(What’s Left of) Our Economy: Trump’s Real China Currency Blunder

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airstrikes, alliances, America First, chemical weapons, China, currency, currency manipulation, dollar, exchange rates, North Korea, nuclear weapons, predatory trade, Syria, Trade, trade barriers, Trump, Xi JInPing, yuan, {What's Left of) Our Economy

What was worst about President Trump’s decision yesterday to let China off the currency manipulator hook (for now) was not the scrapping of a long-time campaign promise it represented. What was worst about the decision was its geopolitical rationale – that is, Mr. Trump’s judgment that major Chinese cooperation in reining in North Korea’s nuclear program could be secured if his administration moderates or delays various efforts to counter Beijing’s trade predation.

Nonetheless, some recent developments also presage reasons for modest optimism that a sounder approach to currency manipulation by China (and other countries), at least, will eventually emerge if it becomes clear Beijing is welshing on this deal.

The president’s new China policy makes least sense from a pure negotiating tactics standpoint. After all, what course of action could now be more tempting than for China to keep stringing America along with promises to get tough on North Korea, and even with token actions suggesting that meat is being put on these bones? Think “Charlie Brown,” “Lucy,” and “football.” And how will the president decide that his gamble has failed?

Moreover, Mr. Trump’s own views of China’s clout with North Korea seem confused, at best. On the one hand, the president must (logically) believe that China can make much more of a difference in resolving the North Korea situation than it’s so far chosen to. Why else would he offer China the valuable benefit of better terms of trade than it would otherwise receive? On the other hand, Mr. Trump said in an interview with The Wall Street Journal “After listening for 10 minutes [to Chinese leader Xi Jinping at their summit a week ago], I realized it’s not so easy. I felt pretty strongly that they had a tremendous power [over] North Korea. … But it’s not what you would think.” So here he’s indicating that Beijing can’t help decisively at all.

Related Trump statements point to another major negotiating No-No: Rewarding interlocutors for steps they would take anyway. The president is now on record as stating that Xi “means well and wants to help” on North Korea. But this confidence raises the question, “Why?” It’s of course possible that Chinese policy has entered a new, more charitable phase. It’s more likely, however, that Beijing is becoming increasingly worried about the situation in its next-door neighbor spinning out of control and triggering a conflict that could go nuclear right on its borders.

Indeed, a recent editorial from its own government-controlled press clearly signals that those dire concerns are China’s main motivator: “China…can no longer stand the continuous escalation of the North Korean nuclear issue at its doorstep. Instead of accepting a situation that continues to worsen, putting an end to this is more in line with the wish of the Chinese public.”

Even more revealing, the same editorial made plain as day that official Chinese nerves have been frayed further by Mr. Trump’s willingness to go-it-alone militarily in Syria (when he ordered airstrikes in the middle of his meetings with Xi), by his threat to take a similar course of action against North Korea, and by his dispatch of a powerful American naval force to Korean coastal waters. In other words, the president’s apparent comfort with using force already has caught China’s attention.

Better yet, some concrete evidence of this success has appeared. China seems to be reducing its imports of coal from North Korea – one of Pyongyang’s few major sources of foreign exchange – and it abstained yesterday from voting on a UN resolution condemning Syria’s government for the chemical weapons use that prompted the U.S. cruise missile attack. Until then, China had vetoed similar UN resolutions. Why, therefore, would Mr. Trump sweeten the supposed deal further with trade breaks?

At the same time, these latest Trump decisions are sending signs about the president’s national security strategy and overall priorities that are equally disturbing. Principally, during his campaign for the White House, Mr. Trump displayed a keen awareness of the burgeoning nuclear risks being run by the United States by maintaining its defense commitments in East Asia. In numerous remarks that were pilloried by an ossified bipartisan American foreign policy establishment, candidate Trump quite sensibly suggested that the United States should transfer much of this risk to the local countries (like China) most directly threatened by the North Korean nuclear program. Yesterday, Mr. Trump endorsed America’s longstanding Asia strategy even though the North can increasingly call the U.S. nuclear bluff on which regional deterrence has been based with forces of its own that can strike American targets.

Even more striking, Mr. Trump’s new quid pro quo has demoted policy options that can deliver major economic benefits to his core voters and the entire U.S. economy (more trade pressure on China) back to their longstanding position subordinate to national security strategies that primarily help other countries (the Asian allies covered by the American nuclear umbrella). Far from the type of America First strategy he touted during his campaign and especially in his Inaugural Address, these new Trump moves add up to an America Last strategy.

All the same, Trump’s new approach could set the stage for improved U.S. anti-currency manipulation strategies should circumstances require them. Although unmistakably disheartening to many trade policy critics, this latest American China currency decision was defensible on its own terms. It’s true that substantial evidence continues indicating that China’s yuan is significantly undervalued versus the U.S. dollar – and still enables producers in China (including those owned by or linked with U.S. and other foreign-headquartered companies) to offer their goods for artificially low prices in markets around the world. Nonetheless, it’s also true that China has permitted its (surely dollar-dominated) foreign currency reserves to drop by about 25 percent since 2011 – largely because it’s been selling those reserves and buying yuan in order to curb worrisome capital flight. In other words, Beijing has been trying to support the yuan versus the dollar, and keep its value higher than it would be were it freely traded.

Yet there’s absolutely no reason for trade policy critics – or the U.S. government – simply to conclude that ambiguous circumstances simply force America to accept the status quo. In fact, such shoulder-shrugging would amount to rewarding China currency cheating that the conventional wisdom now admits lasted for years, and whose cumulative effects continue to undercut the price competitiveness of domestic U.S. manufacturers and other producers.

So what to do? According to at least one press report, the Trump administration is considering revamping currency manipulation policy in ways that would appear to abandon the current, blinkered approach in favor of one that takes these cumulative effects into account. Specifically, a Reuters article last week suggested that one option that’s attracted the administration’s attention would involve lengthening “the time period for reviewing currency market interventions from 12 months to several years, capturing more past interventions by China….” At least logically, this shift would signal recognition that the impacts of these interventions (to suppress the yuan’s value) are dynamic, and long-lasting.

Even better, however, would be to recognize that, important as it’s been because of its effects on prices across the Chinese economy, currency manipulation is only one form of trade predation practiced by China, and that such individual policies can easily frustrate current legalistic countermeasures by virtue of the powerful and secretive Chinese bureaucracy’s ability to turn them on and off at will – often with little more than a phone call. More important, China has successfully used these ploys in the past. And P.S.: Other Asian economies are just as skilled as China’s at pulling off these scams.

In other words, the various mercantile measures used by China and others to distort markets are completely fungible. Dealing with them effectively therefore requires Washington to become much more agile and flexible in response. And the critics need to stop focusing so tightly on currency manipulation and keep the much bigger, more important China and global trade picture in mind.

For the entire U.S. economy has a big stake in the Trump administration putting these changes into effect before Chinese and other countries’ trade predation sucker punches even more of its most productive sectors – whether they interfere with the president’s new North Korea strategy or not. So, in all likelihood, does Mr. Trump’s political future.

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Following Up: Glimmers of Progress on ISIS and on Covering Trump

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2016 election, Afghanistan, airstrikes, Al Qaeda, amnesty, Ashton Carter, boots on the ground, Cheap Labor Lobby, Donald Trump, Following Up, Immigration, ISIS, Middle East, offshoring, offshoring lobby, Republicans, Ross Douthat, special forces, terrorism, The New York Times, Trade

Since I have no evidence that either anyone with President Obama’s ear or New York Times columnist Ross Douthat reads RealityChek, I can’t take credit for important insights each one has arrived at in recent days. Even so, it’s gratifying that both America’s latest decision on tactics for fighting ISIS, and Douthat’s new column on dealing with the rise of Donald Trump in American politics, both echo points I’ve been making here for many months.

On Tuesday, Defense Secretary Ashton Carter announced that the Obama administration would send to Iraq American commandos from a unit whose mission has been capturing or killing top terrorist leaders overseas. Carter euphemistically called the commando team a “specialized expeditionary targeting force.” But its deployment represents the most important and useful escalation of the fight against ISIS that the president has approved – and potentially a move toward a strategy I’ve long described as America’s best hope for neutralizing this and similar terror threats.

The conventional wisdom is correct in observing that airstrikes alone are no lasting solution against ISIS and comparable groups. In order to defeat the terrorists on foreign battlefields – thereby preventing them from striking the American homeland – terrorist-held territory will need to be recaptured and then secured, and only significant ground troops can achieve that objective. The conventional wisdom is also correct in observing that the more these boots on the ground are dominated by troops from Middle Eastern countries, the less likely it is to provoke a backlash from local populations.

But as I’ve noted, the conventional wisdom is completely loopy in assigning any chance that Middle Eastern countries will rise to this occasion. For local conflicts pit so many religious and ethnic forces against each other, and thus have so many dimensions, that each local power invariably has numerous other agendas than defeating ISIS – including those they consider more important.

So the beginning of wisdom in countering ISIS begins with realizing that no major locally dominated ground campaign is in the offing, and then searching for substitutes. The best that I can think of is focusing not on decisively defeating terrorists on the battlefield, but on keeping them off balance enough to deny them the secure control of territory needed to create bases for planning strikes on the United States, and to prevent their leaders from spending significant time for planning – as opposed to running for their lives.

In conjunction with strengthening border security, such an approach would concentrate on interests that are truly vital to America – protecting the homeland, as opposed to the pipe dream of pacifying or reforming the Middle East. And unlike those aims, it has the added virtue of being achievable at acceptable cost and risk. And as I’ve also noted, this very strategy showed real promise in Afghanistan, where it long neutralized and actually did “degrade” Al Qaeda, to use a favorite Obama term.

Mr. Obama’s decision to send commandos after ISIS leaders means that one leg of my preferred strategy is being put in place – though their numbers may not be adequate. Intensified airstrikes could represent the second leg – though their intensity may still not suffice. If only genuine resolve to secure America’s borders wasn’t still sorely lacking.

This morning, The New York Times‘ Douthat provided more reinforcement for recent RealityChek posts on the presidential campaign. He wrote compellingly (and it’s worth quoting in full) that:

“[F]reaking out over Trump-the-fascist is a good way for the political class to ignore the legitimate reasons he’s gotten this far — the deep disaffection with the Republican Party’s economic policies among working-class conservatives, the reasonable skepticism about the bipartisan consensus favoring ever more mass low-skilled immigration, the accurate sense that the American elite has misgoverned the country at home and abroad.

“If Republicans don’t want Trump the phenomenon to turn into an actual movement, if they don’t want the intimations of fascism in his appeal to cohere into something programmatically dangerous, then tarring his supporters with the brush of Mussolini and Der Führer right now seems like a shortsighted step — a way to repress the problem rather than dealing with it, to dismiss discontents and have them return, stronger and deadlier, further down the road.

“The best way to stop a proto-fascist, in the long run, is not to scream ‘Hitler!’ on a crowded debate stage. It’s to make sure that he never has a point.”

I made similar arguments last Saturday, and can only say “Amen.” Here’s hoping that Douthat’s good sense will start spreading to his fellow journalists (including at The New York Times) – and more important, to both other Republicans and Democrats. But I have my doubt, since the corporate Offshoring and pro-amnesty Cheap Labor Lobbies remain so influential over both parties, and since many Democrats and liberals in particular seem to value ever greater immigration inflows over the interests of native-born workers. So you can expect me to keep calling out those who prioritize Trump demonization over ensuring that America’s economy starts working for the great majority of Americans once again.

Our So-Called Foreign Policy: An Economic Key to Meeting Putin’s Syria Challenge?

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airstrikes, Bashir Al-Assad, ISIS, Our So-Called Foreign Policy, Russia, Spanish Civil War, Syria, Vladimir Putin, War of Attrition, World War II

Although historical analogies are often whoppingly abused, the past crisis brought to my mind by Russia’s decision to launch airstrikes in Syria has nothing to do with the Middle East – and not even with the so-called 1969-1970 Israel-Egypt War of Attrition. That’s when Soviet pilots began flying combat patrols over Egypt to save its leaders from a humiliating defeat. Instead, the analogy that worries me is the Spanish Civil War of the 1930s. This conflict quickly turned into a proxy war between the Europe’s democracies and its fascist dictators, and World War II broke out shortly after the latter prevailed.

The forces being mainly and possibly exclusively attacked by Moscow so far are not the ISIS terrorists that have been targeted by the U.S.-led coalition in Syria, but Syrian and other groups waging an American-backed revolt against Syrian dictator Bashir Al-Assad. So even though Washington’s support for the anti-Assad insurgents has been half-hearted, this Russian escalation clearly confronts President Obama with the prospect of defending these forces militarily, or suffering a hammer blow to whatever anti-ISIS and Middle East strategies he is pursuing, and to America’s global reputation. And even if the Russians wound up focusing on ISIS – in parallel with the American-dominated air campaign – the chances of friendly fire-type mishaps would be alarmingly high.

There are tempting arguments to be made for letting Vladimir Putin do the world’s dirty work in Syria, even if it leaves Assad in power. But they’re not arguments that Mr. Obama or his supporters can make, since the Syrian tyrant’s ouster has been a major goal of theirs for years. Much more important, the president’s hawkish critics also make valid points in warning that a Putin-Assad victory would greatly boost the influence of a Russian-Syrian-Iranian coalition in a region whose oil remains crucially important to the world economy. And although ISIS’ defeat would greatly reduce the terrorist threat the United States has faced from the Middle East’s Sunni Muslims, it’s entirely possible that Putin and his friends could empower Shiite replacements.

So it’s true that, as I’ve written, over the long run (really meaning “ASAP”), the best American approach to the Middle East is responding to the threats it generates with domestic policy measures. But it’s also true that even though U.S. dependence on Middle East oil – and in turn, the world’s, since global energy markets are so tightly integrated – is greatly reduced, the kinds of border security improvements needed to keep most terrorists out are nowhere in sight. So opting out of the Middle East, or a “Let Putin Do It” approach, simply aren’t safe enough options yet.

Putin indeed might back down if the United States follows through its vow to continue its own airstrikes whether or not they bring American jets dangerously close to Russian craft. But that’s only a possibility, and one fraught with peril. Economics may offer a better option, in one of two ways.

First, the West could at least decisively strengthen the message sent by continued sorties over Syria, and thus get the Russians out of its skies sooner rather than later, by threatening to impose truly sweeping sanctions on Moscow.

Some international business ties have been cut off in response to Putin’s muscle-flexing in Crimea and Ukraine, and Russia’s economy has been hurt, but the pain clearly has been manageable. Moreover, the sanctions’ failure to change Russian behavior so far stems no doubt not only from their limited scope, but from Putin’s clear, and seemingly sensible, confidence that the Europeans, whose own economies have been weak, are eager to restore unfettered commerce – or at least are determined not to escalate sanctions unless absolutely necessary. But if the Europeans are as angered by Putin’s latest moves as they sound, here’s their chance to show it. And here’s Washington’s chance to find out just how reliable an ally Europe will be.

But there’s another sanctions-related strategy worth considering: a Western promise to end the sanctions if Putin agrees to abandon Assad and cooperate actively and comprehensively with the U.S.-led campaign to destroy ISIS. The result would be a de facto Western acceptance of Russian domination of neighboring Ukraine – surely Putin’s top current strategic priority – in exchange for the Russian leader (temporarily?) dropping his ambitions to be a dominant player in the much further away Middle East. In the process, Putin also gets to help counter Islamic terrorism, a continuing threat in those Russian regions with big Muslim populations.

This bargain should serve Western interests, too, since however regrettable Ukraine’s likely fate is, its importance to U.S. and European security is dwarfed by the need to defeat ISIS. And victory in Syria could start easing the refugee crisis with which Europe is struggling to cope.

But whether the prospect of much greater economic losses is enough to end Russia’s military intervention, or whether the prospect of ended sanctions accomplishes the goal, economics seems to have considerable potential for defusing a genuinely scary Syria situation. The Europeans’ cooperation certainly can’t be assumed – especially for sanctions escalation. But here’s hoping that, although there’s no evidence for diplomatic creativity in Washington, President Obama is at least exploring such proposals.

Our So-Called Foreign Policy: Wishful Thinking Dominates Both Sides of the Iran Nukes Debate

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airstrikes, Binyamin Netanyahu, Iran, Israel, John Kerry, nuclear weapons, Obama, Our So-Called Foreign Policy, sanctions, Susan Rice

If you want to become totally depressed, try following the heated debate over efforts to prevent Iran from developing nuclear weapons – which of course came to a head today (for now) with Israeli Prime Minister Binyamin Netanyahu’s speech to a joint session of Congress over the objections of the Obama administration.

This debate is depressing because none of the major participants seem to have an especially promising strategy for keeping Iran’s dangerous regime non-nuclear, at least not for the foreseeable future. In fact, the two most prominent blueprints – advanced by President Obama and by Mr. Netanyahu – seem to place excessive faith in economic sanctions to produce a long-term solution, albeit for dramatically different reasons.

The American position in the current negotiations assumes that the best strategy to achieve a non-nuclear Iran entails (a) promising to ease and eventually end current sanctions depending on the regime’s adherence to any agreement, and (b) threatening to intensify sanctions if the present talks fail. In addition, the Obama administration insists that it has not ruled out military action against Iran’s nuclear program if it concludes that sanctions have been unsuccessful as well.

Secretary of State John Kerry has been leading the American diplomatic effort, and wrote in a Washington Post op-ed last June, “All along, these negotiations have been about a choice for Iran’s leaders. They can agree to the steps necessary to assure the world that their country’s nuclear program will be exclusively peaceful and not be used to build a weapon, or they can squander a historic opportunity to end Iran’s economic and diplomatic isolation and improve the lives of their people.”

In Kerry’s apparent view, this offer is too good for Iran’s leaders to pass up. As he wrote, if it agrees to forswear weaponizing their nuclear program, and to the measures needed to verify compliance, that nation “will be able to use its significant scientific know-how for international civil nuclear cooperation. Businesses could return to Iran, bringing much needed investment, jobs and many additional goods and services. Iran could have greater access to the international financial system. The result would be an Iranian economy that begins to grow at a significant and sustainable pace, boosting the standard of living among the Iranian population. If Iran is not ready to do so, international sanctions will tighten and Iran’s isolation will deepen.”

The problem is that Kerry could well be overlooking compelling reasons for Iran’s leaders to value becoming a nuclear weapons state over the benefits of reintegrating with the global economy and political system. These benefits would be especially important for an Iran determined to maximize its influence in the Middle East through means that include supporting terrorism and other forms of violence. Specifically, a nuclear arsenal and the means to deliver warheads throughout the region could effectively give Tehran the retaliatory capability to deter any American or Israeli counter-strikes. Longer-range delivery systems, including those that could reach the United States, would give Iran even greater scope to pursue its agenda. As I have written, the acquisition of such intercontinental capabilities is threatening to give North Korea this degree of deterrence, and to destroy the foundations of America’s security strategy in the Far East.

Yet President Obama’s critics, including Mr. Netanyahu, may be harboring equally unrealistic expectations of sanctions. In late 2013, he criticized America’s Iran strategy for granting Iran “relief from sanctions after years of a grueling sanctions regime. They got that. They are paying nothing because they are not reducing in any way their nuclear enrichment capability.”

Speaking to American lawmakers today, Netanyahu made even clearer his confidence in both the sanctions that he believe should not have been lifted, and of those that could still be imposed:

“Iran’s nuclear program can be rolled back well-beyond the current proposal by insisting on a better deal and keeping up the pressure on a very vulnerable regime, especially given the recent collapse in the price of oil. Now, if Iran threatens to walk away from the table — and this often happens in a Persian bazaar — call their bluff. They’ll be back, because they need the deal a lot more than you do. And by maintaining the pressure on Iran and on those who do business with Iran, you have the power to make them need it even more.

And of course using the threat of harsher sanctions allegedly more effectively than the administration has was at the heart of the recent bipartisan Senate bill that was co-sponsored by 16 Senators upon its introduction.

But why does Netanyahu, who has assailed the Obama administration’s ostensibly shortsighted decade-or-so Iran time frame, believe that oil prices will remain low, especially over the long run? And why does he seem so confident that the Europeans and others, whose cooperation is essential for sanctions to exert genuine pain, will buy in for as long as is necessary? Surely he can’t be basing this optimism on Europe’s response to Russia’s campaign against Ukraine.

Scarily, this analysis seems to point – logically at least – to military strikes as the best means of preventing Iran’s nuclear-ization. And “best” here isn’t a synonym for “good” or even “feasible.” I’ll leave the purely military analysis to others with more expertise. But even recognizing the major risks and the long odds, it does seem that the Obama administration undervalues the most plausible benefits.

It’s true, as Kerry has said that, “You can’t bomb knowledge into oblivion unless you kill everybody. You can’t bomb it away.” But that’s the wrong standard for success. If Iran’s most important nuclear facilities are vulnerable to air attack (a crucial “if”), then destroying or disabling them would serve the objective – which should never to be underestimated in this tragically flawed world – of buying time. And if and whenever Iran is able to reconstitute a critical mass of its nuclear capabilities, the best option may be resuming attacks.

The military option could also move Iran’s toward the kinds of compromises that it’s so far resisted – including a massively intrusive inspection regime that, incidentally, would have to function in a much more streamlined and seat-of-the-pants manner than its predecessors, to avoid lengthy controversies about documenting violations that Tehran could exploit to make weapon-ization progress. But the case for airstrikes shouldn’t depend exclusively, or even heavily, on diplomatic hopes, much less on expectations of regime change. In other words, Americans may need to start viewing the Iran nuclear threat not as a problem to be solved, but as a condition that needs to be managed in forceful – and frankly dangerous – ways. And that’s if we’re lucky.