(What’s Left of) Our Economy: Looks Like Obama Aide’s Conceding a Major TPP Argument

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AIIB, Asian Infrastructure Investment Bank, China, exports, free trade agreements, Free Trade Area of the Asia Pacific, GDP, imports, Michael Froman, Obama, Regional Comprehensive Economic Partnership, TPP, Trade, Trans-Pacific Partnership, U.S. Trade Representative, USTR, {What's Left of) Our Economy

Compelling evidence just appeared that the Obama administration is conceding that many critics are right to call its Pacific Rim trade deal is a nothing-burger economically – at best. It came in the form of U.S. Trade Representative Michael Froman’s official comment on the new, Congressionally mandated U.S. International Trade Commission (USITC) projection of the deal’s economic effects.

The USITC did a good enough job pouring cold water on the notion that the Trans-Pacific Partnership (TPP) would be a major boon for the American economy. As has been widely reported, the Commission forecasts that the impact on the nation’s growth and real incomes is statistically insignificant.

These findings logically challenge critics’ descriptions of the deal as disastrous. But at the same time, the USITC assumes full compliance with the TPP’s terms by the eleven non-U.S. signatories. As I’ve explained, even if Washington performed a dramatic about-face and treated trade monitoring and enforcement as a priority, logistical and political barriers mock the belief that the United States can hold its TPP partners’ feet to the fire.

Indeed partly because its methodology can’t adequately take such problems into account, the USITC has a long and sorry track record of greatly understating the net harm to the American economy from new trade agreements.

But Ambassador Froman’s strategy for handling the USITC report strongly indicates that President Obama has decided to gloss over the claim that his aides did a great job at the TPP talks. For the U.S. Trade Representative evidently has decided to change the subject.

Froman did make some token stabs at portraying the TPP’s terms as economic winners for Americans. For example, he took the time-honored official Washington tack of touting export projections while ignoring predictions for imports (which globally would be greater according to the USITC) and thus the net economic impact of trade flows.

Yet Froman quickly exited this specifics-oriented economic debate and pointedly contended that “What cannot be quantified in this study or any other is the cost to American leadership if we fail to pass TPP and allow China to carve up the Asia-Pacific through their own trade agreement.”  

Unfortunately for him and the president, this position puts them on no stronger ground. On the one hand, after all, Froman is implicitly conceding that any set of TPP provisions to which the United States agrees is better than none because simply signing the treaty creates an American seat at the Asia-Pacific rule-writing table. On the other hand, as I’ve repeatedly noted, expectations that such American participation will create even longer-term benefits is laughable for at least four main reasons.

First, most of America’s main regional allies – and most major TPP signatories – are already taking part in those Chinese initiatives that Froman describes as so hostile to American interests. These initiatives include not only China’s new Asia infrastructure bank, but its Regional Comprehensive Economic Partnership – its explicit counterpart trade agreement.

Second, the United States itself has given its blessing to another Chinese-backed regional trade scheme – a proposed Free Trade Area of the Asia Pacific.

Third, these Chinese measures have attracted such regional support largely because so many East Asian countries in particular (as opposed to TPP’s Western Hemisphere members) pursue the kinds of Chinese-style trade and broader economic policies that the administration has long noted have undercut U.S. Domestic economic interests. Regardless of the piece of paper they have signed, the last thing these neo-mercantilist powers want to see is an enforceable set of “rules for trade” that reflect America’s more free-market-oriented values and practices.

Fourth, because U.S. and Asian definitions of acceptable and unacceptable economic behavior contrast so strikingly, even sitting at the TPP table can’t possibly guarantee pro-American results – unless the TPP’s dispute-resolution mechanism breaks with all recent precedents and awards outsized authority to the United States, as opposed to operating on consensual, or one-country, one-vote, principles.

Not that Froman or the rest of the administration are running out of arguments yet. They could refocus the debate on the national security claim that TPP is essential for preserving and/or strengthening America’s geopolitical position in the Asia-Pacific region, especially as China’s power and influence surge (even though this administration has done little at most to stem the flow of defense-related technology and valuable economic wherewithal to that same China). They could also warn that President Obama’s international credibility will be undercut if TPP is rejected (even though his presidency is nearly over).

Wouldn’t it be much better if Mr. Obama and his aides just threw in the towel, admitted that despite decades of experience, neither Democratic nor Republican administration’s have figured out how to negotiate trade agreements that work for America on net, and if the next president spent time and resources developing a learning curve instead?

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(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.

Our So-Called Foreign Policy: A Big Overlooked Lesson of the Iran Deal

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AIIB, allies, Asian Infrastructure Investment Bank, burden sharing, China, Cold War, IMF, Iran, Iran deal, John Kerry, multilateralism, Obama, Our So-Called Foreign Policy, sanctions, Security Council, United Nations, World Bank

Whatever you think of President Obama’s deal aimed at preventing Iran’s acquisition of a nuclear weapon, it’s vital to recognize that it greatly compounds the evidence that a key pillar of recent U.S. foreign policy is crumbling – the belief that many crucial American international objectives can successfully be pursued multilaterally. The terms of the deal powerfully indict extensive reliance on formal U.S. alliances and less formal groupings of allegedly like-minded countries. They also indict extensive reliance on international institutions like the United Nations. And they make more urgent than ever the development of alternatives.

Even President Obama has described the terms of the Iran deal as sub-optimal. But he and his aides have insisted that it is better than any feasible alternative non-military approaches to Iran’s nuclear program. The president appears to be correct on this score, and consequently, a compelling case can be made for the deal’s approval by Congress. Nonetheless, it’s imperative to understand why an agreement with genuinely disturbing weaknesses has in fact been the best peaceful option available.

The principal reason, as made clear by Mr. Obama and Secretary of State John Kerry, is that even the western powers involved in the Iran negotiations have decided that the economic sanctions to which they have agreed have exacted a high enough price, and that the further costs they might have to pay due to efforts to strengthen the deal are unacceptable. In other words, for Britain, France, and Germany, the desire to resume potentially lucrative commercial ties with Iran outweighs the benefits of increasing pressure on Iran’s economy in order to, say achieve the right of no-notice, “anytime, anywhere” inspections of suspect Iranian sites. Similarly, the allies judge new business opportunities to be more important than requiring Iranian compliance with the agreement’s terms for longer time spans before restoring its ability to buy arms – including ballistic missiles – on the international market.

Kerry has noted that the United Nations has been even less interested in keeping The Bomb out of Iran’s hands. He has pointed out that the Security Council had not decided to condition early ends to the weapons- and missile-buying embargoes on signing a nuclear deal with Iran. The Council conditioned these actions on nothing more than Iran’s agreement to participate in nuclear negotiations. That’s why, Kerry argues, he needed to agree to these relatively early sunsets to begin with, and why he insists that the United States will be isolated in the world community if Congress does not agree.

In other words, a goal described by the president as vital – keeping Iran nuclear weapons free – has been significantly compromised because the allies do not fully share U.S. concerns. Nor does most of the rest of the world. As a result of this fundamental disagreement, it’s difficult to understand, as I’ve written, why anyone supposes the allies or the UN membership would agree to reimposing (“snapping back”) sanctions while the agreement is in place, much less holding Iran’s feet to the fire once the deal’s various provisions lapse.

Economics just delivered a similar message to Washington. The United States had initially decided to oppose China’s decision to set up an international development bank to serve as an alternative to the existing World Bank. Chinese leaders argued that the Western-dominated Bank was too slow to finance the massive infrastructure needs of developing countries in Asia and elsewhere, but U.S. leaders suspected that China was really seeking to gain international influence at America’s expense. Washington also worried that a Chinese dominated aid bank would be managed irresponsibly from a financial and governance standpoint, and that its projects would run roughshod over the environment. Anyone who knows anything about Chinese financial, governance, and environmental practices would need to regard these fears as legitimate.

As I’ve written, however, despite this U.S. opposition, even most of its closest allies decided to join the Chinese-led Asian Infrastructure Investment Bank (AIIB) anyway. They have cited two main reasons that even many prominent Americans agree with, but that turn out to be bogus on closer inspection – and that underscore the weaknesses of multilateralism. First, many of the allies themselves maintained that their participation would promote best business and environmental practices at the new institution. Second, they – and many influential Americans – describe the aid bank as an understandable Chinese reaction to the U.S. Congress’ refusal to approve increasing China’s voting power in the International Monetary Fund (IMF).

Yet the U.S. allies that have jumped on the AIIB bandwagon are acting so eager to win new infrastructure contracts that it’s hard to believe they’ll pressure Beijing to adopt high standards. Moreover, increasing China’s IMF vote amounts to increasing the global clout of a government and economic system that’s by far the worst kleptocracy of all major countries. That’s a terrible idea, which in particular overlooks the multi-decade failure of western policies to moderate China’s behavior by integrating it into the world economy. The results to date have been a country that’s immensely stronger militarily, far more aggressive towards its neighbors, increasingly protectionist on the trade and investment fronts, and increasingly repressive towards domestic dissent.

The United States has never been especially successful at alliance management. In particular, it was never able to convince either its European or Asian allies to contribute proportionately to the common defense and security burden. And the Europeans frequently broke with Washington even on the military conflicts of the day – to the point of continuing to trade with North Vietnam during the Indochina conflict. But failures during the Cold War took place in a period when America possessed much greater relative military and economic power than today. So it needed allied cooperation much less to achieve goals it considered important. The Iran deal and AIIB failures show that a lack of allied cooperation is now enough to prevent America from achieving such goals.

Which means that, as during the Cold War, the main point is not the United States has been necessarily right and other countries necessarily wrong in these disputes. The main point is that America today finds itself in a position in which the rest of the world (including its closest allies) can – and have – fatally undermined measures needed to achieve objectives that Washington regards as deserving the utmost importance. As a result, whether its leaders know it or not, the nation faces a basic choice. It can either accept the global consensus, and decide to live in a world that its own leaders have stated will pose unacceptable risks. Or it can start figuring out ways to attain an acceptable level of security through its own devices.

The possibilities are wide-ranging, depending on how the American political system defines the nation’s overseas priorities, how much it decides to spend on achieving them, and how much wealth the economy can generate – thereby determining how intense the inevitable resource competition between “guns and butter” will be. My own hope is that U.S. leaders recognize two truths that seem to be recognized by the public already. First, foreign policy is about achieving important goals that cannot be attained through domestic policy. Second, although the United States lacks the power to become acceptably safe and secure by stabilizing, pacifying, enriching, or democratizing the rest of the world, it has ample power to survive and prosper even in the deeply flawed and indeed dangerous world it faces today.  

Worrisomely, though, President Obama doesn’t even yet seem to recognize the problem. Speaking at the West Point commencement last year, he made a point that’s become presidential boilerplate by now: “America should never ask permission to protect our people, our homeland, or our way of life.” Yet as demonstrated by his Iran diplomacy and, secondarily, by the AIIB fiasco, that’s exactly what the nation is doing.  And the rest of the world is anything but reluctant to say “No.”

 

Our So-Called Foreign Policy: How a Superpower Would React to China’s Infrastructure Bank Challenge

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AIIB, allies, Asian Infrastructure Investment Bank, China, escalation dominance, Financial Crisis, Global Imbalances, Ingternational Monetary Fund, Japan, Korea, NATO, North Korea, Our So-Called Foreign Policy, Russia, TPP, Trade, Trans-Pacific Partnership, World Bank

So now what? That’s the question a Twitter follower asked me after reading my posts and tweets criticizing China’s establishment of a new Asian infrastructure financing bank, and the ineffective U.S. response to its’ allies rush to join an institution that challenges an international economic order that they themselves built. I’ve now started to think this through, and here are my preliminary thoughts – which focus on the golden opportunity these events create to rethink an American alliance policy that was obsolete even before the Cold War ended.

China’s move spells trouble for the United States on any number of levels, but especially for its efforts to preserve the approach to foreign policy and the global economy it’s clung to under Democratic and Republican presidents alike since the end of World War II. This strategy has ultimately aimed at eliminating the conditions responsible for great power war in the first place by binding like-minded countries (generally, but not always, democracies) into cooperative economic networks that could promote global stability and prosperity, and by expanding this system whenever practicable. Challengers from outside this free world camp would be dealt with through various global alliances.

Also crucial: In all of these endeavors, the United States provided the lion’s share of the so-called public goods – the resources for defense and liquidity for promoting growth (which included wide open trade markets for countries that kept theirs substantially closed). In turn, the United States was generally recognized as first among equals for the systemic, existential decisions.

These arrangements, which extended to the free world camp’s consequential institutions (NATO and the other security relationships, the World Bank and the International Monetary Fund) were far from America’s only viable strategy during the early post-World War II decades, as I’ve explained here. But they were a sensible choice and deserve credit for fostering successful postwar reconstruction, as well as peace and record prosperity throughout the developed world.

Yet it made much less strategic sense for the United States once the Soviet Union caught up in nuclear armaments, and thereby gained the power to turn America’s defense of its allies into an exercise in suicide. And it made much less economic sense for the United States once its allies began catching up economically, and its role as liquidity provider became less affordable.

It’s no surprise, then, that the early postwar monetary system – the heart of that period’s international economic system – fell apart in 1971, and has never been adequately replaced, even though its institutions survived in shriveled forms. The alliance system outlived its Soviet adversary, and China’s weakness following the Cultural Revolution and growing tensions with Moscow pushed it to the military and ideological competition’s sidelines for many years. But by the same token, the remaining American costs and risks required to maintain Cold War security structures lost much of their rationale.

Now new versions of these problems and dilemmas are now being forced into the open – including those involving nuclear threats – by China’s Asian Infrastructure Investment Bank (AIIB) gambit as well as by the return of Russian revanchism. In fact, because so many of America’s NATO allies have applied to join the bank, these two developments intersect. These allies are facing Russian challenges throughout Europe that for the first time in decades raise the possibility of spheres of influence being redrawn by force – primarily in the Baltics. As I’ve written, I believe that America’s ill-considered decision to expand NATO’s frontiers right up to Russia’s borders is largely responsible. But the allies clearly went along, and the shrunken states of their conventional military forces mean that they have no prospect of responding effectively – but not catastrophically (i.e., without nuclear weapons) – without American help.

At the same time, these allies have ignored American objections and joined a Chinese creation that can only be legitimately viewed as a rival of a U.S. and Western-fostered blueprint to ensure that growth and development worldwide proceed according to market-based principles and associated political values. Anyone familiar with Asia in particular knows that this goal often has been honored in the breach – one main reason for the global economic imbalances that nearly blew up the world economy just over six short years ago. It’s entirely understandable that low-income countries complain that even the rapid growth they’ve achieved under the Western-dominated global economy hasn’t been fast enough. But imagine how excessive and unbalanced their growth would be, and how dangerously distorted the world economy would become once again, if the current restraints were removed – if China was allowed to write the rules of doing business in Asia, as President Obama says he fears. Moreover, the entirety of East Asia itself could look as bloated and filthy and corrupt as China itself.

That America’s allies (Japan is still sitting on the fence) should ignore these considerations in a clear rush to win whatever contracts the AIIB winds up handing out raises the most profound questions about their commitment to longstanding free world foreign policy goals. Their actions are particularly stunning in light of renewed security threats that, due to enduring facts of geography, endanger them much more than they endanger America. The idea that the United States should continue assuming any risks of nuclear confrontation on behalf of such countries looks particularly dubious.

Nor should it be forgotten that China itself has been a major beneficiary of the current American-inspired order. Peace and stability in Asia has been by far the most important contributor to its breakneck growth and dramatically improved living standards. So it’s at least jaw-droppingly ironic to read reports of Chinese warnings that North Korea’s nuclear arsenal could be much larger than so far estimated, and could grow much faster. After all, Beijing not only still serves as the North’s economic lifeline, and has been more aggressively pressing its claims to seas and islands in East and Southeast Asia, on top of its campaign of undermining America’s regional influence.

Even worse, Korea looks like an ever more dangerous tar baby for the United States. Yes, the ongoing large U.S. troop deployment in South Korea no doubt helps to deter destabilizing provocations and even aggression by the North. At the same time, it threatens to draw the United States into any conflict on the peninsula – which could well go nuclear. Further, as I’ve written, the North’s nuclear forces could soon become strong enough to deter deeper U.S. involvement in a new Korean War – and doom the troops already in harm’s way. Most important, America is exposed to these possible disasters even though it’s located thousands of miles away from Korea, and Northeast Asia looks endowed with more than enough big powers (not only China, but Russia and Japan as well as South Korea) to deal with the North itself. Oh – and did I mention? South Korea is all in with the AIIB, too.

To me, therefore, one obvious U.S. response to China’s creation of the AIIB should be to deliver an ultimatum to those new members that are also negotiating to conclude the Trans-Pacific Partnership (TPP) trade deal with America: If you’re that keen on the AIIB, you can kiss good-bye the TPP and the greater access to America’s market you’re seeking. In fact, Washington should feel free to increase and erect new trade barriers to their products. Nor should the main culprit escape unscathed; China’s access to American customers should be restricted, too. And South Korea should be told that it’s new free trade agreement will be torn up if Seoul doesn’t leave the Chinese-led institution.

The new European members of the AIIB present a more complicated problem. One possible solution would be for Washington to make clear that any Asian products created with the help of new AIIB-financed infrastructure projects (ranging from ports, roads, and bridges to power and water systems) will face new U.S. trade barriers – and Washington would be judge, jury, and court of appeals for identifying these goods. Without the ability to sell to America, those infrastructure contracts sought by the Europeans (and others) become a lot less valuable.

And although the AIIB doesn’t pose any security threats to America per se, its creation carries major security implications because a main rationale for the risks Washington has assumed via its East Asian military presence is economic. In other words, if remaining aloof from the AIIB winds up discriminating against American domestic businesses (as opposed to the foreign factories of U.S. multinational companies), the American military is out of South Korea, its bases in Japan will be cut way back, and the Asians will be more than welcome to deal with North Korea’s nukes on their own. Ditto for those Asian countries worried about the expansionism of China itself. If they want U.S. military help, they’d better not be playing footsie with the threat. I’d also support American leaders reminding the Europeans that it remains an ocean away from Vladimir Putin’s designs, and that the allies would be well advised to take seriously their talk of working inside the AIIB to make sure it acts quasi-responsibly.

U.S. leaders trapped in 20^th century ways of thought will (nervously) laugh off these proposals because they’re still convinced that America needs its allies more than vice versa. Leaders who understand geopolitics and the full range of thoroughly viable strategic options it creates – not to mention America’s unmatched market power and potential for much greater economic self-sufficiency – will start to act like a superpower rather than settling for (increasingly) hollow rhetoric. I just hope Washington doesn’t need a completely unnecessary war to come to its sense.

Following Up: Trade Data Undermine China’s Great Power Claims

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Asian Infrastructure Investment Bank, China, emerging markets, export-led growth, exports, Following Up, International Monetary Fund, Trade, trade surpluses

The economic data published by China’s government has always struck most observers as kind of funny – and not in the “ha, ha” sense. And Beijing’s last few batches of trade figures have been no exception. Still, through all the bizarre seasonal adjustments that China claims to make at this time of year in order to account for its lunar new year holiday, and for all its other well-established statistical shenanigans, shines one key point: Contrary to endless predictions that China is shifting its economic model to domestic demand-led growth, it’s clear that the PRC is actually getting more dependent on exports, and especially net exports (trade surpluses).

As I noted in this January post, although in recent years, exports as a share of China’s gross domestic product (GDP) have fallen , China’s growth rates have fallen faster. So although there’s less growth nowadays, more of it has been generated by overseas sales.

At that point, we were still waiting for the final 2014 China trade numbers. Now we have them. The country’s trade surplus shot up just under 67 percent from 2013 levels – from $227.55 billion to $379.53 billion. Exports grew from $2.21 trillion to $2.34 trillion. But growth slowed from 7.7 percent to 7.4 percent – the worst pace in 24 years.

The trend, moreover, has only intensified during the first quarter of this year. China’s trade surplus has shot up from $16.58 billion between January-March, 2014 to $123.68 billion during the January-March period this year. That’s 7.5-fold growth! Exports are actually down quarter to quarter, by 2.71 percent, from $528.35 to $514.02 billion. But imports fell off the cliff. Even more revealing: The first quarter growth data, set to come out tomorrow, are forecast to be about seven percent – below even the multi-decade low hit for the full year last year.

This heightening export dependence is especially important when you think about the recent debates about whether the world needs to accommodate the rise of China as-is, or insist on better behavior before endorsing, for example, its new Asia infrastructure bank or its demands for more influence in existing international institutions (which have also been made by other so-called emerging market countries). Because it’s a powerful reminder that, despite all the hype about the admittedly stunning progress it’s made on so many fronts, China still needs the rest of the world – and especially the wide open, gargantuan U.S. market – much more than the world needs China.

(What’s Left of) Our Economy: If Larry Summers Really Wanted to End Secular Stagnation….

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allies, Asian Infrastructure Investment Bank, Ben Bernanke, China, decoupling, emerging markets, Financial Crisis, Global Imbalances, globalization, Great Recession, International Monetary Fund, international organizations, Larry Summers, secular stagnation, World Trade Organization, {What's Left of) Our Economy

Former chief Obama economic advisor & Clinton Treasury Secretary Larry Summers has almost uniquely come quite a way in analyzing the major problems caused for the American economy by U.S. trade and other globalization policies. But the latest of his widely syndicated newspaper columns shows that in the most crucial respects, he has a long way to go, suggesting that the rest of the America’s economic policy establishment undoubtedly has even more rethinking to do.

Once a prominent champion of trade deals that have needlessly sent so much of the nation’s productive economy overseas, Summers has had at least two important second thoughts. Lately, he’s been pushing the idea that an American economy unquestionably shaped by Washington’s international economic policies is suffering from “secular stagnation.” This malady is defined as an inability to grow adequately without inflating dangerous financial bubbles. Although Summers doesn’t blame America’s recent approach to the international economy, it’s an especially striking indictment given how significant the globalization strategies he favored were supposed to be in shaping the country’s economic future – not to mention how much triumphalism they fostered.

In addition, as I’ve reported, Summers now agrees that unless it responds effectively to currency manipulation by foreign governments, proposed U.S. trade agreements like the Trans-Pacific Partnership could be more bane than boon for America.

His newest offering adds another useful insight: Too many participants on both sides of the debate on trade and globalization policies are neglecting the needs of the middle and working classes in the United States and other industrialized countries. As he writes:

“It sometimes seems that the prevailing global agenda combines elite concerns about matters such as intellectual property, investment protection and regulatory harmonisation with moral concerns about global poverty and posterity, while offering little to those in the middle.”

Summers strangely adds “rising urban populations” in developing countries to the list of overlooked constituencies, but I fully agree with his claim that approaches that remain so blinkered “are unlikely to work out well in the long run.”

But the larger point made by Summers here shows that he remains utterly clueless as to the real dangers created by U.S. trade failures. Indeed, his proposed solutions would make matters far worse. According to Summers – who’s now back teaching at Harvard – China’s successful creation of a new infrastructure financing bank over American objections shows that “This past month may be remembered as the moment the United States lost its role as the underwriter of the global economic system.” Consequently, “a comprehensive review of the US approach to global economics is urgently needed.”

As Summers sees it, the United States must reestablish its bona fides for global economic leadership by encouraging, not resisting, the creation of a “new global economic architecture” that reflects the rise of China and other emerging market countries; and by subordinating itself to the same international rules that it insists others obey.

I have my doubts as to whether an objective as gauzy as “global economic leadership” deserves any priority in Washington – if it’s defined, as Summers seems to, as the ability to steer the world economy toward goals that would benefit all countries. Not that I object in principal to win-win global outcomes.  But where’s the evidence that even America’s allies are interested in anything more than free-riding on U.S. economic largesse, and in continuing to grow mainly by wracking up trade surpluses with the United States? China and the rest of the so-called emerging world, more growth-starved than ever these days because their own economies are slowing dramatically, are even further off the reservation.  

Moreover, as dreary as its performance has been since the financial crisis struck, the U.S. economy has been the world’s pace-setter among industrialized countries and it’s outgrown even many developing countries. Combined with its still decent outlook amid a weakening international recovery, this development keeps strengthening the case that the United States is “decoupling” from the rest of the world – and by extension, that any form of leadership is less and less necessary.  

But if I did value leadership, I’d be mindful, unlike Summers, that the only dependable foundation for this role is the kind of unquestionably superior economic and financial strength that the United States has spent nearly a quarter century squandering – largely through offshoring-friendly trade policies. This kind of predominance is essential either to lead through historically traditional muscle-flexing, or to lead in line with Summers’ conception – which happens to have been Washington’s general approach for most of the post-World War II period – by providing “public goods,” like wide, asymmetrically open import markets and lots of liquidity. Without such a margin of superiority, Leadership Version Number One will be all too easy to resist, and Leadership Version Number Two will founder for the very reasons it’s failed since the early 1970s – its over-magnanimity will degrade its material basis.

Further, as I’ve argued here, giving developing countries – especially China – more authority in international institutions is bound to deepen the economic woes faced by not only America, but by the entire world. For it will strengthening the forces of the secular stagnation that so alarms Summers. After all, in their understandable but shortsighted determination to grow at all costs, these countries will surely use organizations like the International Monetary Fund like they’ve used the World Trade Organization.  They’ll enable ever more economic free-riding, mainly by curbing Washington’s ability to respond. The inevitable result will be ever more third world export-led growth at the expense of America’s manufacturing base, and a deepening need for U.S. leaders to sustain phony prosperity through easy money.

As a result, even more ominously, this Summers strategy will contribute to fueling the kinds of global imbalances that triggered the last financial crisis, ensuing Great Recession, and current feeble recovery.

The lessons couldn’t be more clear. Whether you favor a broader or narrower view of U.S. leadership, there’s no substitute for rebuilding American wealth and power. And if you’re interested in creating a global economy that’s more stable, less crisis-prone, and better positioned to foster the greatest prosperity for all countries over the longest run, an America capable of administering some tough love, and of course wise enough to do so, is your very best bet as well.  

By the way, Summers, former Fed Chairman Ben Bernanke, and many other leading economists have been engaged in a vigorous blogging debate over both the global and domestic implications of secular expansion, and the related issue of whether the notion is valid to begin with.  Although they and the commentary they’ve inspired has generally ignored this dimension, these new writings bear strongly on the trade deals Congress is evaluating, and I’ll put my two cents in as soon as I digest their analyses.

 

Following Up: The China Aid Bank Debate Gets Dumb and Dumberer

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AIIB, allies, Asian Infrastructure Investment Bank, Australia, China, containment, Financial Crisis, Following Up, Global Imbalances, IMF, Japan, pivot, quotas, TPP, Trade, Trans-Pacific Partnership, World Trade Organization

It’s been a while since any global development has generated so much hypocrisy, baloney, and hypocritical baloney as China’s new Asia infrastructure bank and America’s response. (OK – maybe it’s only been a couple of days.) Still, the hubbub about something whose name is dominated by a MEGO word if ever there was one (“infrastructure”) is worth examining again. For it once again reminds that U.S. leaders, as well as most of our leading commentators, really aren’t smarter than a fifth grader when it comes to foreign policy, international relations, and the Pacific Rim.

Last week, I focused on how the rush of American allies to join the Asian Infrastructure Investment Bank (AIIB) exposed the folly of President Obama’s dream of a Pacific Rim trade zone that would be governed by U.S.-style commercial rules. Since then, however, it’s become embarrassingly clear that the same ridicule is deserved by the president’s belief that his Trans-Pacific Partnership (TPP) trade deal will balance rising Chinese power in the region. For Japan is now apparently ready to join the long list of TPP countries (including Australia, one of the planned pact’s other major economies) that is signing up with the Chinese. Whether Mr. Obama really does believe in “leading from behind” or not, it’s getting painfully obvious that he has precious few followers.

In addition, some recent commentary shows that it’s imperative to dispel two other myths surrounding the AIIB and hanging over the future of the Asia Pacific region and the rest of the globe.

The first has to do with the nature of President Obama’s China strategy. Critics of his administration’s opposition to the AIIB’s creation charge him with pursuing a crude, outdated strategy of containing China’s rise the way many of his predecessors sought to contain the former Soviet Union. Nothing could be further from the truth. There’s no question that the president wants the United States to remain the Asia-Pacific region’s preeminent power, that he sees China as America’s main challenger, and that he’s even announced that America’s grand global strategy will “pivot” from its preoccupation with the Middle East to give economically dynamic Asia its proper due. There’s also no question that, even before the last year’s flareup of large-scale Middle East violence, it was apparent that the Obama pivot was nearly all talk and little military redeployment.

But Mr. Obama’s China/Asia strategy is not simply half-hearted. It is completely incoherent. For despite his stated China concerns, the president has steadfastly continued his predecessors’ policies of looking the other way while Beijing’s predatory trade policies led to huge trade surpluses with the United States (which have undoubtedly helped China finance its huge, ongoing military buildup), and while U.S. technology and manufacturing companies transferred much of their most advanced knowhow to China (which has undoubtedly increased the sophistication of China’s weapons and helped teach the Chinese how to hack effectively).

In other words, Mr. Obama has kept feeding the beast he has warned against. As a result, the only legitimate beef American allies have with the administration’s current opposition to the AIIB is that it has been so sudden, and so completely out of character.

The second myth entails the claim that the United States (and especially the hawks in its Congress) are reaping what they have sown when they decided to block a decision by other International Monetary Fund members to give China more voting power in the institution. What the critics forget is that the world already has experience bringing China into a front-line international organization before making sure that Bejiing would act as “a responsible stakeholder” of the international system (as a former senior Bush administration policymaker once put it). And it’s backfired disastrously.

Since joining the World Trade Organization, China has profited handsomely from the benefits of membership (which include substantial immunity from unilateral American counters to Chinese protectionism). But it shouldered few of the obligations. The immense, China-centric global trade and investment imbalances that built up subsequently were crucial in setting the stage for the financial crisis. Those who hope that dealing with Western powers in the AIIB will lead to more constructive Chinese behavior need to explain why China will not remain as parasitic as ever, and even backslide – as it has on trade and economic liberalization during its WTO years.

More broadly, the free-riding U.S. allies who are grabbing for Chinese money while still enjoying American military protection are forgetting a vitally important (for them) truth. The United States is geopolitically and economically self-sufficient enough now – and potentially much more so – to be able to get by quite nicely a world with a much more influential China. Few of them, particularly in China’s neighborhood, can say the same.

Following Up: Podcast of Last Night’s John Batchelor Show Debate on China’s Economic Future

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Asian Infrastructure Investment Bank, China, currency manipulation, debt, Following Up, foreign exchange, Gordon Chang, John Batchelor Show, Trade

As promised, here’s the link to the podcast of my appearance last night on John Batchelor’s nationally syndicated radio show.  This segment was especially interesting, as John, co-host Gordon Chang, and I didn’t quite see eye-to-eye on whether China’s footprint on the world economy, and its impact on the United States’ future (including as “America’s banker”) are still growing or shrinking.  Our conversation starts off right at the beginning of the podcast.

(What’s Left of) Our Economy: China Aid Bank Success Reveals Obama’s TPP Naivete

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AIIB, allies, Asian Infrastructure Investment Bank, Australia, China, IMF, Korea, TPP, Trade, Trans-Pacific Partnership, transparency, United Kingdom, World Bank, {What's Left of) Our Economy

The readiness of American allies worldwide and numerous major Asia-Pacific countries to ignore Washington’s objections and sign on to the Chinese-led Asian Infrastructure Investment Bank (AIIB) isn’t just a major diplomatic embarrassment for the Obama administration. It also exposes the dangerous naivete of U.S. expectations of how the Pacific rim trade agreement being sought by the president will function.

According to President Obama, the American-spearheaded Trans-Pacific Partnership (TPP) trade deal is needed largely to prevent China and its often free market-unfriendly objectives from dominating the process of writing the rules that govern commerce in one of the world’s most economically vibrant regions. But the folly of faith in international rules should be more painfully obvious than ever from the rush of so many countries to join a regional economic development bank created precisely to marginalize the transparency, environmental and other standards imposed on aid spending by existing, Western-dominated institutions.

It’s true that Asian and other developing countries have long objected to their limited role in the World Bank, International Monetary Fund, and similar institutions. But their main objections are that being outvoted has meant a curbing of their access to resources by requirements of financial and policy controls aimed at ensuring adequate efficiency and sustainability. In other words, results have mattered far more to them than rules.

As for the wealthier countries that have signed on to this Chinese initiative, they’ve clearly been motivated by the lure of contracts that could juice their stagnant economies. Britain’s government and many analysts believe that the presence of European countries and Australia can maximize the odds that the AIIB will operate responsibly. But these countries could already look to existing institutions for lending based on good governance and balanced priorities (not that these institutions have been perfect by these measures). With so much opportunity at stake, will the growth- and jobs-starved Europeans and Australians really challenge – and therefore complicate – Chinese-style procedures?

Australia and several new AIIB participants would also be among the first round of TPP signatories. Moreover, other new AIIB members, like Korea and China itself, are knocking on the door. Mr. Obama’s comments on the Pacific trade deal’s rule-making benefits for America appear to be based on one of two equally illogical propositions.

The first is that once in TPP, these other members will suddenly drop their “anything for a buck” mentality and rediscover their devotion to strong procedures. (In the case of TPP’s Asian members, the belief seems to be that they will convert to rules-based priorities despite rejecting this approach to governing for their entire histories.) The second is that whatever priorities the majority of TPP members bring to its bargaining tables and dispute-resolution systems, the United States will be able to sell them on the superiority of stringent rules and all of the openness and market orientation they foster.

The good news for Americans is that their country retains ample capacity to shape commerce around the Pacific rim to its liking – and in a way that can prevent the reemergence of the historic global trade imbalances that helped trigger the financial crisis and its painful aftermath. As the most important final market for much of what’s produced by export-dependent Asia-Pacific countries, the United States can use its economic power to ensure mutually beneficial, sustainable trade and investment. The bad news is that the president seems ignorant of America’s advantages, and clueless that the TPP can only weaken, not strengthen them.

Our So-Called Foreign Policy: Obama Ignores the Diplomacy Lesson Taught by China’s Aid Bank Gambit

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allies, Asian Development Bank, Asian Infrastructure Investment Bank, China, diplomacy, international organizations, international relations, Obama, Our So-Called Foreign Policy, power, TPP, Trade, trade agreements, Trans-Pacific Partnership, World Bank

You have to be a regular visitor to the furthest reaches of business news websites to be up to speed on the controversy over dealing with the new Asian Infrastructure Investment Bank (AIIB) China has organized. Which is a shame, because the issues involved bring up our most fundamental ideas about how international relations are actually carried out and how they should be carried out.  They show how violently many of them clash.  And they point to the dangers of learning the wrong lessons.

The bank is an institution that Beijing says will serve two main purposes. First, it will speed up lending to Asian countries for urgently needed infrastructure projects that has been slowed by concerns about adequate spending controls, environmental standards, merit-based contracting practices, and similar conditions typically attached by existing development organizations like the World Bank and the Asian Development Bank. Second, it will give Asians more control over their own destinies, because those existing aid organizations are still dominated by Western countries – and by extension the supposedly Western values epitomized by their aforementioned policies.

The United States initially opposed the AIIB’s creation. But when China pushed ahead anyway, Washington began focusing on urging its regional allies and other Asian countries, as well as prospective non-Asian donor governments, to give it the cold shoulder. Unfortunately, many of these countries have ignored U.S. wishes, too – including Britain, Germany, France, Italy, and probably Australia.

The results add up to a major setback for American diplomacy – but also a self-inflicted one. U.S. leaders have viewed the Bank’s creation as part of a Chinese master plan to ensure that the rules of commerce in the economically dynamic Asia-Pacific region are written by free market countries and therefore reflect free market norms, rather than by Beijing and other champions of more secretive, more discriminatory, and more nationalistic practices. In addition to opposing the Bank’s creation, the Obama administration also has sought to respond by concluding the Trans-Pacific Partnership (TPP) trade deal, whose provisions it believes will lock the region into a free market future, and create incentives for countries seeking to join (like China) to change their ways.

But China’s successes are just the latest reminder that Washington completely misunderstands the forces that separate the winners from the losers not only in Asian politics, but around the world. For as widely reported, even America’s closest partners are cooperating with China because the lure of Chinese economic power, and the promise of increasing access to China’s enormous actual and potential market, have proven irresistible. All maintain generally free market, and thus rule-based, economic systems at home.  But none of these governments seems concerned about entering arrangements with countries like China, which actively reject the primacy of rules and all of their corollaries, like openness, and accountability to consumers, voters, and the like.

In other words, President Obama’s focus on rule-writing is completely misplaced. Fortunately, the United States has ample power of its own. In fact, as the most important final market by far for all countries currently involved in the TPP negotiations, and for all countries hoping to join, as well as the military protector of many of these nations (and of the Europeans flocking to the AIIB), the United States should have no trouble keeping the lid on China’s influence. A simple declaration that “If you want the benefits of trade with and protection by the United States, you need to act like it,” should suffice – along of course with the determination to walk this walk.

But the most important ingredient for this strategy is a U.S. chief executive who recognizes that world affairs is still mostly jungle, not civics class. Troublingly, the record indicates that Americans won’t get one until January, 2017 at the earliest.