(What’s Left of) Our Economy: The Laughable EU-Japan Trade Deal

Tags

agriculture, automotive, driverless cars, EU, European Union, fake news, Financial Times, free trade agreements, G20, globalization, Japan, Mainstream Media, Trade, Trump, Wolfgang Munchau, {What's Left of) Our Economy

It seems like the economic policy world is all abuzz about the news that the European Union (EU) and Japan have agreed to the broad outlines of a trade agreement. That’s odd, to put it mildly, since reviewing what’s known about the deal for about five minutes is enough to debunk the notion that it’s a global economic game-changer – and the related claims that it will represents a stinging rebuke to President Trump’s moves toward a more results-oriented U.S. trade policy.

It’s true that the EU and Japan are enormous economic entities. They’re also high-income entities. But they haven’t been very dynamic economic entities. From 2005 to 2016, the former increased its output by just under 28 percent (in euro terms) before factoring in inflation. The latter has grown by less than 2.50 percent in yen terms. By contrast, the United States (which hasn’t been killing it, either) has boosted its current dollar gross domestic product by 41.82 percent during this period in U.S. dollars. 

They’re also regions that tend to run trade surpluses – although massive energy imports following the Fukushima nuclear plant disaster have generally tipped Japan’s total trade into deficit. So from a macro-economic standpoint there’s a major question regarding how willing they are to open their markets significantly on a net basis – especially given how slow their overall growth has been. Maybe that’s why one joint European-Japanese effort to estimate their welfare effects came out with results that barely move the needle. And interestingly, this study projects that the United States will be a net winner.

But the strangest aspect of the prospective deal, especially from the EU perspective, concerns the specific trade flows that are apparently targeted. For Brussels is aiming mainly to boost its exports of food products like meat, wine, and dairy, and in return has been willing to lower its automotive tariffs. The agreement has even been nicknamed the “cars for cheese” deal.

In other words, the Europeans supposedly believe they’ll prosper – and show the Trump administration a thing or two – by giving pride of place to industries that, however politically powerful, have relatively little ability to generate big positive spillovers to the rest of the economy, and welcoming more predatory competition to an industry with phenomenal potential to foster future innovation and productivity growth. (Think “driverless cars.”) In fact, this quid pro quo is so bad for Europe that it casts considerable doubt as to whether its terms will be honored.

Also interesting – for all the European ire about the steel tariffs being mulled by the United States (which runs a big trade deficit in this sector), Brussels has said little about the industry during its trade talks with Japan (which runs a big surplus).

Financial Times columnist Wolfgang Munchau has admirably dissented from the Mainstream Media groupthink and dismissed the EU-Japan deal as “a shameful attempt at manipulation” of the narrative surrounding the recent G20 summit that was hyped by journalists exhibiting “confirmation bias” of their pro-internationalist, anti-Trump views. On this side of the pond, we’ve come up with a simpler description: fake news.

(What’s Left of) Our Economy: Why Ag Fears Mustn’t Drive Trump’s NAFTA Revamp

Tags

agriculture, automotive, exports, imports, Jacob Bunge, manufacturing, Mexico, NAFTA, North American Free Trade Agreement, offshoring, The Wall Street Journal, Trade, Trade Deficits, Trump, {What's Left of) Our Economy

You have to hand it to the American agriculture industry: It has great lobbyists and public relations flacks. Just look at the job they’ve done convincing the Trump administration to pay special attention to the farm sector’s concerns when renegotiating the North American Free Trade Agreement (NAFTA) with Mexico and Canada. And as made clear by The Wall Street Journal today, they’re keeping the pressure on in an effort to convince the president that the United States doesn’t hold such overwhelming leverage in these talks with Mexico in particular.

No one can blame ag from doing its job. But maybe the press could do a somewhat better job of providing valuable context, as the Journal article today simply didn’t?

It’s indeed noteworthy, as The Journal‘s Jacob Bunge reported, that American farm exports to Mexico have fallen so far this year, especially given that Mexico is the third largest foreign market for these goods. Moreover, it does look like the drop stems at least partly from Mexico’s search for alternatives to U.S. suppliers in order to create NAFTA revamp bargaining chips.

But a broader examination of bilateral trade flows shows that, however important, agriculture doesn’t deserve pride of place in America’s trade negotiations – with Mexico or any other countries. First of all, according to the U.S. Bureau of Economic Analysis, last year, agriculture (along with forestry, fishing, and hunting) comprised 0.9 percent of the American economy on a value-added basis. Manufacturing represented 11.7 percent.

Last year, moreover, manufactures exports (of $1.05127 trillion) topped agricultural exports ($134.88 billion) by a factor of nearly eight. It’s true that agriculture ran a trade surplus and manufacturing an immense deficit. But the former – about $20 billion – was hardly an economic game-changer, and that was especially so considering the nearly $862 billion scale of the latter.

U.S.-Mexico trade tells a similar story: According to The Journal, 2016 saw America sell $18 billion worth of agricultural products to Mexico. Manufacturing exports were about eight times as great: just over $143 billion.

But there are some big problems with these manufacturing exports. For example, they’re much more than offset by U.S. manufactures imports from Mexico. In fact, since 2009 (the year the current recovery began), this bilateral trade deficit has risen more than twice as fast (by 125 percent) than that with China (52.56 percent).

Moreover, Trump is right about much of this imbalance resulting from NAFTA-induced American production offshoring to Mexico that aims to sell back into the United States. That’s had much to do with the 1990-2013 drop in the United States’ share of North American light vehicle production from 78 to 64 percent, and the rise in Mexico’s share from six to 19 percent. That’s also had much to do with the more than tripling of the U.S. bilateral trade deficit in autos and light trucks since NAFTA’s signing.

In fact, in the first eleven months of 2016, Mexico exported nearly 80 percent of the 3.22 million autos it produced, and fully 77 percent of them were sent north of the border.

As a result, auto industry leaders have plainly stated that without the unfettered access NAFTA provides to the American market, and without the incentives to produce in super-cheap and largely unregulated Mexico created by the treaty, most of their auto investment in Mexico would lose its raison d’etre.

No one is calling for neglecting America’s farm sector during the NAFTA renegotiation. But the outsized role played by manufacturing, and manufacturing trade deficits in regional trade, along with manufacturing’s historic role as the United States’ productivity growth and innovation leader, couldn’t make clearer that letting ag export fears dominate this economic diplomacy would be a classic case of letting the tail wag the dog.

(What’s Left of) Our Economy: Why the Latest World Trade Failure Should be Celebrated

Tags

agriculture, Alan Greenspan, bubbles, China, Congress, developed countries, developing countries, Doha Round, Federal Reserve, Financial Crisis, George W. Bush, Global Imbalances, Information Technology Agreement, ITA, Obama, offshoring, poverty, Robert Zoellick, September 11, terrorism, TPP, Trade, trade law, Trans-Pacific Partnership, World Trade Organization, WTO, {What's Left of) Our Economy

Trade policymakers have just uncharacteristically – and perhaps unwittingly – given the world economy an important holiday gift: a virtual decision to kill the so-called Doha Development Round of world trade liberalization talks.

This outcome of the latest meeting of the World Trade Organization (WTO) in Nairobi won’t make an active contribution to solving global economic problems. But it greatly reduces the odds that additional multilateral trade expansion will keep worsening the kinds of international economic imbalances that helped trigger the last financial crisis and keep threatening to set the stage for a new meltdown.

The Doha round (named after the capitol of Qatar, where it was launched) was a product of the September 11 terror attacks, but was whoppingly misconceived both strategically and economically. Though intended to spur the prosperity needed in developing countries ostensibly needed to reduce terrorism’s appeal, its founders – notably President George W. Bush’s administration trade chief Robert Zoellick – seemed unaware that dangerous extremism had never taken hold in most world regions where poverty was most desperate, e.g., rural India and rural China. Moreover, the round’s explicit aim of channeling most of its trade liberalization benefits to developing countries completely violated the core principles of genuinely free trade.

But those mistakes and their impact paled next to the damage likely from a treaty reflecting the Doha goals – ever greater global financial instability stemming from trade flows that fostered the offshoring of production, and therefore income-earning opportunities, to countries that would still long remain too poor to consume adequately, and away from the rich-country populations (especially America’s) whose purchasing power was still crucial for adequate global growth.

By the time the Doha talks were inaugurated, in 2001, years of NAFTA-style, offshoring-centric U.S. trade liberalization decisions capped by China’s admission into the WTO had already recklessly placed the U.S. and world economies on a completely unstable course. The Bush administration and the Federal Reserve under Alan Greenspan further greased the skids for crisis with two decisive moves. The former filled the resulting American income and growth shortfall with renewed, and record, federal budget deficits. The latter even more powerfully fueled consumption with prolonged (then) record low peacetime interest rates. For half a decade, the United States experienced an unprecedented burst of debt-led, bubble-ized growth. And then the entire global economy nearly collapsed.

Success at Doha was always bound to magnify world trade imbalances further and ensure even more badly lopsided growth by requiring the United States and other developed countries to open their markets much wider and faster than low-income countries. Particularly important were measures practically certain to gut the U.S. trade laws that shielded America’s domestic economy from foreign predatory trade practices like export subsidization and dumping. In fact, the inequities were so egregious that even America’s staunchly pro-trade liberalization agricultural sector, which has long wielded outsized influence in Congress, balked; its reservations began the Doha hold-up that eventually brought its demise.

Unfortunately, another recent international trade policy decision is likely to add to dangerously distorted global growth – the new Information Technology Agreement reached under WTO auspices, which eliminates tariffs on many tech products but does nothing about the non-tariff barriers and predatory commercial practices used so heavily by so many U.S. trade rivals. New financial pressures may also be fueled if Congress passes the Trans-Pacific Partnership (TPP) trade deal pursued so avidly by President Obama. As I’ve often explained, this agreement’s text does target non-tariff barriers, but creates no mechanisms even remotely capable of actually curbing their use. Therefore, it’s all but certain to create the trade deficit-boosting, finance destabilizing effects of the previous American trade agreements on which it’s modeled.

All the same, TPP ratification this year looks doubtful, given election-year opposition by major Republicans in Congress. Doha’s death would represent a second “do no harm” decision in a single year – certainly not enough progress on the trade policy front, but considerably better than nothing.

(What’s Left of) Our Economy: About Those “Jobs Americans Won’t Do”

Tags

agriculture, automation, Bryan Caplan, Center for Immigration Studies, farm workers, illegal immigrants, illegal immigration, Immigration, Jobs, labor shortages, Mark Krikorian, Michael Dukakis, minimum wage, Open Borders, productivity, Ron Unz, technology, wages, {What's Left of) Our Economy

As “everybody knows,” one of the main reasons that the U.S. economy desperately needs a huge population of low-paid immigrants (whether legal or soon-to-be legalized) is that these workers do crucial jobs that the native-born population snubs. And with the immigration policy debate continually intensifying in this presidential campaign cycle, expect this claim to be trotted out again and again by champions of Open Borders-style approaches to the issue. (Here’s a good post indicating just how often it’s been made by major political and chattering class figures.)

What a surprise, then, to keep discovering evidence showing that the “jobs American won’t do” contention to be completely bogus.

As should be clear to anyone familiar with standard economic thinking, the idea underlying all such claims – of chronic labor shortages that can only be eased with big new influxes of foreign workers – is nonsensical theoretically. The reasons have to do with time-honored concepts of supply and demand. When they’re out of balance – which in this imperfect world happens all the time – actors in free markets adjust in several ways, all involving the price mechanism. Employers facing such labor market mismatches will either raise wages, in order to attract the workers they need, or they introduce labor-saving machines or other efficiency-enhancing improvements if the former option isn’t appealing. Of course, in the real world, responses are often some combination of these alternatives.

But whatever business’ choices, the implications for the economy as a whole are the same. “Jobs that Americans won’t do” will before too long be filled by better paid workers or by the proverbial robots.

Both options, moreover, contain ample potential to strengthen the economy to everyone’s benefit. The pluses of higher wages (up to a point, of course!) are self-evident. But although the labor-saving technology strategy sounds like a formula for mass unemployment, centuries of history teach that automation ultimately creates many more, and better, jobs than it displaces. (Will this record continue in an unfolding age of more and more sophisticated robots and artificial intelligence? I sure as heck don’t know. But that’s a medium-term challenge, not an imminent one.) Moreover, more use of machines is typically a sign that the economy is becoming more productive. And that’s as good as it sounds – including for wages and broader living standards.

There is an important caveat: Not all companies, or even whole industries, are capable of making these adjustments (whether they want to or whether they’re confident that immigrants will keep flooding to their rescue). But that doesn’t mean that labor shortages need to or should be dealt with by new government measures like opening borders even wider. Instead, it mean that these companies and industries have lousy, and even completely non-viable business models. Why should they be bailed out with immigration policy at the expense both of native-born workers and greater efficiency?

It’s true that theories can be and often are wrong. But not this one. Exhibit One has to do with technology. Immigrants both legal and not comprise a big share of America’s agricultural workforce, and the farm sector has long insisted that the depressed wages that result from immigrant-fueled labor surpluses are crucial to keeping food affordable. Further, they and their supporters argue, few native-born Americans would want to toil in the fields even if pay was raised.

As it turns out, however, meager wages ultimately were making workers harder and harder to find throughout the ag sector. And rather than close up shop – and let entire crops go unplanted, immense harvests rot on the vine, and widespread hunger to emerge – guess what American farmers have started to do? Yep. They’re spreading mechanization beyond the grains and other commodity crops for which its use has been commonplace for decades!  (Thanks, by the way, to Mark Krikorian of the Center for Immigration Studies for a recent tweet that first alerted me to this development.) 

In fact, thanks to ever more sophisticated robots and similar devices, they’re even mechanizing the picking of fruits and vegetables long considered to be too delicate to be handled by machines, like strawberries and blueberries. And it’s pretty reasonable to suppose that these machines will keep getting cheaper, better, and able to perform an ever wider range of tasks. .

Exhibit Two isn’t a real-world development yet. Instead, it’s a proposal that dramatically shows how higher wages could slash the nation’s supposed need for illegal immigrant labor. According to folks ranging from former Democratic presidential candidate Michael Dukakis to reform-minded California Republican multi-millionaire businessman Ron Unz, a healthy increase in the minimum wage would draw many legal U.S. residents back into the nation’s workforce and reduce the attractiveness of hiring illegals – many of whom are poorly educated and speak limited English. And of course, businesses that hired only legal residents would have no law enforcement worries. Even George Mason University economist Bryan Caplan, an unabashed supporter of completely Open Borders (seriously!) has acknowledged the “logic” of the proposal.

So the next time you hear the “jobs Americans won’t do” argument, you can be pretty sure that it’s coming from someone who just doesn’t know their basic economics, whose ideologically committed to completely unfettered immigration, or who has a big political or economic self-interest in importing poverty on a huge scale into the United States.

(What’s Left of) Our Economy: Japan’s Farm Trade Position No Longer Passes the Laugh Test

Tags

agriculture, farm products, Japan, protectionism, tariffs, TPP, Trade, {What's Left of) Our Economy

Certainly foreign customs and sensitivities deserve respect from the U.S. government when it negotiates trade agreements. (The reverse holds, too, of course.) That’s why I’ve always believed that Japan’s touchiness about food security shouldn’t simply be ignored in negotiations like the current Trans-Pacific Partnership talks – where opening the Japanese market to American agricultural exports has been a major sticking point.

The U.S. farm sector is light years ahead of Japan’s (and everyone else’s) and Japan, which the United States sought to starve into submission during World War II (that’s not meant as a criticism) isn’t very sympathetic to free market economists’ claims that it should be happy to become highly dependent on foreign supplies of food because its own efficiency and welfare, and the world’s, will be thereby enhanced over the long run. That shouldn’t be too hard to understand.

But it’s hard to continue respecting this Japanese position in light of the recent news that McDonald’s affiliate in the country has admitted getting 20 percent of the chicken it uses for its McNuggets from a Chinese company that’s apparently been selling giant fast food companies’ China restaurants meat that’s past its prime.

It’s true that McDonald’s is an American-owned company. But if concern about food security is so deeply embedded in the Japanese psyche, shouldn’t McDonald’s Japanese executives and other employees have been raising the roof about this sourcing decision? Moreover, it’s not as if this chicken has been coming from a country especially friendly to Japan lately.

Japan is a sovereign country of course, and if it wants to continue opposing dropping all tariffs on key foreign agricultural products, it’s completely free to do so. But the United States and its other trade partners now should also feel free to consider this position as nothing more than simple protectionism — and to laugh Japanese officials out of the TPP negotiating sessions until they stop standing on transparently phony principles.

Im-Politic: Kevin McCarthy’s Divided Trade Policy Loyalties Could Sink TPP

Tags

agriculture, Congress, Im-Politic, Japan, Kevin McCarthy, Republicans, TPP, Trade

Yes, it’s hard to imagine, but even trade policy activists pushing total overhaul should be grateful to the Cato Institute on at least one count.  The staunchly libertarian think tank, long synonymous with market-extremist positions on trade, has also been usefully tracking votes on the issue by House and Senate members at this website:  http://www.cato.org/research/trade-immigration/congress)  

So thanks to “Free Markets, Free Trade:  Rating the Congress” and its terrific interactive search engine, it’s easy to document that House Republicans have just elected a job-killing trade deal booster – Kevin McCarthy of California  — to replace primaried job-killing trade deal booster Eric Cantor as Leader of the majority caucus. 

Nonetheless, McCarthy could yet shock the trade policy world in his new position.  The key is whether he’ll continue his record (and his influential California predecessor’s tradition) of consistently championing free trade except when such policies jeopardize his own district – which depends heavily on agriculture. 

The new Majority Leader has favored every free trade agreement he’s had the chance to vote on since first winning his seat in 2006 – including the 2012 Korea deal that has supercharged the U.S. overall and manufacturing trade deficits.  For good measure, McCarthy that year also backed legislation that paved the way for granting World Trade Organization membership to Vladimir Putin’s Russia – which could prevent the West from punishing Russia’s aggression in Ukraine with meaningful sanctions.  And in 2010, he joined Cantor, House Speaker John Boehner and only 76 other House Members in opposing a bill passed by the House to create new tools to fight China’s currency manipulation.  (That measure was opposed by President Obama and killed in the Senate.)   

Not that McCarthy hasn’t broken this trade policy mold.  For example, he did favor a law to help Washington offset foreign government subsidies that rig trade markets to America’s disadvantage, and endorsed the ban that through 2011 kept unsafe trucks from Mexico off U.S. roads. 

But the vast majority of his decisions to leave the free trade and offshoring ranch have concerned farm trade.  As with his predecessor in California’s 23d district and former Capitol Hill boss , retired House Ways and Means chair Bill Thomas, McCarthy apparently considers standard trade liberalization (and other free market) policies to be good for all Americans but not necessarily for the agricultural producers at home whose votes he needs, or for the U.S. farm sector in general. 

Thus McCarthy has supported longstanding U.S. subsidies for cotton (a big crop in his district), sugar and farm products in general, along with trade barriers to impede olive oil imports (another district mainstay).  But evidently since the California 23d doesn’t produce any U.S.-brand automotive products, the new Republican leader opposed the General Motors bailout.

Oddly, these single-minded ag loyalties and McCarthy’s new position could yet push him to play a major role in upsetting the U.S. trade policy apple cart.  The farm lobby has long favored conventional trade liberalization policies, especially since most have kept its massive subsidies and other key perks intact.  Indeed, lately its power has made the difference in winning Congressional endorsement of increasingly unpopular agreements and other conventional trade policy positions. 

But because trade deals have been under-performing lately for American agriculture, and its subsidies have often been on the diplomatic chopping block, farm sector disenchantment with trade policy is growing.  Nowadays, its most powerful elements have been strongly opposing any Trans-Pacific Partnership trade deal that permits Japan or other prospective members to keep any farm tariffs of their own.  Yet Tokyo has stonewalled Washington’s pleas to eliminate these barriers, and the Obama administration shows every sign of caving in order to save a signature policy achievement. 

If the farm lobby stands firm (still a considerable “if”) McCarthy will need to choose between the ag interests that literally made his career, and that could still torpedo the TPP on their own, and numerous other powerful business lobbies that are pushing hard for the Pacific Rim deal – and that are huge donors to Republican office-seekers.  Just as important, he could try to square the circle by giving an ag-opposed TPP a blessing that his caucus would easily recognize as half-hearted and safely ignored.  Wherever he lands, his decision, along with ag’s backbone, could literally make or break the Obama trade policy agenda.