Leibowitz on Trade: The Devil (or Angel) is in the Details

This is a potentially significant issue for U.S. competitiveness, for reasons I’ll explain, but it also made me look at other trade provisions that affect U.S. competitiveness. There are too many to explore in one column. I have selected three provisions to start: (1) the de minimis entry portions of Section 321; (2) the trucking provisions of the new USMCA; and (3) the Jones Act (formally known as Section 27 of the Merchant Marine Act of 1920, which celebrates its 100th anniversary this year.

1. Section 321—If you have a specific Customs entry for a specific customer, this provision may be useful to you. It provides that goods entered for a single customer on a single day are eligible for “informal” entry if the entered value is $800 or less. Section 321 benefits retailers and e-commerce order fulfillment companies (Amazon is a key player in this industry but they are far from the only one). Distributors with small orders (like fabricated steel suppliers) outside the U.S. might want to explore the possibilities. For one thing, the tariffs on China (Lists One-4A) don’t apply to goods properly informally entered under Section 321. However, Section 232 tariffs must be paid—these tariffs are not eligible for waiver under Section 321.
2. Trucking provisions of the new USMCA—The new USMCA implementing bill was signed into law on Jan. 29 by President Trump. It contains the latest in a 25-year epic battle regarding access of Mexican trucks to the United States market. Under the old NAFTA (which is still in effect until Canada ratifies the new USMCA), Mexican trucks were eligible to enter the United States carrying cargo. This provision was vigorously opposed by trucking companies and the principal trucking union, the Teamsters. In the last decade (more than 20 years after NAFTA was approved), the U.S. finally began to permit Mexican trucks to enter the U.S. market. Under USMCA, Mexican trucks are still permitted; however, there is a new legal proceeding to contest the qualifications of Mexican trucks to enter the U.S. market. The procedure is brought before the U.S. International Trade Commission and requires the commission to make a determination regarding qualifications within 120 days after a petition is brought.
3. The Jones Act—In the aftermath of World War I, Congress passed laws regulating (and encouraging) the U.S. merchant marine. At that time, the end of the war created a massive surplus of merchant ships, which were used to carry war materiel to the battle fronts, a use that dried up instantly in November 1918. Congress enacted the Jones Act to require intra-coastal trade between U.S. ports to be conducted only on American-built ships, owned by U.S. companies and with shareholders and the ships’ crews largely restricted to U.S. citizens or permanent residents. This law is still in effect today—since 1920, global maritime commerce has changed a lot. Today, U.S. ships are entirely uncompetitive in global commerce. A very small number of Jones Act-compliant ships serve the container trade, which did not exist in 1920. But the supporters of the Jones Act are desperate to retain it. The Jones Act has led to a dramatic reduction in the U.S. merchant marine because American ships with American crews are uncompetitive globally. The lower cost of international freight has been a major factor in the increase in imports of manufactured products since the end of World War II. To get around the U.S. prohibition of foreign ships to carry goods between American ports, many shippers import goods directly from abroad rather than purchasing domestically produced manufactured goods, solely because of the freight savings. Imported goods are not limited to areas surrounding port cities because of “minibridge” and similar freight rates that can bring foreign goods to the heartland of the U.S. at lower rates than trucking or rail companies could charge for hauling domestically produced goods. Liquefied natural gas is an example of this—rather than bringing domestically produced gas through pipelines to New England from the Gulf of Mexico, customers found it cost-effective to bring in LNG from Russia on foreign-flag ships.

Two of these trade provisions permit customers to save money if they qualify. Section 321 changed the “de minimis” value from $200 to $800 in 2016. This is a big jump—the de minimis value was $50 before 1993. Traders and distributors are just now getting used to the new, sharply higher threshold.

The USMCA permits opponents of Mexican trucks to bring legal proceedings, and they are very likely to do so. Until decisions are made, the continued competition from Mexican trucks will affect the market, particularly near the southern border.

The third, the Jones Act, has not been changed except in minor ways since its enactment a century ago. The impact of these provisions on the U.S. economy is not a widely studied phenomenon. It seems that supporters of the Jones Act in particular are not eager to know who loses from this regime, and how much they are losing. But the more we know, the better we can balance the interests of different players in the commerce (and politics) of the country. We may be nearing a critical look at the maritime laws and their impact on manufacturing in the United States.

As always, your comments are welcome.

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