(What’s Left of) Our Economy: Trump Tariffs Evoke Summers Snake Oil

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Al Gore, China, Clinton administration, current account surplus, Emergency Committee for American Trade, exports, FDI, Financial Times, forced technology transfer, foreign direct investment, General Motors, intellectual property theft, Larry Summers, Obama administration, offshoring lobby, tariffs, Trade Deficits, Trump, {What's Left of) Our Economy

Larry Summers doesn’t like President Trump’s China trade policies – that’s not news. After all, he served in senior economic policy posts both in the Clinton administration, which proudly championed expanded trade with China and laid the groundwork for the PRC’s entry into the World Trade Organization, and in the Obama administration, which less proudly but nonetheless effectively coddled much of the Chinese trade predation (including intellectual property theft) that even most globalization cheerleaders now admit is a major problem.

Newsier are two arguments Summers made yesterday in the Financial Times that indicate how dishonest years of justification of the China trade policies by globalist U.S. administrations have been, and how clueless they remain.

The dishonesty entails Summers’ dismissive treatment of China’s intellectual property “extraction” (as he calls what is usually and rightly recognized as “extortion”) from U.S. and other foreign companies that are forced by Chinese policy into joint venture partnerships with Chinese entities. According to Summers, this form of theft is no big deal for Americans because these episodes

“typically involve cases where the company in question produces for China in China and so have little impact on US employment. In many cases a substantial number of the company’s shareholders are foreign and it pays taxes to many governments. It is more than a little ironic that an administration that condemns outsourcing should make standing up for those who move production to China so central a priority.”

As should be clear to anyone who has followed U.S. trade policy toward China and other offshoring-friendly countries, that’s a heckuva way to describe the outbound American investment that’s been encouraged by the trade deals and related policy decisions enthusiastically supported by Summers and his White House bosses.

For especially during the Clinton years, when so many of these policies were put in place, the construction of American-owned factories, labs, and similar facilities in China was depicted not as activity that would substitute for American exports, or for U.S.-based production (in the form of goods shipped from these factories to the U.S. market), but as activity that would benefit the domestic American economy and its workers by supercharging U.S. exports – which would comprise much of the content of these foreign-made products.

Here’s a typical example from a 1998 report by the (Offshoring Lobby-funded) Emergency Committee for American Trade:

“American companies with global operations ship the large majority — between 60 percent and 75 percent — of total U.S. exports. Their foreign affiliates are important recipients of these exports; their share has increased to over 40 percent today.”

And let’s not forget one of the showcase examples of such Clinton-era investments – General Motors’ 1997 agreement with a Shanghai-run entity to produce autos in China. GM gushed that the joint venture would generate billions in American auto parts exports to China, and the importance attached by the Clinton administration to such deals was made clear by the decision to send Vice President Gore to the PRC to attend the signing ceremony. (Neither GM Chairman John Smith nor Gore mentioned that the agreement’s provisions mandated that the factory achieve 80 percent Chinese content levels within five years.)

Now, according to Summers, these joint ventures don’t significantly benefit the American domestic economy at all. Of course, there’s still the matter of how this Chinese tech theft – including from world-leading U.S. companies in cutting edge industries – will affect America’s innovation and technology futures. But these critical issues don’t seem to be on Summers’ screen.

The author’s cluelessness is evident from his insistence that

“it is wrong to say nothing has been achieved through negotiation with China. Only a few years ago, China’s current account surplus was the largest relative to GDP among significant countries….Today China’s global surpluses are far below past US negotiating targets of a few years ago….”

Here’s the (glaringly obvious) problem. During the current economic recovery, China’s total trade surplus with the United States (including its services deficit) jumped by 75 percent – from $219.47 billion in 2009 to $385 billion in 2016 (the last year for which such figures are available). Can a piece from Summers expressing his astonishment that so many U.S. voters opted in 2016 for a candidate promising to look after “America First” be far behind?

(What’s Left of) Our Economy: Offshorers’ Protests (Unwittingly) Reveal Why Trump’s Tariffs Can Work

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Al Gore, Bill Clinton, imports, Mexico, NAFTA, North American Free Trade Agreement, offshoring, offshoring lobby, Ross Perot, tariffs, Trade, Trump, {What's Left of) Our Economy

A funny thing has happened on the way to this early stage in the development of Donald Trump’s policies on using trade measures to foster manufacturing employment: The nation’s powerful corporate Offshoring Lobby has just revealed that the critics have been right in charging that America’s trade agreements have fueled massive net job and production flight.

The evidence? Its panicky reaction to the president-elect’s declared intention to slap stiff tariffs on the exports its foreign factories try to send to the United States.

Think about it. Ever since the debate over the North American Free Trade Agreement (NAFTA) turned trade into a front-page issue, supporters of new deals insisted that their main aim was fostering exports from the United States. And since these new foreign sales would be added to the exporting firms’ existing sales, American growth and job-creation would increase. The quintessential boast along these lines? Then-Vice President Al Gore’s promise during his 1993 debate with former independent presidential candidate Ross Perot that NAFTA would further open an already huge, fast-growing Mexican consumer market to U.S. producers:

“Did you see the Wal-Mart that opened in Mexico City on the news?…Largest one in the world, if I understand it. They have 72 cash registers ringing constantly with people in that- in Mexico taking American products out of that store….They prefer American products. If we lower those trade barriers and get rid of them altogether, we will have an export surge into Mexico.”

Moreover, during that debate, Gore explicitly refuted Perot’s claim that the vast majority of American exports to Mexico eventually come back to the United States because they’re parts and components of finished goods that Mexicans have been too poor to consume. That is, Gore insisted that when American business looked at Mexico, it overwhelmingly saw those net new customers for their U.S. facilities and employees that would boost their American production and employment. And he dismissed as not even a half-truth the notion that the multinationals valued Mexico largely as a source of low-wage workers in a regulation-light country that could replace American workers in their U.S.-focused supply chains.

Years later, a different export-oriented justification for free trade agreements and offshored production emerged – especially in the policy community: American multinational companies were mainly building factories overseas because they were the most effective way to reach foreign customers, but that these new plants were engaged in the relatively simple activity of assembling finished goods from large numbers of more advanced parts and components. And since domestic U.S. factories and workers excelled in the latter, offshored production would serve as an immensely powerful magnet for those more sophisticated products.

Interestingly, by 1997, these contentions were all debunked by an unusually authoritative source – Gore’s boss, President Bill Clinton. In a speech aimed at convincing American labor unions to endorse his quest for new trade agreements, Clinton insisted that the deals he had in mind weren’t “about NAFTA or factories moving there to sell back to here.” Not that anyone noticed at the time – and I didn’t even find this quote till researching my book The Race to the Bottom in 1999.

Fast forward to today. There’s no doubt that purchasing power in many low-income countries (especially China) has increased substantially. But there’s also no doubt that it hasn’t improved nearly enough to enable them to rely on their own domestic consumption to spearhead their growth and modernization. Therefore, “moving there” by American businesses is still heavily motivated by “selling back to here.”

And even stronger evidence comes from the howls of corporate protests against Trump’s tariff plans. After all, if serving those foreign markets was the top priority for production offshoring – and especially if Gore was right and that “80 to 90 percent” of American sales to Mexico even more than 20 years ago stayed in Mexico (and similar countries) – why would tariffs reducing their access to the United States matter so much? In particular, if corporate offshoring has had so little to do with supplying U.S. customers, why would Corporate America not in effect throw a bone to a new president and win more than a little White House good will – not to mention great PR with so many Main Street Americans?

The answer, of course, is that the Gore view of offshoring remains as bogus today as it was the night he debated Perot, and that Trump is absolutely right: Without easy access to the U.S. market, offshored production loses a decisive share of its value. Therefore, denying or at least interfering with this access via trade curbs should create powerful incentives to bring these factories (and related facilities, like labs) stateside again. Clearly these firms know it. Mr. Trump’s election indicates that much of the public knows it. The only remaining question is whether, and how quickly, Congress and the chattering classes will catch on.

(What’s Left of) Our Economy: GM’s China Buick Sourcing Casts Shadow on Obama’s Pacific Trade Credibility

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Al Gore, automotive, Buick, Canada, General Motors, imports, Jobs, Labor Force Participation Rate, manufacturing, Mexico, North American Free Trade Agreement, Obama, offshoring, rules of origin, TPP, Trade, Trans-Pacific Partnership, wages, {What's Left of) Our Economy

In his sales pitch for his new Pacific Rim trade agreement, President Obama repeatedly has tried to establish his street cred to a skeptical Congress and many even more skeptical Americans by acknowledging past trade policy failures. “I’m the first person,” he typically insists, “who will say that past trade agreements haven’t lived up to their promise.”

This record of unjustified hype has taken on new importance this week with The Wall Street Journal’s report that General Motors is planning to import into the United States Buicks it’s currently making in China – and with a Chinese government-owned partner. The Buick news, which GM has not denied, represents an example of a trade promise that was not only flagrantly broken, but that was patently false from the get go.

When it was announced in 1997, GM’s Buick factory in China – owned in tandem with the Shanghai Automotive Industry Company – was set to be the largest foreign joint venture in the country. And the clear message sent by the Detroit automaker and by President Clinton’s administration was that it vividly confirmed their claims that the expansion in U.S.-China trade they championed and lobbied for was a slam dunk, win-win proposition for America’s domestic economy, including its workers.

At a lavish signing ceremony presided over by no less than Vice President Al Gore and Chinese Premier Li Peng, then GM Chairman John Smith promised, “This joint venture will support U.S. jobs by generating almost (U.S.) $1.6 billion in exports for the United States over the next five years” – presumably of parts and auto manufacturing equipment. What he failed to mention is that Chinese law at that time required the factory to achieve 80 percent Chinese content in its vehicles five years after start up. Indeed, the law required new factories to incorporate 40 percent local content at the onset of operations. Nor did GM announce that it was procuring non-Chinese parts for the Shanghai factory from Japan and South Korea, as well as parts from the United States.

Now GM has decided to supply the U.S. market with these vehicles – largely because sales in ballyhooed China market have slowed. The company, which of course, was bailed out by the U.S. government during the financial crisis, has invested in significant new domestic American production. But although its U.S. employment is up from recent crisis-era bottoms, it remains low compared with historic levels. Moreover, despite improvement this year, automotive wages during the current American economic recovery have fallen much faster in real terms (by 4.66 percent) than manufacturing wages overall (0.19 percent).

So if GM decided to build these Buicks in the United States, demand for auto workers would rise much faster, along with wages. This development could even finally help push America’s labor force participation rate up from multi-decade lows.

But those domestic gains seem further away than ever, because GM’s China Buick decision looks certain to mark simply the beginning of this latest chapter of American manufacturing’s long-running offshoring story. According to The Wall Street Journal, it “signals the beginning of a strategic production shift for the Detroit auto giant and a bold experiment that will be closely followed by other auto companies that have said they would eventually consider such a move.”

Moreover, Mr. Obama’s Pacific Rim trade deal is certain to make supplying the American automotive market from abroad more attractive than ever. For among its many provisions granting duty-free treatment for products made largely outside the new free trade zone (e.g, from China) are measures that loosen requirements set by the North American Free Trade Agreement that freely traded automotive products consist mainly of content from the United States, Canada, and Mexico.

In other words, President Obama keeps telling Americans that he’s part of the solution to the harm they and their economy have suffered from recent free trade agreements and related policies. But the GM Buick decision reminds vividly that his record is a big part of the problem.

Im-Politic: How Trump Can “Win”

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2016 elections, Al Gore, amnesty, Bernie Sanders, China, conservatives, Democratic Party, Donald Trump, Im-Politic, Immigration, independents, Japan, liberals, Mexico, multinational corporations, NAFTA, North American Free Trade Agreement, Open Borders, Populism, Republican Party, Ross Perot, Trade, unions

First off, a confession. I don’t think either Donald Trump (or Senator Bernie Sanders) can win their parties’ respective presidential nominations. I don’t even think they can come close. But both candidates can win in this important sense: They can change this latest version of the quadrennial national debate occasioned by presidential elections even more dramatically than they have already done. And they could even foster real progress toward the realignment that American politics could really use.

The trouble is, both candidates would need to modify some key planks in their platforms, and even though such fixes make eminent political and logical sense, I see few signs that either man will meet the challenge. And somewhat surprisingly, I sense that Sanders would need to overcome bigger obstacles than Trump. I’ll discuss The Donald today and the Vermont Senator very soon.

Trump, who began surging in Republican presidential polls as soon as he declared his candidacy, has stayed near the top precisely by pounding two issues bound to prompt vitriol from the national press corps and chattering classes even if he had zero personal quirks: job- and wage-killing trade and immigration policies. He’ll never become a media darling (though if he remains a major factor in the race, watch much of the always bandwagoning press corps start to identify his supposedly hidden virtues). But he could well expand his base and his acceptability ratings by picking his targets more intelligently and more accurately.

In particular, this means that rather than focusing all of his blame for trade and immigration policy failures on foreign governments (or on allegedly clueless American negotiators), he should target the main problem – domestic corporate lobbies that profit hugely from the cheap labor flood provided by so-called free trade and amnesty-friendly immigration approaches.

Are foreign governments blameless? Nope. Certainly China, Japan, and indeed most other major foreign economies have long pursued predatory trade strategies at the expense of America’s workers, its entire productive economy, and global financial stability. And Mexico has undoubtedly long been enabling emigration to the United States as a safety salve that’s kept it floating just above failed-state status.

But when it comes to the overwhelmingly third world-oriented thrust of American trade diplomacy since the North American Free Trade Agreement’s (NAFTA) pursuit began in the late 1980s, the leading culprits by far have been U.S. multinational corporations. These firms have become enamored with the idea of boosting profits by producing in very low-cost, virtually unregulated developing countries and selling much of that output in the very high price American market. And they know that trade deals are key to the resulting offshoring by virtually guaranteeing that the U.S. market will stay open to their foreign output even if the economy grows too weak to absorb them painlessly.    

The immigration story is more complicated, since much of the Open Borders pressure has come from an alliance of Democratic Party politicians seeking huge new constituencies for their Big Government programs and labor unions seeking huge new pools of dues-paying recruits. But certainly while stumping for Republican primary votes, the corporate cheap labor lobby should be targeted for many of his immigration slings and arrows. And if Trump somehow makes it into the general election, he could attract lots of independents and even some of organized labor’s socially and culturally conservative, and economically stressed, rank and file with this genuinely populist message.

In fact, Trump could throw his media and chattering class detractor for a total loop – and excite big chunks of the electorate across the spectrum even more – by turning his very wealth into a political asset. Like the Roosevelts before him, he could conspicuously turn on his fellow one percenters and rail against “economic royalists” and “malefactors of great wealth.”

And he could (legitimately) maintain conservative/free market bona fides by noting that urging strengthening the productive sectors of the American economy and therefore the earnings power of the nation’s workers amounts to a growth recipe that doesn’t require either (a) more government spending; or (b) tax cuts that simply aren’t affordable given still-towering budget deficits and a national debt that will grow further once further demographic changes trigger more entitlement spending.

So what’s the obstacle? I’m betting that the main one will be Trump’s own personality. Like so many other tycoons, he clearly attributes nearly all of his business success to his personal genius. And like many tycoons who enter politics, he no doubt believes that those matchless business skills easily translate into politics and policy. One likely result: He won’t be eager to take or even solicit advice from others.

Surely more important for the longer run, for related reasons, I’m confident that, once he’s defeated, Trump will display no interest in the hard, unglamorous, day-to-day work of turning his ideas and appeal into a more enduring movement that could help end the gridlock that’s paralyzed Washington for so long. 

I have no first-hand evidence for these suppositions. But I do have some second-hand evidence from a slightly different context. After Ross Perot’s remarkable performance in the 1992 presidential election, he agreed to debate then-Vice President Al Gore on NAFTA on Larry King’s cable talk show. I was a minor participant in an informal team that tried offering substantive material and rhetorical tips to Perot. He obviously didn’t get smoked because or even mainly because he ignored us. But his stubborn belief in his own media skills and mastery of the subject sure didn’t help. And when he ran for president again in 1996, he made many of the exact same mistakes. 

For the record, I haven’t approached the Trump “campaign” in any way, and haven’t been approached by his operatives. (I did try offering advice in a previous political year, but made no headway.) I might send some thoughts on election issues to presidential candidates from time to time, but if I do, I’ll send them to the entire field in both parties, see who (if anyone) responds, and hold a dialogue with them as long as they’re interested. And I’ll report publicly on whatever new experiment in political guru-ing I conduct, just to make clear that I’m not playing any favorites. If I ever get to that point, however, you’ll get the word right away.

Meanwhile, whatever difficulties may prevent Trump from fully capitalizing on the potential to create an enduring populist force in American politics, I’ll shortly explain why they’re probably less impressive than those faced by Sanders – which mainly seem to me not personal but ideological.