried. Here’s the arithmetic and the logical endgame:

1. In FY2023, the U.S. government collected $4.44 trillion in revenue: $2.18 trillion from personal income taxes, $1.61 trillion from payroll taxes, $0.42 trillion from corporate taxes, $0.08 trillion from excise taxes (on tobacco, alcohol, gasoline, etc.), also $0.08 trillion from tariffs, and $0.16 trillion from miscellaneous other fees and taxes.  So, scrapping the personal income tax would cost the government half its revenue, and require a $2.18 trillion increase somewhere else simply to match the 2023 revenue.

2. If the tariff system is this “somewhere else,” a system now at $0.08 billion (and already inflated by the 2018/19 tariffs) must grow to $2.26 trillion. Imports of goods potentially subject to tariffs, meanwhile, totaled $3.1 trillion. So, where tariffs now raise $2.80 for every $100 spent on imports, they’d have to get $73. For example, U.S. hospitals, clinics, and drug stores bought $250 billion worth of medicines and medical devices from abroad last year, mostly duty-free. A 73% tax on them (assuming the buyers kept buying) would be $185 billion in new costs for the health system — for example, a $2 billion hike in hearing aid costs, $1.5 billion for crutches, etc.

3. In reality, of course, the buyers probably mostly wouldn’t keep buying; instead, a 73% tariff is likely to collapse trade, leaving us with oil shortages, OTC medicine price spikes, clothing and shoe rationing, and so on. Setting these aside, if imports collapse so does tariff revenue, leaving the U.S. Treasury without its extra $2.18 trillion but still on the hook to pay Social Security, Medicare, interest on previous debt, defense, and other bills. This in turn suggests a supplementary set of policies to prevent or reverse a collapse in revenue, interest rate spike, etc. The logical endgame, a year or so later, is pairing the new tariff system with a big “Buy Foreign” spending and subsidy scheme for businesses and consumers.

ABOUT ED

Ed Gresser is Vice President and Director for Trade and Global Markets at PPI.

Ed returns to PPI after working for the think tank from 2001-2011. He most recently served as the Assistant U.S. Trade Representative for Trade Policy and Economics at the Office of the United States Trade Representative (USTR). In this position, he led USTR’s economic research unit from 2015-2021, and chaired the 21-agency Trade Policy Staff Committee.

Ed began his career on Capitol Hill before serving USTR as Policy Advisor to USTR Charlene Barshefsky from 1998 to 2001. He then led PPI’s Trade and Global Markets Project from 2001 to 2011. After PPI, he co-founded and directed the independent think tank ProgressiveEconomy until rejoining USTR in 2015. In 2013, the Washington International Trade Association presented him with its Lighthouse Award, awarded annually to an individual or group for significant contributions to trade policy.

Ed is the author of Freedom from Want: American Liberalism and the Global Economy (2007). He has published in a variety of journals and newspapers, and his research has been cited by leading academics and international organizations including the WTO, World Bank, and International Monetary Fund. He is a graduate of Stanford University and holds a Master’s Degree in International Affairs from Columbia Universities and a certificate from the Averell Harriman Institute for Advanced Study of the Soviet Union.

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FACT: Japanese firms are the top international investors in the United States.

THE NUMBERS: Japanese population –

Children and teenagers (0-19 years):	19.5 million
70 years and older:	21.2 million

 

WHAT THEY MEAN:

Speaking to Congress in Joint Session last April, Prime Minister Kishida radiates confidence in the U.S.-Japan alliance and takes some pride in the Japanese place in American economic life:

“We are on deck, we are on task. And we are ready to do what is necessary.  The democratic nations of the world must have all hands on deck.  I am here to say that Japan is already standing shoulder to shoulder with the United States. You are not alone.  We are with you.”  …  “Japanese companies have invested around 800 billion dollars, creating almost one million American jobs. These are good jobs with half a million jobs in the manufacturing sector alone.”

Newly-minted PPI Senior Fellow and veteran economic journalist Yuka Hayashi picks up on his themes — alliance, partnership, Japanese industry’s American commitments — in PPI’s newest global-economy research paper “Behind Japan’s U.S. Steel Bid: An Aging, Shrinking Home Market,” through the lens of Nippon Steel’s proposed purchase of venerable Pittsburgh-based U.S. Steel.

To start there: Nippon Steel, the world’s fourth-largest steel producer at 43.7 million tons last year, has been a U.S. metal producer since 1984 and is currently the 50% operator of Alabama’s 5-million-ton capacity Calvert steel mill.  Its 2023 bid for U.S. Steel, though approved by U.S. Steel’s Board and shareholders, has sparked some U.S. controversy and “economic nationalist” rhetoric. PPI’s Ed Gresser and Diana Moss have examined this through the lens of U.S. foreign direct investment policy and anti-trust law; Hayashi picks up the Japanese side of the story, with a picture of Japanese industrial and manufacturing excellence set against an aging population and in some ways shrinking domestic economy, and a consequent search by leading Japanese firms for options beyond the home islands.

Examined from the U.S. angle, science and industrial data add exclamation points to the PM’s point about the large role of Japanese industry in the U.S. economy. The U.S. Patent and Trademark Office, for example, granted 48,051 U.S. patents to residents of Japan in 2022 (the last year available), which was an eighth of all the 385,433 U.S. patents awarded in total and far beyond PTO’s grants to residents of any country apart from the United States itself. Japan-based businesses, meanwhile, have a “foreign direct investment” stock of $775 billion in the U.S. – a seventh of the $5.25 trillion world total, and more than any other country in the world.  (Canada is second at $684 billion and the UK third at $661 billion.)  The Japanese firms employ 1.04 million American workers, paying $107.6 billion in wages and salaries — about $103,000 a year on average — and put $13 billion into U.S. research and development.  And Kishida’s half a million U.S. manufacturing jobs slightly lowballs the precise figure: the Commerce Department reports 544,000 of the U.S.’ 13 million manufacturing workers at work for Japan-based firms.

Hayashi’s paper, meanwhile, illuminates the Japanese side of the story: some of the impressive investment figures reflect Japanese businesses’ response to profound demographic and economic challenges at home. Japan’s population has fallen from a 2007 peak of 127.7 million people to 124.1 million and is dropping by over 600,000 per year. The country’s 21.2 million 70-and-olders now outnumber the 19.5 million Japanese children and teenagers. This means fewer workers each year, a smaller consumer base, and lower future growth prospects. The result, she explains, is that with Japan’s home economy slowly contracting, Japanese industry seeks growth by producing and selling abroad:

“Combined with sluggish wage growth in recent decades, demand for everything from housing, cars to snack food has been shrinking in Japan.  The downturn is likely to intensify. That has pushed Japanese companies, big and small, to expand abroad if they can compete. Overall, Japanese manufacturers are projected to earn 39% of their revenues outside of Japan during fiscal 2023, up from 29% two decades ago, according to a survey of 534 companies by Japan Bank for International Cooperation, a government lender. The companies planned to manufacture 36% of their products outside of Japan, compared with 26% in fiscal 2003.”

Auto star Toyota, for example, sells 1.7 million of its cars at home and 8.6 million elsewhere; therefore, it now makes only 3 million of its 10 million vehicles in Japan itself, while producing another 3 million in China, the United States, and Thailand, and three million more in factories spread across Europe, Southeast Asia, and Latin America. Nippon Steel is making similar choices. With Japan’s own steel use down from a 99 million-ton peak in 1990 to 58 million tons in 2023, Nippon Steel is closing five furnaces in Japan; meanwhile, since 2019 it has launched a massive joint venture with Euro-Indian firm ArcelorMittal in India, and bought facilities in Sweden, Thailand, and Brazil.  Hence its high interest in an American partner. Hayashi concludes that the idea makes sense for both countries:

“Nippon’s emergence as a bidder for a prominent American manufacturer is an inevitable outcome of a changing economic landscape. In the past, Japanese companies came to the U.S. to build factories to escape the impact of trade friction and currency appreciation.  Now they are doubling down because there is no longer enough demand at home to support their growth. The U.S. is where they see opportunities.  All of this will yield significant benefits for the American economy and workers should the U.S. welcome foreign investment by friendly nations like Japan. 

…

“The beneficiaries, in particular, will be American workers without college degrees, who tend to reap greater rewards from good manufacturing jobs. Increased FDI will also mean more of the funding and innovative know-how the U.S. will need to improve productivity, reduce reliance on imports and withstand competition from China. That’s particularly true for the steel industry where companies have struggled with Chinese overcapacity even as they face enormous pressures and funding requirements to shift to greener technologies.  The Biden administration’s own “friend-shoring” strategy calls for closer ties and cooperation with allies and like-minded countries. The goal is to strengthen supply chains for critical products in order to strengthen national security and respond to future emergencies. It is difficult to see the wisdom of any response to Nippon Steel’s bid short of embracing the vote of confidence in our marketplace that the Japanese company’s proposed transaction represents.”

FURTHER READING

Yuka Hayashi’s “Behind Japan’s U.S. Steel Bid: An Aging, Shrinking Home Market” looks at Japanese industry, demographic contraction at home, expansion abroad, and American policy choices.

PM Kishida in April on the U.S.-Japan alliance, economic ties, and more.

And U.S. Embassy/Tokyo promotes American exports and pitches U.S. investment.

Japan:

The U.S. Patent and Trademark Office’s most recent patent data.

The Bureau of Economic Analysis’ annual look at international business investment in the U.S. has figures by country and industry, and topics from employment and wages to exports, imports, and R&D. A quick table of current FDI stock value (2022, the most recent year available) for the world, top five, and all others combined:

World:	$5.255 trillion
Japan:	$775 billion
Canada:	$684 billion
United Kingdom:	$661 billion
Germany:	$619 billion
France:	$360 billion
All other countries:	$2.156 trillion

And the full release from BEA.

The Japan Statistical Bureau summarizes Japanese demographics, with provisional estimates of population by age through May 2024.

More on Nippon Steel/U.S. Steel:

From the Alabama Department of Commerce, an update on the ArcelorMittal/NS mill at Calvert.

PPI’s Ed Gresser and Diana Moss examine the U.S. controversy from the FDI policy and antitrust points of view.

ABOUT ED

Ed Gresser is Vice President and Director for Trade and Global Markets at PPI.

Ed returns to PPI after working for the think tank from 2001-2011. He most recently served as the Assistant U.S. Trade Representative for Trade Policy and Economics at the Office of the United States Trade Representative (USTR). In this position, he led USTR’s economic research unit from 2015-2021, and chaired the 21-agency Trade Policy Staff Committee.

Ed began his career on Capitol Hill before serving USTR as Policy Advisor to USTR Charlene Barshefsky from 1998 to 2001. He then led PPI’s Trade and Global Markets Project from 2001 to 2011. After PPI, he co-founded and directed the independent think tank ProgressiveEconomy until rejoining USTR in 2015. In 2013, the Washington International Trade Association presented him with its Lighthouse Award, awarded annually to an individual or group for significant contributions to trade policy.

Ed is the author of Freedom from Want: American Liberalism and the Global Economy (2007). He has published in a variety of journals and newspapers, and his research has been cited by leading academics and international organizations including the WTO, World Bank, and International Monetary Fund. He is a graduate of Stanford University and holds a Master’s Degree in International Affairs from Columbia Universities and a certificate from the Averell Harriman Institute for Advanced Study of the Soviet Union.

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FACT: ILO: $236 billion in worldwide profits from forced labor, three-quarters of it from forced sex work.

THE NUMBERS: ILO estimates of forced labor worldwide, 2021 – 

Total:	27.6 million
Sex work	6.3 million
“Industry”*	6.3 million
Services	5.5 million
Governments:	3.9 million
Agriculture	2.1 million
Domestic service	1.4 million
Other:	1.9 million

* Includes construction, manufacturing, mining and quarrying, and utilities.

WHAT THEY MEAN:

From the International Labour Organization, two reports describe the shadow-world economy of forced labor:

The first Global Estimates of Modern Slavery Forced Labour and Forced Marriage, released in 2022, develops a human picture by estimating the scale of forced labor in the world, describing the various forms it can take, and providing details by industry, age, gender, and other characteristics. The core number: in 2021, 27.6 million of the world’s 3.4 billion workers — 0.8%, just under one in a hundred — were in various forms of “forced labour,” defined as “work that is both involuntary and under penalty or menace of a penalty (coercion)”.  The most common form, representing 36% of the 27.6 million workers — 9.9 million people — involves workers trapped in jobs by withholding pay.  Others include debt bondage, threat of violence by criminal gangs (often in sex work), and in 1% of cases chattel slavery.

By industry, the ILO estimates 3.9 million people in state-driven forced labor programs, and 6.3 million in forced sex work, including 4.9 million women and girls and 1.4 million men and boys (or, alternatively, 4.6 million adults and 1.7 million children).  Another 6.3 million are in private-sector “industrial” work; 5.5 million in services; 2.1 million in agriculture; 1.4 million in domestic service such as maid and nanny work; and 1.9 million in other fields. By region, 55% of the total — 15.1 million people — were in Asia/Pacific countries, a figure slightly below Asia’s 59% share of the world workforce; the highest forced labor rate, proportional to workforce, was in the Middle East, and the lowest in sub-Saharan Africa. ILO also finds cross-border migrant workers at especially high risk, making make up 15% of the 27.6 million — 4.1 million people — but only 5% of the total world workforce. The report does not speculate on how much-forced labor goods production enters international trade flows. It notes, though, that forced labor rates appear “highest in severity and scale” in “informal micro- and small enterprises operating at the lower links of supply chains in high-risk sectors and locations,” and that with respect to trade destined for wealthier countries, forced labor is likely most common in “raw materials production in the lower tiers of supply chains of consumer goods.”

The second report, “Profits and Poverty: The Economics of Forced Labour,” came out this past March and adds financial numbers.  Two large ones stand out:

1. A quarter trillion dollars in profits: According to this report, forced labor enterprises generated $236 billion in profits worldwide.  To put this in perspective, the IMF estimates the world’s 2021 GDP at $97 trillion, and McKinsey consultants have guessed that corporate profits in general have been about 8% to 10% of world GDP over the last decade.  With the caution that GDP estimates in general are blurry and estimates of the size of criminal enterprises especially so, these figures suggest that forced-labor profits amount to about 2% of about $10 trillion in total business profits, and about 0.2% of world GDP. Looked at from a different angle, in 2021 the world’s most profitable company (Saudi Aramco), reported $110 billion in profit.

2. Three-quarters of forced-labor profit comes from forced sex work: The ILO believes about $173 billion of this $236 billion in profit — essentially three-quarters of the total — comes from forced sex work.  (Again, the 6.3 million people in forced sex work are about a quarter of the world’s forced labor victims.) The remaining $64 billion includes $35 billion from industry, $20.9 billion from services, $5 billion from agriculture, and $2 billion from domestic service. The report also provides a ‘profit per victim’ range, illustrating the especially high profits drawn from victims of forced sex work: $27,252 for forced sex work, $4,944 in industry, $3,407 in services, $2,113 in agriculture, and $1,570 from domestic service. ILO suggests that the very high extraction of profits from forced sex work reflects the fact that “in most cases people in forced commercial sexual exploitation are paid very little or nothing at all,” are particularly likely to be held in debt bondage, and typically have “limited or no access to justice.”

FURTHER READING

The ILO’s 2022 look at the human world of forced labor (as of 2021), with totals by region, industry, and explanations of different varieties of abuse.

And follows up this March with an investigation of profits.

Policy:

The ILO reports illustrate a world.  How might governments and observers respond?  With many different varieties of forced labor, responses vary but include a mix of police work and courts, media and public exposure, diplomacy, Customs enforcement, and other options. Two contemporary cases — the eradication of government-sponsored forced labor in Uzbekistan’s cotton industry over the 2010s, and the Biden administration’s more recent work to eliminate forced labor from Malaysian rubber-glove production, offer some insights on successful approaches.

Uzbek cotton:

Put briefly, Uzbekistan’s cotton industry is a large part of the national economy, accounting for about 20% of Uzbekistan’s export earnings.  For the first 25 years of its post-Soviet history, the Uzbek government required residents of cotton-growing districts to participate in autumn cotton harvesting. As such, it was a state-led forced labor program rather than a collection of small-scale private enterprises the ILO report suggests account for most world forced labor. Over the 2010s, a combination of international pressure and internal reform led the Uzbek government to abolish this system and convert cotton harvesting to paid work. Core factors in this reform include:

(a) A fifteen-year international activist effort through the “Cotton Campaign” involving businesses, labor unions, and human rights groups, to bring attention to forced labor in the cotton industry and discourage purchases of Uzbekistan cotton.

(b) International government pressures, in the U.S. case including regular human rights reports published by the State and Labor Departments, and a “review,” entailing possible cancellation, of the tariff waivers Uzbekistan received through the Generalized System of Preferences.

(c) Contingent factors, in particular, the death in office of post-Soviet leader Islam Karimov and his replacement by a new leader, Shavkat Mirziyoyev, whose government hoped to repair the reputational damage associated with forced labor and put sustained effort, with ILO advice and monitoring, into reshaping the cotton industry.

A March 2022 ILO report announcing an end to “systemic forced labour and child labour” in Uzbek cotton harvesting.

The Cotton Campaign lifts its boycott of Uzbek cotton, March 2022.

And via the Uzbekistan Embassy in D.C., remarks from Tanila Narbaeva (Chair of National Commission on Combatting Human Trafficking and Forced Labor) on the abolition of forced labor and next steps in labor reform.

Rubber gloves:

A more recent Biden administration program — the  investigation of rubber gloves produced by six Malaysian companies from 2019 through 2021, and remediation afterward — addresses a situation closer to those the ILO reports are most common. The line workers in these glove factories are mostly migrants from other countries; U.S. Customs and Border Protection investigators in 2021 found credible evidence of unfree recruitment, debt bondage, confiscation of passports, and other abuses.  CBP accordingly prohibited imports from these companies and their subsidiaries through a “Withhold Release Order”. Following this, a program of consultation and reform, including through the Malaysian government, the ILO, and the companies, enabled CBP to find that many of the companies had remediated the conditions and reopen trade. A chronology:

The Department of Labor reviews Customs and Border Protection’s initial Withhold Release Order, July 2020 through September 2021.

CBP’s “Withhold Release Order” banning imports, November 2021.

ILO’s report on Malaysian rubber glove manufacturing and options.

… and an ILO progress report from 2023.

CBP reopens trade, April 2023.

And lists current “Withhold Release Orders”.

And two more general perspectives on U.S. policy:

U.S. Customs and Border Protection explains forced labor-product interdiction.

The Department of Labor’s International Labor Affairs Bureau on its child labor and forced labor programs.

ABOUT ED

Ed Gresser is Vice President and Director for Trade and Global Markets at PPI.

Ed returns to PPI after working for the think tank from 2001-2011. He most recently served as the Assistant U.S. Trade Representative for Trade Policy and Economics at the Office of the United States Trade Representative (USTR). In this position, he led USTR’s economic research unit from 2015-2021, and chaired the 21-agency Trade Policy Staff Committee.

Ed began his career on Capitol Hill before serving USTR as Policy Advisor to USTR Charlene Barshefsky from 1998 to 2001. He then led PPI’s Trade and Global Markets Project from 2001 to 2011. After PPI, he co-founded and directed the independent think tank ProgressiveEconomy until rejoining USTR in 2015. In 2013, the Washington International Trade Association presented him with its Lighthouse Award, awarded annually to an individual or group for significant contributions to trade policy.

Ed is the author of Freedom from Want: American Liberalism and the Global Economy (2007). He has published in a variety of journals and newspapers, and his research has been cited by leading academics and international organizations including the WTO, World Bank, and International Monetary Fund. He is a graduate of Stanford University and holds a Master’s Degree in International Affairs from Columbia Universities and a certificate from the Averell Harriman Institute for Advanced Study of the Soviet Union.

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FACT: Estimated Cost to Families of Trump Tariff Proposal: $1,500 – $1,700

THE NUMBERS:

Median U.S. household budget for goods, 2022:*	$19,154
Extra U.S. household costs from a 10% tariff:**	$1,500 – $1,700

*  Bureau of Labor Statistics, Consumer Expenditure Survey. The total includes BLS’ 2022 figures for mean household spending on food at home, alcohol, natural gas, fuel oil, housekeeping supplies excluding postage stamps, household furnishings, apparel and services, new vehicle purchases, gasoline, medicines, toys, and personal care products.

** $1,500 estimate from Center for American Progress; $1,700 from Peterson Institute for International Economics

WHAT THEY MEAN:

This fall’s core choice is more basic than policy: Can a person who has attempted to overthrow a settled election, and called for the “termination” of unspecified parts of the Constitution, keep an oath to “faithfully execute the office of President of the United States” and “preserve, protect, and defend the Constitution”? But though secondary concerns this time, policies still have human consequences. Three notes therefore on tariffs and prices, with an introduction and a coda:

Intro: As we noted in March, the Trump campaign’s proposal of a 10% worldwide tariff, plus 60% on Chinese-made goods, would be the highest U.S. tariff rate since the late 1930s. Meanwhile, Dr. Peter Navarro — a former trade personality as Trump-era “Director of the Office of Manufacturing and Trade Policy,” a minor player in the attempt to overthrow the 2020 election, and current resident of the Federal Correctional Institution in Miami — skirted federal prison policy last week by connecting with news website Semafor for an email interview.  He uses the opportunity to hold forth on a hypothetical second Trump term (mass deportations, immediate purge of the Federal Reserve), air grievances with former colleagues, and insist that tariffs do not affect prices: “In a general equilibrium world, tariffs over time boost growth and real wages; they are not inflationary.”

What do definitions and evidence say?

Definition: As the Commerce Department’s International Trade Administration, explains to hopeful U.S. exporting businesses, a tariff “is a tax levied by governments on the value including freight and insurance of imported products,” which “increase[s] the cost of your product to the foreign buyer and may affect your competitiveness.” In the case of consumer goods, retailers pay tariffs at the border, and shoppers ultimately pay. For industrial inputs, the tariff payers are farmers, manufacturers, construction firms, and other goods-using industries, and tariffs raise their production costs. This in turn raises the prices they charge customers, and/or erodes their competitiveness against imports or exports. Either way, tariffs are meant to raise prices and generally succeed.

Recent Experience: Moving from on-paper definition to recent experience, the 2018/19 tariffs on metals and Chinese-made products raised the U.S.’ overall tariff rate from 1.8% to 2.8%. Most of the impact seems to have fallen on manufacturers and other goods-users — logically, since while the permanent U.S. tariff system mainly taxes clothes and other consumer goods, Trump-era tariffs are more on industrial supplies. The Government Accountability Office’s examination of the process for making “exclusions” to the China tariffs illustrates this: GAO found 52,810 relief appeals, over half of which — 27,646 — came from buyers of capital goods and industrial inputs worried they couldn’t find affordable alternatives. Another 12,633 came from buyers of auto parts. Assessments of the resulting price increase — e.g. by the Peterson Institute for International Economics and San Francisco Fed staff economists — range from 0.3% to 1.3%.

Next: The campaign proposal is much larger. Two independent nonprofits, studying its probable effect this month, basically agree on what to expect. Mary Lovely and Kimberly Clausing, writing for the Peterson Institute of International Economics earlier this month, estimate an additional $1,700 in additional costs per U.S. household, with the greatest loss of purchasing power in the lowest-income families.  Brendan Duke, a former National Economic Council economist now with the Center for American Progress, finds a similar $1,500 increase in costs per middle-income household, with specific examples including $120 in higher payment for fuels, $90 for medicine, $220 for autos and boats, $80 for consumer electronics, and $90 for food. Overall, the Bureau of Labor Statistics’ Consumer Expenditure Survey reports that on average households spent $19,154* on goods in 2022. Against this background, a $1,500 or $1,700 cost increase is something like an 8% or 9% burst of inflation in goods prices, or an equivalently high “tax increase” depending on the angle from which you look at it. Prices are higher either way.

Coda: Again, policy issues are secondary this fall. But Rep. Bennie Thompson (D-Miss.), Chair of the House’s January 6th  Committee in 2022, reminds us of why Dr. Navarro must do his interviews from the Miami FCI this summer, and that policy can’t be wholly separated from the really basic choice:

“Peter Navarro abandoned his oath to the Constitution and abused the public trust while he worked as a trade adviser to former President Trump when, in the days leading up to January 6th, he worked to keep a defeated incumbent in the White House. He abused it again when he willfully defied a lawful subpoena from the January 6th Select Committee to answer questions about the lead-up to that deadly day. Last summer’s guilty verdict and today’s sentence are the consequence.”

FURTHER READING

Looking back:

Former Treasury Secretary Larry Summers assesses estimates of potential to roll back price increases through tariff cuts, finds a 1% price reduction credible (2022), with link to Peterson Institute for International Economics research.

Pre-trade war, San Francisco Fed staff economists estimate price inflation.

And the GAO looks back from 2021 on government handling of requests for exclusions from “301” tariffs in 2018 and 2019.

Looking ahead, three views on a 10% across-the-board tariff:

The Peterson Institute’s Mary Lovely & Kimberly Clausing foresee a $1,700 per household cost increase.

Center for American Progress’ Brendan Duke estimates $1,500.

… and the Bureau of Labor Statistics Consumer Expenditure Survey puts these numbers in context with data (through 2022) on how much families spend.

And completing the ideological balance (though not quite parallel with the PIIE and CAP studies, as the focus is on macro rather than extra household costs), Erica York of the Tax Foundation sees a GDP contraction and higher prices ahead.

Update from the Federal Corrections Institution/Miami:

Navarro interview on mass deportations, Federal Reserve purge, grudge against Gary Cohn, tariffs, etc.

The Federal Correctional Institution in Miami, with explanations of work requirements (7 ½ hours per day), media policy (press visits allowed, though not “to provide publicity for an inmate or special privileges for the news media, but rather to ensure a better-informed public”), and a non-luxurious but also non-Spartan commissary menu.

And Rep. Bennie Thompson (D-Miss.) reminds us of why he’s there.

ABOUT ED

Ed Gresser is Vice President and Director for Trade and Global Markets at PPI.

Ed returns to PPI after working for the think tank from 2001-2011. He most recently served as the Assistant U.S. Trade Representative for Trade Policy and Economics at the Office of the United States Trade Representative (USTR). In this position, he led USTR’s economic research unit from 2015-2021, and chaired the 21-agency Trade Policy Staff Committee.

Ed began his career on Capitol Hill before serving USTR as Policy Advisor to USTR Charlene Barshefsky from 1998 to 2001. He then led PPI’s Trade and Global Markets Project from 2001 to 2011. After PPI, he co-founded and directed the independent think tank ProgressiveEconomy until rejoining USTR in 2015. In 2013, the Washington International Trade Association presented him with its Lighthouse Award, awarded annually to an individual or group for significant contributions to trade policy.

Ed is the author of Freedom from Want: American Liberalism and the Global Economy (2007). He has published in a variety of journals and newspapers, and his research has been cited by leading academics and international organizations including the WTO, World Bank, and International Monetary Fund. He is a graduate of Stanford University and holds a Master’s Degree in International Affairs from Columbia Universities and a certificate from the Averell Harriman Institute for Advanced Study of the Soviet Union.

Read the full email and sign up for the Trade Fact of the Week.

FACT: A new container ship launches every day.

THE NUMBERS: Largest container ship by year, in TEU* capacity –

2024:	24,327 TEU (MSC Irina)
2020:	23,992 TEU (Ever Ace)
2014:	19,100 TEU (CLC Globe)
2010:	14,770 TEU (Emma Maersk)
2004:	8,500 TEU (CLC Asia)
2000:	8,160 TEU (Sovereign Maersk)
1990:	4,614 TEU (American New York)
1974:	2,984 TEU (Hamburg Express)
1956:	56 TEU (Ideal-X)

*  “Twenty-foot Equivalent Units.” A TEU represents one 20 x 8 x 8.5 foot shipping container; a 40-foot container is two TEUs.

WHAT THEY MEAN:

After a squad of tugboats pulled the stranded Dali away from the Key Bridge wreckage on Monday, the Port of Baltimore’s operators hope to reopen their main shipping channel by the end of May, and Danish shipping giant Maersk plans to start container service to the Port again by early June. With a brightening outlook for Baltimore’s port workers and users, here are four notes on the container-shipping fleet:

There are more container ships each year: Alphaliner, a Paris-based maritime consultancy, counts 6936 container ships operating worldwide this week, up from 5,101 in 2014.  Mainly built in China, Korea, and Japan, these ships make up about 6% of the world’s 105,000 cargo vessels, but (being large ships) have a seventh of the world’s 2.2. billion deadweight tons — that is, carrying capacity — of merchant shipping.  The full container fleet has a combined capacity of 29.7 million TEU, up about 10% from the 25.8 million TEU at President Biden’s inauguration, and up 50% from the 19.9 million TEU of 2014. This growth is not slowing: Denmark-based shipping association BIMCO says 350 new container ships launched in 2023, and 2024 will likely top 475. A table illustrates:

2024	29.7 million TEU
2020	25.8 million TEU
2014	19.9 million TEU
2010	12.8 million TEU
2000	4.3 million TEU
1990	1.2 million TEU
1980	0.5 million TEU

They are getting bigger: The Dali is 948 feet or 300 meters long, with deadweight tonnage of 116,851 tons and a crew of 21.  Built by Hyundai and launched in 2015, it has a capacity of 9,971 “TEUs,” meaning it can carry just under 10,000 standard 20’ x 8’ x 8.5’ shipping containers at a time. Twenty years ago, the Dali would have been easily the world’s largest container ship. Today it’s still well above median — average capacity across the whole fleet is now about 4,600 TEU — but has less than half the 24,000+ TEU capacity of its largest relatives.

As of this month, 121 ships can carry 20,000 TEU or more. The largest one on the water today is MSC Irina, owned by Geneva-based Mediterranean Shipping Corporation, whose capacity more than doubles Dali’s at 24,326 TEU and 240,739 deadweight tons.  Delivered in March 2023 from a Chinese shipyard and currently in Busan, MSC Irina is 400 meters/1,312 feet long.

They are mostly new: The container-ship concept is almost 70 years old — the first, Ideal-X, launched from Newark in 1956 — but most of the actual ships are young, and every 20,000+ TEU ship has been built since 2017.  UNCTAD’s most recent Review of Maritime Transport says the average container ship is 14 years old, while the average age of cargo vessels in general — container ships plus bulk carriers, general cargo, tankers, ro/ro, etc. — is 22.

And they don’t need many people: Though not exactly a giant floating robot, a modern container ship isn’t far from that. Dali’s forlorn crew totals 21 people — 20 from India, one Sri Lankan, finally getting some land time today after being stuck on board doing maintenance and responding to investigation queries since March — and even MSC Irina with its 24,000 containers needs just 25.  To put this in perspective, this is no more staff than you’d find in a medium-sized restaurant or hardware store.  Alternatively, Great Republic — the largest 19th-century clipper ship, built to sail back and forth from New to Australia — needed a crew of 67 to manage about 5000 tons of cargo.

FURTHER READING

Updates:

Maryland Port Authority updates.

Maersk plans an early-June return to Port of Baltimore cargo service.

And Gov. Moore’s interim support program for Port workers and distressed businesses.

Container-ship data:

UNCTAD’s Review of Maritime Transport series has data and trends for container ships, oil tankers, port efficiency, and more. The most recent edition, out last November, counts 105,400 cargo ships around the world, or about 5,000 more than the 99,800 they found in 2020.

Alphaliner Top 100 has day-to-day updates of current container capacity, worldwide and by shipping firm.

The Copenhagen-based Baltic and International Maritime Council (BIMCO), in a January “Shipping Number of the Week”, reports a likely 478 new containership launched in 2024, after a record 350 in 2023.

… and a decade-old but still evocative visualization of daily maritime transports, with small lights representing a hundred thousand ships against a darkened blue-grey ocean backdrop

Ship comparisons:

Combining various tallies — UNCTAD for cargo, military sites for navies, FAO for fisheries—– the world’s large-vessel fleet comes out at about 170,000. (105,000 cargo vessels, 45,000 large fishing boats, 10,000 navy ships, 5,000 cruise ships, with miscellaneous cable layers, LNG tankers, yachts, and so forth making up the rest.) At the top end, container ships are the longest by about 20 meters. Bulk ore carriers and supertankers are a bit shorter but have more cargo space. A quick look at the largest in each category:

Container ship: Mediterranean Shipping Corp.’s 400-meter, 24,347-TEU MSC Irina.

Oil tankers: Ultra-Large Capacity supertankers, though shorter than the top container ships at 380 meters, at 442,000 deadweight tons can carry twice the cargo weight. The largest are the four T1s, dating to the early 2000s and named for continents. TI-Europe is in Singapore.

Bulk cargo carriers: The 35 Valemax-grade iron-ore freighters are very slightly smaller than the tankers, 360 meters long with deadweight tonnage up to 400,000 tons. Built between 2011 and 2016 (again by Chinese, Korean, and Japanese yards) they carry iron ore from Brazil and Australia to China.

Military: U.S. Navy’s 337-meter Gerald R. Ford aircraft carrier is the largest naval vessel on the water, launched from the Newport News yard in 2013, and the first of the 11 Ford-class carriers replacing the Nimitz-class fleet.

Roll-on/Roll-off: The standard automobile carriers are a bit smaller. The largest is the 265-meter MV-Tonberg, built by Mitsubishi in 2012 and operated by Norwegian carrier Wallenius Wilhelmsen. It can carry 8500 cars and trucks at a time.

Fishing: The largest fishing vessel, the Vladivostok 2000, is 228 meters and 49,000 tons. A converted oil tanker with a dismal history of IUU (illegal/unreported/unregulated) fishing, V2K is blacklisted in the South Pacific but continues to operate in northern waters. It’s currently berthed in the eponymous city of Vladivostok.

Cruise ship: The Icon of the Seas at 385 meters, launched last January and built for 7,600 passengers. By comparison, the largest 19th-century passenger ship, Victorian super-engineer Isambard Kingdom Brunel’s 211-meter Great Eastern, could carry nearly 5,000. The BBC on IotS.

Shipbuilding:

A gloomy two-pager from CRS on cargo vessel construction worldwide, and the very modest U.S. role in it over the last 50 years.

And some maritime-logistics lit.:

GPS and satellite communication, 60-foot propeller blades, computer terminals, and crane loading — Horatio Clare’s Down to the Sea in Ships (2015) tracks the Gerd Maersk, a 6,600-TEU ship built in 2006 — still operating, en route this week from Oakland to Qingdao — on a two-month trip from Felixstowe through the Suez Canal to Malaysia, Vietnam, China, and Los Angeles. Detail on crew life (Filipino ratings, European and Indian officers; no alcohol at any time), cargo loading, rules for avoiding Red Sea pirates, the approach to the Port of L.A., etc.

Coal-burners and on-board smokestacks, radio, and breakbulk cargo — Richard Hughes’ In Hazard (1938), recounts the fictional passage of a British general-cargo vessel with a ‘globalized’ 1930s crew (Chinese ratings, U.K. and American officers, few if any alcohol limits) from Virginia through a gigantic Caribbean hurricane.

Wood, rope, canvas, muscle, and wind — Richard Henry Dana’s Two Years Before the Mast (1840) on the Pilgrim’s five-month journey from Boston to pre-Gold Rush California via Cape Horn, and back a year later.  (Mostly New England crew with some Europeans; strict alcohol limits for sailors, but not for the mates or captain.)  Lots here to disenchant age-of-sail romantics – a drowning, a scurvy case, two of the Pilgrim’s 12 sailors flogged for back-talk, ice storms, constant deck-scrubbing, etc. Also looks at early California: Los Angeles, “a large and flourishing town of about twenty thousand inhabitants, with brick sidewalks”, is full then as now of helpful and friendly people; on the other hand, “nothing but the character of the people prevents Monterey from becoming a great town”.  San Francisco has promise (“if California ever becomes a prosperous country, this bay will be the centre of its prosperity”); also see the large Native Hawaiian role in West Coast shipping, and Dana’s very disparaging, no-filter comments on visitors from Russia’s Alaska colony, whose southernmost fort was 90 miles north of present-day Oakland.

ABOUT ED

Ed Gresser is Vice President and Director for Trade and Global Markets at PPI.

Ed returns to PPI after working for the think tank from 2001-2011. He most recently served as the Assistant U.S. Trade Representative for Trade Policy and Economics at the Office of the United States Trade Representative (USTR). In this position, he led USTR’s economic research unit from 2015-2021, and chaired the 21-agency Trade Policy Staff Committee.

Ed began his career on Capitol Hill before serving USTR as Policy Advisor to USTR Charlene Barshefsky from 1998 to 2001. He then led PPI’s Trade and Global Markets Project from 2001 to 2011. After PPI, he co-founded and directed the independent think tank ProgressiveEconomy until rejoining USTR in 2015. In 2013, the Washington International Trade Association presented him with its Lighthouse Award, awarded annually to an individual or group for significant contributions to trade policy.

Ed is the author of Freedom from Want: American Liberalism and the Global Economy (2007). He has published in a variety of journals and newspapers, and his research has been cited by leading academics and international organizations including the WTO, World Bank, and International Monetary Fund. He is a graduate of Stanford University and holds a Master’s Degree in International Affairs from Columbia Universities and a certificate from the Averell Harriman Institute for Advanced Study of the Soviet Union.

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FACT: U.S. auto production unchanged since ‘USMCA’ replaced ‘NAFTA’ in 2020.

THE NUMBERS: U.S. car and light truck production* –

2023	10.6 million vehicles
1994-2019 average	10.7 million vehicles
1975-1993 average	10.3 million vehicles

* Bureau of Transportation Statistics for 1993-2021; OICA for 2022 and 2023. From 1993-2019, production ranged from a low of 5.7 million vehicles during the financial crisis in 2010 to a peak of 13.0 million in 1999.

WHAT THEY MEAN:

Trump administration negotiators in 2018 said their “primary objective” in renegotiating the North American Free Trade Agreement was “to improve the U.S. trade balance and reduce the trade deficit with the NAFTA countries.”  This plainly didn’t happen — deficits instead rose by a combined $91 billion by 2023 –—but not because a different agreement text or legislative drafting would have gotten a different outcome. Rather, the Trump group promised something a new agreement couldn’t, and therefore didn’t, deliver. (See below for a bit more.) As the resulting “USMCA” approaches its fourth birthday this June, the more interesting question is whether the four big real-world policy revisions separating it from the NAFTA — automotive trade, labor policy, environmental protection, internet policy, and digital data flows – are working.  Here’s a somewhat troubling look at the auto side:

As a point of reference, U.S. auto production averaged 10.7 million vehicles annually over NAFTA’s 26-year life, with output varying from a 13.0 million peak in 1999 to a financial crisis low of 5.7 million in 2009.  The 2016 figure was 12.2 million vehicles, of which two million went abroad for export and 10 million to American dealerships. Meanwhile, about 8 million vehicles arrived from abroad that year as imports, including 2.2 million from Mexico and 2.0 million from Canada under NAFTA’s tariff waivers. (The normal auto tariff rates are 2.5% on cars and 25% on light trucks.) According to the U.S. International Trade Commission’s “Dataweb,” about 1% of these vehicles arrived outside NAFTA — 39,000 passenger cars and 100 light trucks from Mexico, 6,000 cars from Canada — and so were subject to the regular tariffs.

USMCA’s U.S. negotiators and Congressional legislative text drafters hoped to (a) encourage more car and truck assembly in the United States, and (b) increase the “North American” parts, metal, and labor content of vehicles produced in the U.S., Mexico, and Canada for American, Mexican, and Canadian car-buyers. To this end, USMCA developed “rules of origin” — that is, legal definitions of what it means for a car or truck to be “made in” the U.S., Canada, or Mexico and therefore eligible for tariff waivers — much more restrictive than NAFTA’s. Briefly summarizing some complex formulae, NAFTA required a “regional value” of 62.5%.  This meant buyers had to certify that 62.5% of a car’s value was “North American”. That is, a sedan valued at $30,000 at the border needed to show that $18,750 of its parts, labor, metal, paint, and so forth had to come from the U.S., Canada, or Mexico to qualify. USMCA’s 46-page set of rules raised this “regional value” to 75% — $22,500 of the same $30,000 car — and added new requirements covering (i) use of parts, from brake linings and transmission shafts to ball bearings, gaskets, and radios; (ii) use of metals, with 70% of the steel and aluminum in a car or truck (by value) needing to come from North American mills or smelters; and (iii) labor input, with 45% of the labor value required to be “high-wage.” The rules take effect in over five years, beginning with USMCA’s “entry into force” in June 2020 and fully in effect by 2025.

What has happened since?

Output: Not much so far, at least in the U.S. Auto production fell sharply during the 2020 COVID pandemic to 8.8 million vehicles, and as of 2023 had rebounded to 10.6 million, slightly below the long-term NAFTA average. So to date, USMCA’s auto innovations have left U.S. production about the same, though they’re still new and might have larger effects later on.

Trade: Trade flows in total likewise haven’t changed drastically. Last year’s 8 million in new car and truck imports were about the same as those of 2016, with a few more from Mexico and a few less from Canada. But the detailed data published in the Dataweb suggest an unexpected shift: at least in car trade with Mexico, USMCA seems to be getting less use than NAFTA.  These figures report that in 2023, about 468,000 Mexican-made cars — 20% of the year’s 2.1 million total, 20 times the 2016 figure — arrived with the 2.5% MFN tariff rather than duty-free under USMCA.  Light truck imports have also shifted a bit, though much less dramatically, with 1700 arriving outside USMCA.  Canadian cars and trucks, by contrast, were almost all covered by USMCA.  The 468,000 outside-USMCA vehicles are not subject to any “rule of origin” at all, so if the Dataweb figures are correct rather than some kind of data entry problem, and don’t simply reflect a temporary adjustment as manufacturers get used to new rules, the tariffed cars can contain lots more foreign parts, metal, and so forth than their NAFTA-era predecessors.

A cautionary note: The USMCA is still new, the shift is mainly in car imports from Mexico rather than in trucks or U.S.-Canada trade, and auto production patterns take years to change. More generally, the slightly lower post-USMCA auto production in the U.S. isn’t necessarily related to the agreement; it could reflect unusual post-pandemic buying patterns, EV transition, etc. But these points duly noted, the revised auto rules so far (a) don’t seem to have brought more auto production to the U.S., and (b) if the tariffed, outside-USMCA imports continue to grow, could be encouraging more rather than less “international” content in “North American” cars. They haven’t by any means failed in the conclusive way Trump negotiators’ hope for lower trade deficits failed; but so far, they seem less than a resounding success, and maybe not an improvement.

FURTHER READING

USMCA text, see pp. 224-270 of Chapter 4 for rules governing cars, trucks, and parts.

Agreements and rules:

A U.S. Trade Representative Office Federal Register Notice from last March requests thoughts on supply-chain “resilience,” with Question 8 asking specifically about rules of origin:

“There is concern that preferential rules of origin in free trade agreements can operate as a “backdoor” benefiting goods and/or firms from countries that are not party to the agreements and are not bound by labor and environmental commitments. What actions could be taken to mitigate these risks and maximize production in the parties? What policies could support strong rules of origin and adherence to rules of origin?”

The FRN.

PPI’s Gresser, testifying at the hearing a week ago Thursday, carefully suggests that USTR’s phrasing is a bit off, as adjectives like “strong” or “weak” aren’t really the point. The low-drama response, using USMCA’s auto rules as a case in point.

“A well-designed rule strikes a balance, enabling firms to meet it easily and cheaply while not being so permissive as to reduce the benefit to the countries participating in the agreement.  Complex and very demanding rules, however, may be so costly or create such paperwork burdens that businesses choose not to use the agreement.  In this case they may continue importing under MFN tariffs (using any outside inputs they find convenient) or find non-FTA sources instead.”

Gresser testimony.

Global perspective:

Where do cars come from? The Organization of International Automobile Manufacturers’ country-by-country data show about a third of the world’s 93.5 million new cars made in China in 2023, and a sixth in the U.S./Canada/Mexico:

World Vehicle Production:	93.5 million
China	30.2 million
European Union	14.3 million
(Germany)	4.1 million
(France)	1.5 million
(Slovakia)	1.4 million
(Czechia)	1.4 million
(Italy)	0.9 million
United States	10.6 million
Japan	9.0 million
India	5.9 million
Korea	4.2 million
Mexico	4.0 million
Thailand	1.8 million
Canada	1.6 million
United Kingdom	1.0 million
All other	10.9 million

OICA’s production and sales data.

And from the Commerce Department, U.S. automotive trade data, sadly updated only through 2021.

And a note on balances:

The Trump administration’s 2018 “President’s Trade Agenda” report uses trade balance as the main grounds to renegotiate NAFTA:

“[O]ur goods trade balance with Mexico, until 1994 characterized by reciprocal trade flows, almost immediately soured after NAFTA implementation, with a deficit of over $15 billion in 1995, and over $71 billion by 2017. … USTR has set as its primary objective for these renegotiations – to improve the U.S. trade balance and reduce the trade deficit with the NAFTA countries.”

As of 2023 — three years into USMCA — this same “goods trade balance” with Mexico was -$152 billion in deficit, and with Canada -$25.8 billion.  So, pretty total failure here, with both deficits doubled. The reason for this, though, isn’t any particular problem with the new agreement’s text or legislative drafting, though. Rather it’s that the Trump-era policy designers didn’t understand trade balances and promised something the agreement couldn’t deliver.

The U.S. trade balance is the difference between national savings and national investment. The nearly simultaneous 2017 tax bill raised fiscal deficits, and therefore reduced government savings. Unless for some reason families and businesses started to save more (and they didn’t), the overall U.S. trade deficit was naturally going to rise as a result.  With tariffs on China pushing U.S. purchasing of some formerly Chinese-made refrigerators, TV sets, clothing, etc. into other countries (especially Vietnam but also Mexico), the U.S.-China “bilateral” deficit dropped a bit, but this forced a larger increase with other countries, Mexico and Canada among them.

ABOUT ED

Ed Gresser is Vice President and Director for Trade and Global Markets at PPI.

Ed returns to PPI after working for the think tank from 2001-2011. He most recently served as the Assistant U.S. Trade Representative for Trade Policy and Economics at the Office of the United States Trade Representative (USTR). In this position, he led USTR’s economic research unit from 2015-2021, and chaired the 21-agency Trade Policy Staff Committee.

Ed began his career on Capitol Hill before serving USTR as Policy Advisor to USTR Charlene Barshefsky from 1998 to 2001. He then led PPI’s Trade and Global Markets Project from 2001 to 2011. After PPI, he co-founded and directed the independent think tank ProgressiveEconomy until rejoining USTR in 2015. In 2013, the Washington International Trade Association presented him with its Lighthouse Award, awarded annually to an individual or group for significant contributions to trade policy.

Ed is the author of Freedom from Want: American Liberalism and the Global Economy (2007). He has published in a variety of journals and newspapers, and his research has been cited by leading academics and international organizations including the WTO, World Bank, and International Monetary Fund. He is a graduate of Stanford University and holds a Master’s Degree in International Affairs from Columbia Universities and a certificate from the Averell Harriman Institute for Advanced Study of the Soviet Union.

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FACT: U.S. R&D spending approaching $1 trillion per year.

THE NUMBERS: U.S. share of world “knowledge- and technology-intensive” manufacturing and services –

Manufacturing
2022	20.4%
2012	20.1%
Services
2022	39.7%
2012	29.3%

National Science Foundation, 2024.  Manufacturing includes chemicals; pharmaceuticals; weapons and ammunition; computer, electronic, and optical; electrical equipment; machinery; automotive; aerospace; railroad and other transport; and medical devices.  Services include IT and information services, software, and research and development.

WHAT THEY MEAN:

President Biden in October delivered seven Medals of Science and nine Medals of Technology and Innovation:  Dr. Marder of Brandeis for analysis of brain biochemistry and neurocircuitry, Caltech’s Professor Barish for detecting gravitational waves from merging black holes, Mary-Dell Chilton of Syngenta for agricultural biotechnology, Roy Cooper from the VA for inventing improved wheelchairs, along with Internet pioneers, 3D printing founders, social neurologists and more.  He took some time to note administration science policy highlights –— the Cancer Moonshot, the CHIPS and Science Act, climate research — but could perhaps have said a bit more.  The individual achievements and the government policy look less like one-offs than or unusual cases, than especially strong examples of a remarkable if little-recognized Biden-era boom in American science. Two indexes and then some comparisons:

1. Research and Development: Each year the National Science Foundation publishes figures on research and development spending.  Their latest edition launched in March.  It shows U.S. R&D investment rising from $717 billion in 2020 to a likely $886 billion in 2022, with government support up from $65 billion to $73 billion, business commitments from $520 billion to $673 billion, and nonprofit and academic funding from $43 billion to $47 billion. The overall jumps of 10% and 12% in 2021 and 2022 appear to be the largest in the last thirty years.  This makes America’s “research intensity” — R&D spending divided by national GDP — 3.5% by the NSF’s count, or 3.6% according to the OECD.  This figure is up from 2.8% in 2012 and 3.2% in 2019; or in a longer perspective, from 2.4% at the launch of the World Wide Web in 1993 and 2.6% during the moon-landing year 1969. If this “intensity” level held up through 2023, total U.S. science commitment in 2024 would top $1 trillion.

2. Working Scientists: The Bureau of Labor Statistics, meanwhile, reports a 26% growth in the count of working R&D scientists in the last three years, from 796,000 at the beginning of 2021 to 956,000 as the NSF launched its March R&D report. To put this in perspective, total employment in the U.S. has grown by 10% in the last three years.  So the lab workforce is rising more than twice as fast as the general workforce.  From another perspective, the 3.3-year jump of 160,000 scientists compares to a rise of 290,000 in the entire twenty years from the turn of the century to the end of 2020 (and has nearby analogues in similar jumps of 140,000 in engineering, and 300,000 in computer systems design).

Now to the comparisons:

Measured by spending, NSF’s $886 billion R&D estimate places the U.S. first in the world, and makes up about 30% of known R&D worldwide.  Measured by “research intensity”, OECD’s 3.6% estimate puts the U.S. fourth, behind only Israel’s 6.0%, Korea’s 5.2%, and Taiwan’s 4.0%. Comparable figures for other big economies include 3.4% for Japan, 3.1% for Germany, 2.9% for the U.K. 2.9%, 2.4% for China, and 2.2% for France. Rounding out the G-7, Canada is a bit below at 1.7%, and Galileo’s Italy a comparatively anemic 1.3%. A table with the top countries and the world’s ten largest economies:

Israel	6.0%
Korea	5.2%
Taiwan	4.0%
U.S.	3.6%
Sweden	3.4%
Japan	3.4%
Belgium	3.4%
Germany	3.1%
U.K.	2.9%
China	2.4%
France	2.2%
Canada	1.7%
Italy	1.3%
Brazil	1.2%
Russia	1.1%
India	0.7%

What about real-world output as opposed to spending and puttering about in labs?  In April, a few weeks after the R&D report, NSF’s busy editors put out another one looking at the world’s “Knowledge and Technology Intensive Industries”.  Complete with a new acronym, “KTI”, this examines production of a list of impressive things – aircraft and satellites, high-speed dental drills, self-guiding cars and computer software, digital technology, biologic medicines, etc. — and estimates world high-tech industry output at $11.1 trillion in 2022.  (This would be about 10% of world GDP.)  Here the U.S. has a peer — in fact, China’s $3.0 trillion shades America’s $2.9 trillion – while the EU comes in at $1.7 trillion, Japan $0.6 trillion, and Korea $0.4 trillion.  China’s leads show up in the manufacturing of computers, electronics, and optics, while the U.S. is top producer of medicines, medical devices, aerospace, software, and digital information.

And over time?  The American share of world “KTI” manufacturing, having fallen from 29.5% in 2002 to 20.1% in 2012, began a rebound during the Obama administration and has risen a bit to 20.5%.  Or, setting aside what other countries might be doing, the value of this output has grown from $1.3 trillion in 2020 to $1.6 trillion in 2022. The U.S. share of world “KTI” services production — the software, IT services, and research work noted above – has steadily risen, accelerated by the internet industry, from a world-leading 29.3% in 2012 to 39.7% in 2022. All of which suggests that Biden’s well-deserved praise for the individual neuroscientists, astronomers, wheelchair and Internet-backbone designers highlights not only exceptional personal achievement, but the fact that the administration deserves credit for some large-scale science policies and has reason to feel good about the last three years’ results.

FURTHER READING

Biden presents last year’s Medals of Science and of Technology and Innovation last October.

The White House’s Office of Science and Technology Policy.

… the Cancer Moonshot.

… and never out of fashion, Dr. Vannevar Bush’s original 1945 Endless Frontier report, arguing for a permanent government role in promotion of science and technology.

Assessment:

The National Science Foundation’s April 2024 Production and Trade of Knowledge- and Technology-Intensive Industries report.

And the American Association for the Advancement of Science reviews government policy.

And some data:

OECD’s estimates of R&D spending, GDP share, and science employment by country as of 2022.

And NSF’s State of U.S. Science and Engineering looks at American scientific research, education, workforce and more, with some international comparisons.

ABOUT ED

Ed Gresser is Vice President and Director for Trade and Global Markets at PPI.

Ed returns to PPI after working for the think tank from 2001-2011. He most recently served as the Assistant U.S. Trade Representative for Trade Policy and Economics at the Office of the United States Trade Representative (USTR). In this position, he led USTR’s economic research unit from 2015-2021, and chaired the 21-agency Trade Policy Staff Committee.

Ed began his career on Capitol Hill before serving USTR as Policy Advisor to USTR Charlene Barshefsky from 1998 to 2001. He then led PPI’s Trade and Global Markets Project from 2001 to 2011. After PPI, he co-founded and directed the independent think tank ProgressiveEconomy until rejoining USTR in 2015. In 2013, the Washington International Trade Association presented him with its Lighthouse Award, awarded annually to an individual or group for significant contributions to trade policy.

Ed is the author of Freedom from Want: American Liberalism and the Global Economy (2007). He has published in a variety of journals and newspapers, and his research has been cited by leading academics and international organizations including the WTO, World Bank, and International Monetary Fund. He is a graduate of Stanford University and holds a Master’s Degree in International Affairs from Columbia Universities and a certificate from the Averell Harriman Institute for Advanced Study of the Soviet Union.

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