President Trump is signing the USMCA trade agreement today. It’s probably worse for the U.S. than NAFTA, despite the rhetoric, and the administration was clearly rolled by Democrats and their labor union paymasters at the last minute. Thanks to the political theater of impeachment, it was passed through the Senate with nowhere near enough scrutiny. Nevertheless, at least it brings an end to this phase of the trade war, and American producers and consumers alike should be grateful for that.
Yet, to paraphrase Churchill, if the battle of USMCA is over, the battle of price fixing is about to begin. As Scott Lincicome of the Cato Institute says, “Tariffs not only impose immense economic costs, but also fail to achieve their primary policy aims and foster political dysfunction along the way.” So it has proved with steel and aluminum tariffs. Because they have failed to achieve their primary policy aims, the administration is now imposing tariffs on steel and aluminum “derivative” products like wires and cables. These tariffs will also fail, for well-understood reasons. However, Congress is also compounding the error with an attempt to introduce price controls into the aluminum market.
Price controls are a favored tool of authoritarian and cronyist governments alike. They show that the government “cares” about prices paid by the consumers of the goods. They can be justified as, to put it crudely, sticking it to exploitative producers. Yet because they distort efficient market allocation, which takes into account factors government cannot possibly know about, they always fail. Everything Scott said about tariffs above also applies to price controls.
The legislation in question is the APEX (Aluminum Pricing Examination) Act, which is currently under consideration in both Houses. It would give the Commodity Future Trading Commission (CFTC) jurisdiction over what is called the reference price of aluminum, which is the agreed price around which sellers and buyers negotiate individual deals to purchase the metal. The current price is determined by a private and neutral third party. Transferring this job to government would, of course, make it a political football.
What is so frustrating about this effort is that it is backed by the beverage industry, which has been one of the big losers from the aluminum tariffs. Presumably because they have failed to make the administration see reason over the tariff issue, they are turning to price controls to keep their costs down. This is just another example of how trade wars have a domino effect on the market system. It’s the political equivalent of The Simpsons’s Bolivian tree lizard clean-up plan.
The irony of all this is that the CFTC controlling the price of aluminum to assuage domestic consumers will simply aid Chinese aluminum producers, because the Chinese subsidize them!
The fig leaf that supporters of the bill hide behind is the claim that there are “price irregularities” in aluminum markets. The CFTC, however, investigated this claim under former Chairman Giancarlo, a man who actually understands how markets work, and found no evidence of such irregularities. As he told Congress, “We monitor that [i.e. reference prices] very carefully for areas of manipulation, and we have been looking at aluminum for years. There have been concerns about that, but we have not found manipulation in the market.”
This is why CEI and 16 other conservative and free market groups are opposing this legislation. To paraphrase Scoot Lincicome, price controls not only impose immense economic costs, but also fail to achieve their primary policy aims and foster political dysfunction along the way.