(What’s Left of) Our Economy: Obama’s TPP Case is Staler than Ever

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ADB, AIIB, APEC, Asia Pacific Economic Cooperation, Asian Development Bank, Asian Infrastructure Investment Bank, China, environmental standards, export-led growth, exports, Free Trade Area of the Asia Pacific, FTAAP, Japan, labor standards, NAFTA, North American Free Trade Agreement, Obama, RCEP, Regional Comprehensive Economic Partnership, SOEs, state-owned enterprises, TPP, Trade, Trans-Pacific Parternship, World Bank, {What's Left of) Our Economy

Maybe President Obama believes that repeating even the most laughably off-base contentions endlessly will make them true? Or convincing? It’s hard to look at his new Washington Post op-ed urging passage of his Pacific Rim trade deal and conclude anything else. The article makes clearer than ever that the Trans-Pacific Partnership (TPP) makes sense for the United States only if Americans ignore everything known about the agreement itself, about U.S. trade with the eleven other signatories, and about the region’s economics and commerce.

The President’s fraudulent case for TPP starts with his first claim – that “some of our greatest economic opportunities abroad are in the Asia-Pacific region.” Trouble is, as I’ve noted, the only truly fast growers on the list of TPP countries are economies like Vietnam and Malaysia, whose growth depends on not only exporting, but on amassing large trade surpluses. They lack both the capabilities and the intention of becoming significant net buyers of U.S.-origin goods and services. Compared with the United States, most of the other TPP countries are growth laggards.

Similarly, Mr. Obama’s description of the proposed TPP zone as representing a whopping 40 percent of the global economy ignores how the American economy represents more than 60 percent of total TPP area output. Moreover, the United States already has negotiated trade deals with many of the largest signatories, notably Australia, Canada, and Mexico. So Americans have long reaped nearly all of whatever benefits the President argues will result from this exercise in trade expansion.

No more credible is Mr. Obama’s insistence that the TPP will benefit America by enabling the United States to influence writing the rules that govern regional commerce rather than permitting Chinese-led arrangements shape this environment.

After all, as critics like Republican presidential front-runner Donald Trump has pointed out, China already stands to gain from the TPP, thanks to loose origin requirements that permit free or freer trade of goods with high levels of content from non-TPP countries. And since China for decades has been a key node in the multinational production chains that bind together so many Asian economies, much of this non-TPP content will obviously be Chinese.

Further, nothing could be clearer than the determination of the TPP countries to avoid making either-or choices when it comes to rule-writing exercises for East Asian commerce. No less than six TPP signatories – including Australia and New Zealand – have signed up to participate in the Asian Infrastructure Investment Bank (AIIB) that China set up recently in part as a TPP counterweight. And although the largest by far non-U.S. TPP signatory, Japan, has so far declined to bandwagon, the Asian Development Bank (ADB) that it has traditionally co-dominated has started working actively with the AIIB. So has the World Bank.

These last two developments, by the way, mean that the United States has also decided to work with the Chinese initiative rather than continuing to oppose it, since Washington plays a major role in both institutions.

And what about the Chinese-initiated regional trade agreements about which Mr. Obama expressed so much alarm? The Regional Comprehensive Economic Partnership singled out by the president has already attracted seven TPP signatories – including Japan, along with Australia and New Zealand.

Interestingly, Mr. Obama didn’t mention a second Chinese regional trade scheme – a Free Trade Area of the Asia Pacific (FTAAP). Maybe that’s because he’s decided to cooperate with Beijing on this front, too, at least to the extent that he approved a study of the proposal under the auspices of the Asia Pacific Economic Cooperation (APEC) process in which Washington participates.

Finally, the president’s belief that the TPP will greatly boost U.S. exports through enforceable new rules remains a monument to delusion. As I’ve explained, enforcing labor and environmental standards would require an army of American officials to inspect hundreds of thousands of facilities in low-income countries like Vietnam and Malaysia. Who’s going to pay for these personnel? And that’s not even including the vast manufacturing complex that’s been created in Mexico since it joined a North American Free Trade Agreement (NAFTA) more than twenty years ago, and in which evidence abounds such provisions remain overwhelmingly ineffective.  (Hence, largely, the president’s insistence that “this time, it will be different” in TPP.)  

As for the state-owned enterprises (SOEs) whose trade-distorting activities TPP will supposedly curb, how will U.S. officials gain access to these notoriously secretive constructs and their financial records? Moreover, since low (at best) labor and environmental standards along with opaque SOEs are keys to competitiveness throughout Asia, why would the region’s TPP signatories give Washington the power to weaken these arrangements through dispute-resolution hearings?

President Obama writes that the alternative to Congress passing the TPP is “building walls to isolate ourselves from the global economy.” That’s the most pernicious trade policy and TPP myth of all. The real alternative is developing trade policies based on global economic realities, not his own fantasies about the power of mere pen strokes.

(What’s Left of) Our Economy: Obama’s Fatally Flawed China Environment and High-Tech Trade Deals

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APEC, Asia, China, climate change, environment, greenhouse gases, Information Technology Agreement, non-tariff barriers, Obama, tariffs, technology, trade enforcement, Xi JInPing, {What's Left of) Our Economy

Boy, it’s been some Asia trip for President Obama so far! On the heels of a major defeat for Democrats in the midterm elections, he jets off to Beijing for meetings with Asian leaders and comes away with sweeping deals on fighting climate change and cutting tariffs on trade in high tech goods!

Trouble is, both of these agreements illustrate both that negotiating successfully with China in particular – the 800-lb gorilla on both of these issues – requires recognizing and overcoming a distinctive set of obstacles, and that, like its predecessors, the Obama administration has displayed absolutely no learning curve. The biggest losers, tragically, are bound to be the productive sectors of the American economy and their employees.

Let’s take the U.S.-China climate change agreement first, since it’s predictably dominated the news coverage. There’s no doubt that Chinese dictator Xi Jinping needs to do something to reduce the pollution choking China’s cities, and especially the massive health problems it’s causing. Or maybe it’s more accurate to say that he needs to appear to be doing something. I know it sounds cynical to dismiss his assent to the deal as an exercise in public relations for Chinese leaders. But optimists face a heavy burden of proof.

After all, this is a Chinese leadership that simply decided simply to shut down most polluting activity – like driving and manufacturing – in order to clear the air around Beijing temporarily for the APEC summit. (For good measure, reportedly, it’s blocking Chinese websites and apps that monitor pollution levels from using U.S. government data on the subject – which are regarded as much more reliable than Chinese government data.)

But it’s also a Chinese leadership presiding over a slowing economy, well aware that its hold on power depends heavily on continuing to deliver the material goods for a critical mass of the Chinese people, and surely recognizing that the price of failure could well be bad for its collective health. If you think Kentucky and West Virginia coal miners are upset about Washington policies they believe are attacking their industry and livelihoods, imagine the reactions to job losses by Chinese workers whose living standards are far more precarious, and who lack orderly, democratic outlets for their anger.

So it’s all too easy to conclude that Xi decided to react like any politician with strong interests of fostering the appearance, not the reality, of action. He inked an agreement that is long on impressively ambitious goals and woefully devoid of any teeth.  None of the targets for reducing greenhouse gas emissions are legally binding, and as a result, there are no concrete consequences China will suffer for failing to achieve them.

Moreover, even these voluntary targets don’t have to be met for at least a decade. Who knows who China’s dictator will be then? Or how seriously he (or she) will take these commitments – largely because no one can know how the Chinese economy will be performing then. It’s difficult enough to bind American politicians to long-term promises. Why would anyone assume that Chinese politicians will be any different in this respect?

As a result, as critics have begun to point out, there’s much more reason to believe that the United States will meet these targets, or at least will come closer, than China. Which means that the regulatory and therefore cost gaps between manufacturing in the United States and manufacturing in China could grow even wider. It’s true that domestic U.S. businesses can maintain or regain competitiveness by becoming more innovative and otherwise more productive (or by cutting wages even further). But manufacturers in China can keep growing more efficient as well, leaving American industry further behind the 8-ball than ever.

If anything, the new Information Technology Agreement looks even more misguided. China’s agreement to expand the number of technology products for which it will reduce tariffs to zero (though the timeframes are still completely up in the air) seems great at first glance – until you realize what everyone who knows anything about doing business in Asia has known for decades: The most important Chinese and other Asian barriers impeding trade in technology products are not tariffs, which are easy to spot and therefore cut or eliminate. They’re non-tariff barriers.

And especially because these measures and practices – which include subsidies, domestic preferences in government purchases, officially sanctioned monopolies and cartels, and discriminatory pseudo health and safety regulations – are often put into effect informally, by secretive bureaucracies in Asia particular, they tend to be excruciatingly difficult even to identify, much less combat.

Consequently, even if the world’s mercantile countries (which are found in Europe, too, complete with opaque bureaucracies) do eliminate tariffs on these technology products, all these non-tariff barriers and other predatory policies will remain in effect. And because they’re so seldom used by Washington, U.S.-based producers of these goods will find themselves more disadvantaged than ever.

President Obama seems to believe that many of these Asian and other non-tariff trade barriers will be taken care of in the Trans-Pacific Partnership (TPP) trade agreement he’s pursuing. But he’s been more interested in repeating vague slogans about mandating high economic and business standards in these talks than in explaining how the agreement will overcome the intrinsic difficulties of monitoring and enforcing these standards.

If the United States could afford to treat trade and other international economic issues as throwaways, mainly useful for scoring propaganda points or winning and keeping allies, Mr. Obama’s approach to these two deals might be defensible. But even during the Cold War, the frequent subordination of economic considerations to diplomatic goals arguably won short term victories at the expense of longer-term interests. Nowadays, there can be no question that approaches like these have become completely unaffordable, if not downright dangerous. Six years into his presidency, Barack Obama acts like he’s further from understanding this reality than ever.

Making News: BBC, Connecticut radio, and Reuters Global Markets Forum

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APEC, BBC, China, Making News, Obama, Reuters Global Markets Forum, Trade, WATR-AM

Thanks to the interest in President Obama’s trip to China for a region-wide economic summit, and bilateral meetings with the leaders of China and other countries, it’s been a busy media week for me so far.

Earlier today, I taped a radio interview on U.S.-China trade relations with the BBC.  You can listen here.  Of special interest, the other guest on the  the show, Siva Yam of the Chicago-based USA-China Commerce of Commerce, wound up parroting just about every outdated myth still being spread about the nature of commerce between the two countries.  What you’ll hear is about 10 minutes worth of excerpts from a 25-minute taping.

Also, I’m pleased to announce that I’ll be back on WATR-AM (Waterbury, Connecticut) radio tomorrow at 11:10 AM EST talking about the results of the President’s trip.  You can listen live here.

Finally, I’m just as pleased to announce a return appearance at Reuters Global Markets Forum tomorrow as well.  Join us at 2 PM EST for a half-hour chat session on the Asia trip and America’s broader strategy toward the region here.  But please give yourself a few minutes to sign in!

 

 

(Our So-Called Foreign Policy): U.S. Asia Strategy’s Crumbling Nuclear Foundation

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APEC, Asia, China, Japan, North Korea, nuclear deterrence, Obama, Our So-Called Foreign Policy, pivot, South Korea, Xi JInPing

Both at this week’s region-wide Asia summit and bilateral meetings in Beijing with China’s leader Xi Jinping and others, President Obama will be lacking the kind of crucial military leverage his successors could count on: escalation dominance. And its accelerating loss is undercutting the wisdom not only of his policy of reemphasizing the Asia-Pacific region in America’s global grand strategy, but of the fundamental approach to Asian allies and rivals pursued by Washington since the end of World War II.

Put simply, escalation dominance is the capacity to deter a prospective adversary from challenging major interests, and has been enjoyed by the United States in East Asia due to its superiority in nuclear weapons. America’s military strategy for protecting Korea, Japan, and others has utilized conventional forces as well. But given the conventional military power of China and North Korea in particular, it’s been nuclear weapons that have mainly and continually forced Beijing and Pyongyang to think long and hard before threatening or moving against their neighbors. After all, defying Washington ultimately could unleash a U.S. nuclear attack to which adversaries had no comparable response.

It’s true that China has possessed nuclear weapons for decades, and North Korea successfully tested its first nuclear device in 2006. But although the U.S. edge has narrowed steadily, in terms of quantity and quality, these Asian nuclear forces have remained positively dwarfed by America’s.

In just the last month, however, the U.S. Defense Department has reported important moves by North Korea and China that spell big trouble for America’s nuclear lead and the policies it undergirds. In late October, the commander of American forces in Korea told reporters that the North can now build a miniaturized nuclear missile warhead. Pyongyang had already claimed (but there’s no confirmation yet) to have missiles with ranges long enough to hit the United States. But creating a nuclear explosive small enough actually to be carried by such a missile remained a formidable technological challenge – apparently until now.

U.S. strategy has relied heavily on the threat of a nuclear response to prevent North Korean aggression both because Pyongyang’s conventional forces have stacked up well against their combined American and South Korean counterparts, and because Washington could be confident that the North could not retaliate in kind on the peninsula, much less against American territory. Any significant North Korean intercontinental nuclear missile force would dramatically upset these calculations, and bolster the North’s confidence that any war it launched against the south would stay conventional – and thus succeed. America could face the terrible dilemma of sacrificing (name any U.S. City) to save Seoul.

Unconfirmed press accounts have just reported an even more stunning possible North Korean nuclear arms advance: a submarine that can fire ballistic missiles. This accomplishment would give Pyongyang a nuclear force that is not only powerful, but able to survive an initial exchange. That is, submarine-launched missiles could escape detection, and thus either preemptive or retaliatory strikes from the United States.

Defense experts seem to agree that this North Korean capability is years from actually appearing. (Mobile land-based North Korean nuclear missiles will probably be developed much sooner.) But the Pentagon believes that China will develop a nuclear missile sub much sooner – possibly by New Year’s. China recently demonstrated that its nuclear-powered attack submarines can now venture far beyond Asian coastal seas and into the Persian Gulf as well as the waters off Hawaii.

But the Pentagon believes that soon Beijing will launch a submarine that can carry nuclear-tipped missiles far enough into the Pacific to hit the continental United States. Even if these vessels stay in East Asia, their weapons could reach Alaska and Hawaii.

When its navy passes this milestone, China could feel much freer to press its recent spate of territorial claims against Asian neighbors without worrying about facing the U.S. Seventh Fleet. For Washington’s commitments to defend even treaty allies like Japan and Korea – much less the small, uninhabited islands and even energy-rich seas currently being contested – would have become much more dangerous. Supporting non-allies like Vietnam and the Philippines would look far more problematic, as would acting to preserve the independence of former Chinese province Taiwan.

These emerging North Korean and Chinese nuclear capabilities would not completely defang the United States in Asia. But as was the case with Cold War Europe after the Soviet Union built the Bomb and then reached nuclear parity – and possibly today in the Age of Putin – they present Washington with a set of wholly new and much more fateful set of choices.

For example, President Obama could decide to strengthen America’s own non-nuclear forces in East Asia, its own nuclear deterrent, or both. He could urge America’s Asian allies and other regional powers to beef up their own militaries instead of, or in conjunction with, a U.S. buildup. Conversely, the president could retrench, and rely on America’s role as the leading market for Asia’s export goods can ensure its essential interests in Asia – which arguably are economic.

Depending on the President’s other foreign and domestic priorities, and America’s national finances, any of these choices, along with other alternatives, is perfectly defensible. What’s now indefensible is assuming that nothing fundamental on the East Asian strategic scene has changed, and that Washington can still stare down foes in a showdown. Nothing would be likelier to boost the odds of a disastrous miscalculation in a region of steadily rising tensions.

(What’s Left of) Our Economy: September was the Cruelest Month for U.S. China and Manufacturing Trade

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APEC, China, Jobs, manufacturing, manufacturing renaissance, recovdyr, summit, Trade, trade deficit, {What's Left of) Our Economy

The combined U.S. goods and services trade deficit in September hit its highest monthly level since May, powered by new records in the trade shortfalls with China and in manufacturing.  Here are the China and manufacturing details from the Census Bureau‘s new report.  I hope to post on the rest of the September figures later today or tomorrow morning.

>The China goods deficit of $35.56 billion blew past the old mark of $30.86 billion, set in July, by 15.23 percent. The new deficit also represented a 17.77 percent increase over the August level of $30.20 billion.

>U.S. goods exports to the still strongly growing Chinese economy fell on month in September from $9.63 billion to $9.33 billion (3.12 percent). U.S. merchandise imports from China jumped by 12.70 percent over August levels, from $39.83 billion to $44.89 billion – itself an all-time high.

>The U.S. goods deficit with China this year is now so far running 5.62 percent ahead of 2014’s record pace.

>The longstanding U.S. manufacturing trade shortfall shot up from $59.10 billion in August to $69.16 billion in September. This 17.02 percent jump resulted in a beat of the old record of $67.33 billion, also set in July, by 2.72 percent.

>U.S. manufacturing exports fell by 4.90 percent from August to September, from $103.85 billion to $98.76 billion. Manufactures imports increased on month by 3.05 percent, from $162.95 billion to $167.91 billion.

>The year-to-date manufacturing trade deficit of $534.40 billion is running 11.83 percent ahead of 2013’s pace – also a record.

My take:  As President Obama prepares for his summit with Chinese leader Xi Jinping next week, these awful U.S.-China trade figures make clearer than ever the need for a complete overhaul of U.S. economic strategy towards the PRC. The deficit’s relentless growth, which drags on America’s recovery and job creation, also signals that the President and trade policy critics alike must deal effectively with the entire range of predatory Chinese trade practices, not simply currency manipulation.  

In addition, the new monthly record manufacturing trade deficit makes a new mockery of claims that American domestic manufacturing is in or near renaissance mode, along with the belief that its rebirth is coming largely at the expense of a less and less competitive China.