(What’s Left of) Our Economy: Mainstream U.S. Trade Policy’s Main Rationale Has Just Been Blown Up

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Bill Clinton, BRICS, China, emerging markets, EMs, Financial Times, globalization, Jim O'Neill, multinational companies, offshoring, Project-Syndicate.org, Sherrod Brown, The Race to the Bottom, Trade, trade agreements, {What's Left of) Our Economy

I’m always struck by how often in the news media or policy writing (e.g., in journals like Foreign Affairs), genuinely game-changing points are made in passing, and for folks with any interest in the trade and globalization issues raised to such prominence by President Trump. And two such instances dealing with this subject just came in the Financial Times newspaper and the website Project-Syndicate.org.

The observation they both made with mind-boggling offhandedness – economic growth in countries dubbed “emerging markets” (EMs) is slowing to rates no faster than those of the rest of the world, and thus rendering them incapable as far as the eye can see of replacing the United States as a global growth engine.

This claim matters decisively for trade policy because these EMs have dominated America’s approach in this field for more than two decades. First identified in the early 1990s, they consist of economies in the developing world that not only boasted enormous populations. But largely because communism and a heavy state role in economic policy had been so thoroughly discredited due to the end of the Cold War, they were steadily transitioning to more free market approaches, and thus were seen to have huge growth potential. China and Mexico were the leading examples, but various definitions of the main emerging markets also included India, Brazil, Russia, Turkey, South Africa, and others.

According to trade enthusiasts, this combination of characteristics was going to make the EMs so important that accessing their vast current consumer markets and even greater consuming and importing potential needed to be Washington’s top trade priority. Their significance was portrayed as all the more important given America’s status as a “maturing” economy whose growth was bound to continue slowing. (Former President Bill Clinton used exactly this term while advocating for an emerging markets push in a document that’s not on-line but that’s cited in my book on globalization, The Race to the Bottom. The document was the 1995 Report of the President of the United States on the Trade Agreements Program and it was published by the Office of the U.S. Trade Representative at the start of 1996.)    

Yet however impressive and promising they seemed, the idea was a crock from the beginning – at least in terms of its importance in driving American trade policy for the foreseeable future. EM cheerleading suffered two fatal flaws. First, despite rapid growth and immense growth potential, the emerging markets were starting from such low bases – especially in terms of their populations’ consuming power – that they wouldn’t become significant markets in absolute terms for many years at best. Second, precisely because they remained so poor and under-developed, their governments invariably realized that their own best growth opportunities came from exporting to much wealthier countries like the United States – where the needed consumption power already existed.

So why the EMs euphoria? As documented exhaustively in The Race to the Bottom, the multinational corporations that dominated American trade policy-making never saw the emerging markets as final consumption markets. They viewed them as super low-cost production bases from which they could supply the U.S. market much more profitably than possible from their domestic factories. Which is exactly why, starting with the pursuit of trade expansion with Mexico at the onset of the 1990s, American trade policy almost exclusively targeted the emerging markets and other very low-income countries (like Vietnam and the countries of Central America) for negotiating new trade deals.

Ohio Democratic Senator Sherrod Brown (a possible 2020 Democratic presidential contender) described the multinationals sales pitch to leading EM China somewhat too charitably when he said in 2015, “while walking the halls of Congress, [lobbyists for the multinationals] talked about they wanted access to 1 billion Chinese customers. What they didn’t say is they also wanted access to 1 billion potential Chinese workers.”

As The Race to the Bottom also made clear, EM touting was star-crossed from the start – even embarrassingly so. As it peaked, in the mid-1990s, many of these same countries started experiencing problems that led to major financial crises even before the decade ended. That is, their markets became evaporating, not emerging, and in numerous cases they kept afloat only by cheapening their currencies, limiting their own consumption and importing still further, and making them more powerful exporters than ever.

Yet the multinationals’ power and influence remained so decisive throughout America’s political (and media) establishment that emerging markets hucksterism continued to justify trade agreements with such countries. Hence the continued repetition of wholly misleading contentions like “95 percent of the world’s consumers live outside the United States” (which I debunked here).

So that’s why I was so interested to see the following in a Financial Times blog post – and by no less than a former senior official at the International Monetary Fund and another leading international economic institution:  

“EM growth has slowed to about 4.5 per cent at present….In the long run, according to the OECD, the potential growth rate of the Briics (Brazil, Russia, India, Indonesia, China and South Africa — accounting for most of EM GDP) is expected to slow further, converging to mature market trend growth of 2 per cent. In other words, the growth advantage of more than 4 percentage points that EMs enjoyed over mature markets in the 2000-2010 period has narrowed to about 2 percentage points and will probably disappear in the long run.”

And guess what? Unlike in the United States, in particular, even much of this EM growth will rely on maximizing exports and minimizing imports. So their importance as markets for American-made goods and services will be even less impressive than this impeccably mainstream analyst suggests.

Equally startling: This Project-Syndicate column by Jim O’Neill. O’Neill, for the unitiated, was perhaps the highest profile EM cheerleader, and coined a popular acronym for those economies that described those he believed most promising: BRICS (Brazil, Russia, India, China, South Africa).

The former Goldman Sachs banker has remained a believer in China, and has actually added some countries to his list of economies he believes will loom much larger in this century. But in the column, he also argued that, if China falters in what he (wrongly, in my view) considers its role as a global growth engine, and the American consumer gets tapped out, none of the other emerging economies “is in a position to match the growth of Chinese consumption today, or even over the course of the next decade.” And by extension, the likelihood of these countries replacing the United States is even more infinitesimal.

Former French leader Charles de Gaulle once famously said that “Brazil is the country of the future…and always will be.” The two examples above show that the same solidly grounded skepticism is also finally seeping into the ranks of globalization cheerleaders. How long will it take before the American political, business, academic, and media establishments finally start paying attention?

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(What’s Left of) Our Economy: Foreigners’ Still Keep the Faith in King Dollar

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BRICS, China, currency, dollar, Federal Reserve, foreign exchange, interest rates, national debt, Treasuries, Treasury Department, {What's Left of) Our Economy

It wouldn’t be right to let much more time pass before reporting on the new numbers from the Treasury Department showing how much in the way of U.S. government debt is held by foreigners, including by foreign central banks and other arms of foreign governments.

These monthly data sets are closely followed by finance geeks and some trade specialists because they shed light on critical economic questions (mainly, how much longer the rest of the world will keep on funding America’s habit of living beyond its means) and national security questions (how much influence over U.S. politics and policy might be wielded by creditors whose primary interests are not the well-being of the American people).

That economic question has loomed especially large because even though most outstanding debt is held by Americans themselves, there’s legitimate concern that foreign lenders own than enough to affect interest rates. More specifically, many American leaders and analysts have worried that overseas interests may tire of lending ever more money to an economy that keeps going ever deeper into the red, and will at least start demanding more compensation (i.e., higher rates) for the greater risk they’re being asked to assume.

That kind of tightening would almost certainly slow an already historically sluggish U.S. recovery. Yet if the Federal Reserve held rates steady and simply printed more money to fill the gap, the U.S. dollar could start weakening dangerously, and inflation in America could genuinely take off.

The good news contained in the new Treasury figures is that foreign lenders are more than happy to let Americans’ consumption party continue. Of course, if you’re worried that profligacy can’t indefinitely serve as a national business model, and that continuing huge U.S. international deficits keep threatening to trigger a repeat of the last global financial crisis, that’s also the bad news.

As of August, total foreign holdings of America’s official debt bounced back from a July dip to hit an all-time high of just over $6.066 trillion. Foreign government holdings kept rising month to month, too, and also hit a new record – just over $4.157 trillion.

The figures on some individual countries’ U.S. official debt holdings are noteworthy, too. China is now America’s biggest foreign creditor, which is worrisome in part because of its increasingly aggressive foreign policy in the East Asia Pacific region. It bought $4.8 billion in American government debt in August and raised its holdings to just under $1.270 trillion. That’s below the monthly record Chinese lending hit of nearly $1.317 trillion in November, 2013, but not very far below. In fact, this lending has remained around $1.270 trillion ever since. So there doesn’t seem to be much evidence that Beijing’s stated desire to see its yuan assume a more important role as an international reserve vis-a-vis the dollar is leading it to unload greenbacks.

France has bitterly complained about the dollar’s global predominance for decades, including recently. But France’s dollar holdings also rose in August after dipping in July, and are up more than 13.60 percent since last August.  The BRICS countries (Brazil, Russia, China, India, and South Africa) say they’re so upset about the dollar’s “hegemony” that they’ve formed their own development bank. But as a group, the non-Chinese members steadily keep buying dollars, too.

If there has been a valid reason for concern about foreign dollar buying, it comes from taking a longer perspective. Since March, foreigners’ overall U.S. Debt holdings have increased an average of 6.18 percent year on year. That’s a bit less than the 6.71 percent average for the comparable 2012-13 year-on-year increases. But it’s less than half the 12.74 percent average from 2011-2012.

At the same time, clearly U.S. investors have more than stepped in, and helped keep U.S. Treasury yields low. Moreover, these new August figures precede September and October, when global worries about rising geopolitical tensions and slowing growth in China and Europe in particular triggered a major flight into dollars that pushed the exchange rate way up and interest rates another leg down. Unless foreign investors almost completely avoided the temptations of the dollar’s well established safe haven status, expect the next few sets of monthly Treasury figures to show their dollar holdings strongly on the rise again.

Following Up: Still-Empty Dollar-Dumping Threats and a Manufacturing Renaissance Poster Child Up for Sale

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appliances, BRICS, China, debt, dollar, Following Up, foreign dollar holders, GE, manufacturing, manufacturing renaissance, reserve currency, Treasuries

Two items worth noting today:

First, last month, I wrote a piece for Marketwatch.com noting that, despite the strengthening chorus of international criticism protesting the dollar’s domination of the global financial system, even the countries protesting loudest keep buying dollars.

That article was based on Treasury Department data that brought the story up until May. Yesterday, the June data were published – and the trend I described is still firmly in place.

Total foreign holdings of long-term U.S. Treasury securities rose 0.61 percent over their May levels. In May, they were only 0.26 percent higher than in April. Foreign government holdings of this U.S. debt most directly reflect official foreign views of the dollar’s role, and represent about two-thirds of all foreign dollar holdings. These increased by 0.39 percent on month in June – slower than their 0.61 percent May monthly increase, but hardly a sign of significant dissatisfaction.

As for the countries complaining most vociferously, France did sell off 3.52 percent of its Treasury holdings in June. But they’re still up 9.74 percent since January. The BRICS countries (Brazil, Russia, India, China, and South Africa) say they’re so unhappy with the dollar’s “hegemony” that they’ve created their own development bank. But three of the five bought dollars on net in June – even Russia. China, by the far the largest BRICS dollar holder, appears to have sold off 0.20 percent of its holdings.

As is so often the case, however, appearances may be deceiving when it comes to China. Benn Steil of the Council on Foreign Relations has recently presented compelling evidence that Beijing’s avid dollar buying – which importantly helps keep down the yuan’s value versus the dollar and in turn China’s export prices – remains strong. But according to Steil, the data indicate that, to avoid undue U.S. criticism of this protectionist currency manipulation, the Chinese are disguising their dollar buying by sending its new holdings to Belgium.

Our second follow up item: On July 21, I published an item on the news that GE was reported to be exploring the sale of its appliances division. This divestiture would matter big time because, as I noted, GE appliance-making was portrayed in a recent Atlantic cover story as the poster-child for the renaissance allegedly being enjoyed by U.S. domestic manufacturing. Indeed, one of President Obama’s leading manufacturing policy aides made a high profile visit to the company’s main appliance production complex in Louisville, Kentucky in February, 2011.

On Thursday, GE confirmed reports of its desire to unload appliances, listing Swedish white goods powerhouse Electrolux as one possible buyer. Especially significant for manufacturing renaissance claims – a Washington Post reporter’s observation that “The appliances division in particular has grown less profitable as foreign appliance makers command a growing share of the U.S. market .” With renaissances like this, who needs industrial decline?