(What’s Left of) Our Economy: Russia Sanctions May Be Sending a Crucial Message About U.S. China Policy

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Adam Posen, Antony J. Blinken, Biden, Biden administration, Bloomberg.com, Chad Bown, China, dollar, Donald Trump, finance, Foreign Affairs, foreign policy establishment, Mainstream Media, multilateralism, Qin Gang, reserve currency, Russia, sanctions, tariffs, Trade, trade war, Ukraine, Ukraine-Russia war, unilateralism, Wang Yi, {What's Left of) Our Economy

The Russian invasion of Ukraine has produced a genuinely strange – and potentially crucial – turn in the way American leaders and the political class of pundits and think tankers and the rest of the countrys influential chattering class are viewing and even conducting China policy. Because China could in theory significantly help Vladimir Putin’s never-impressive economy evade the full impact of global sanctions, they’re not only talking of only punishing the People’s Republic if it follows this course. They’re exuding confidence that Beijing could be cowed into backing down.

In other words, the conventional wisdom throughout the U.S. foreign policy,  economic policy, and media establishments now holds that Washington can bend China to its will because the Chinese ultimately need the United States much more economically than vice versa. Because this position looks like such a total reversal of what these folks insisted during the trade war supposedly started by Donald Trump with China, it raises these questions: If America’s leverage is great enough to change Chinese behavior that would mainly threaten another country’s security, isn’t it also great enough to change Chinese behavior that for decades has increasingly damaged America’s own economy, and also to pursue decoupling from the Chinese economy more energetically?

The Biden administration certainly is acting like it holds all the cards over China on anti-Russia sanctions. As a “senior administration official” told reporters in an – official – White House briefing last Friday, the President in his virtual meeting with Chinese dictator Xi Jinping that morning “made clear the implication and consequences of China providing material support — if China were to provide material support — to Russia as it prosecutes its brutal war in Ukraine, not just for China’s relationship with the United States but for the wider world.”

The day before, previewing the Biden-Xi call, Secretary of State Antony J. Blinken said  “President Biden will be speaking to President Xi tomorrow and will make clear that China will bear responsibility for any actions it takes to support Russia’s aggression, and we will not hesitate to impose costs.”

And the national policy establishments are giving these statements their Good Housekeeping Seal of Approval. According to Chad Bown of the Peterson Institute for International Economics, who emerged as the Mainstream Media’s go-to critic of the Trump trade wars, “On the pure economic question, if China were to have to make the choice – Russia versus everyone else – I mean, it’s a no-brainer for China because it’s so integrated with all of these Western economies,”

His views, moreover, came in a Reuters article whose main thrust was “China’s economic interests remain heavily skewed to Western democracies….”

A Bloomberg.com analysis posted a week ago similarly asserted that China “needs good relations with the U.S. and its partners to meet its economic goals, particularly as growth slows to the slowest pace in in more than three decades.”

And although that point was keyed to the current state of China’s economic health – as opposed to the situation during the Trump years, the article also noted that Beijing has “resisted taking retaliatory measures that would hurt its own economy even when the U.S. has directly targeted Beijing. During the height of the trade war, China threatened but never implemented an ‘unreliable entities’ list, and even state-run banks have complied with U.S. sanctions on Hong Kong. It also delayed imposing an anti-sanctions law on the financial hub after businesses expressed concern.”

In all, it’s a stark contrast with the days during that Trump period when the Mainstream Media – relying heavily on analysts like Bown, who work for think tanks heavily funded by Offshoring Lobby interests – routinely ran stories headlined “Why the US would never win a trade war with China.”

Now sharp-eyed readers will notice one big difference between then and now: The Trump China and other tariffs were unilateral. It’s assumed – quite reasonably – that any Biden China sanctions would be undertaken jointly, along with many and possibly most other major national economies.

At the same time, no less than Peterson Institute President Adam Posen has just written in (no less than) Foreign Affairs that it’s the strength of the West’s financial services industries that “are what has truly advantaged the West over Russia in implementing effective sanctions, and what has deterred Chinese businesses from bailing Russia out.”

But these advantages are overwhelmingly the product of the dollar’s reserve currency status and the dominance of U.S. finance in that dominant Western finance sector. So even he’s indirectly admitted that U.S. power specifically has been the key. As a result, wielding the finance cudgel could have pushed the Europeans and Japanese to join in with the Trump China tariffs.

Some other consequential conclusions could flow from this new confidence about China. Maybe even without putting other big economies in the finance cross-hairs, Trump should have threatened – and if need be, imposed – the same kinds of financial sanctions on China instead of tariffs to try to force Beijing to end its predatory trade practices, and/or to press China to accept more U.S. imports. Or maybe a combination of the two would have been best. Maybe President Biden should add the finance sanctions to his decision to maintain most of the Trump tariffs. And if the United States enjoys this kind of leverage over China, wouldn’t the same hold for other troublesome trade partners, even big economies?

But perhaps the most convincing signs of the U.S.’ paramount leverage are coming from China itself. Last Tuesday, Foreign Minister Wang Yi asserted that Beijing would “safeguard its legitimate rights and interests” if hit by punitive U.S. and broader measures. But this language was pretty vague – and he also expressed China’s hope that it would avoid these sanctions to begin with. Moreover, yesterday, Beijing’s ambassador to Washington Qin Gang made clear that Beijing had rejected the option of sending Russia military aid – though he added that China would maintain its “normal trade, economic, financial, energy cooperation with Russia.”

Moreover, there’s no need to go all-in on the tariff, or other China specific sanctions (e.g., on tech entities) fronts yet.  Especially since China is facing mounting economic troubles at home (notably in its gigantic and thoroughly bubble-ized real estate sector) a string of increasingly aggressive “poke the dragon” measures could yield lots of useful information about how Beijing perceives its vulnerabilities without risking noteworthy countermeasures – and about the real extent of America’s capacity to deal with the China challenge.      

(What’s Left of) Our Economy: Chip Derangement Syndrome

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CCP Virus, Chad Bown, China, coronavirus, COVID 19, East Asia, export controls, fabless, Foreign Affairs, Huawei, infotech, lockdowns, Mainstream Media, manufacturing, metals, offshoring lobby, Peterson Institute for International Economics, reopening, semiconductor shortage, semiconductors, supply chains, tariffs, Trade, Trump Derangement Syndrome, Wuhan virus, {What's Left of) Our Economy

As some RealityChek regulars may have noted, I’m spending somewhat less time lately batting down ill-conceived, off-base, and downright incoherent individual books or articles etc on key subjects like trade and globalization, foreign policy, and immigration. It’s not that there’s any less “nonsense out there” these days. Goodness knows there remain enough mouthpieces of the Offshoring-, Forever Wars-, and Cheap Labor-Lobbies in and out of the Mainstream Media paid handsomely cranking out this bilge.

It’s just that they’re clearly so much less important these days, as the American political system has so markedly been ignoring their missives. I mean, even a longtime China coddler and offshoring trade deal supporter like President Biden knows – at least politically – that these stances don’t fly any more. Not that enough progress has been made. But champions of what I think can fairly be called the pre-Trump conventional wisdom in these areas are increasingly giving off those “wrong side of history” vibes – and lashing out at Trump policies in ever more desperate and arguably deranged ways.

I’m making an exception today, however, because Chad P. Bown’s new article in Foreign Affairs blaming the former president significantly for the global semiconductor shortage, appeared in such a (still) influential publication, and is such a thoroughly pathetic example of the marginalized trade policy establishment’s Get Trump and Trumpism obsession.

For the last few years, Bown has served as the MSM’s go-to economist for swipes at Trump’s tariffs and trade wars – every single one of them. As a result, it’s almost inevitable that, with Trump out of power, and Mr. Biden now having retained for months the principal Trump China and metals tariffs – every single one of them – that he’d be looking for new ways to show how mistaken these measures have been.

Although Bown admits that the unprecedened stop-start nature of the CCP Virus-era U.S. economy, the suddently booming demand for microchip-intensive infotech products during the pandemic, and weather-related production disruptions all contributed substantially to the shortage, he also claims that Trump’s trade and tech policies also “squeezed supply” – by definition enough to write about.

His main arguments: First, Trump’s tariffs on semiconductors made in China reduced U.S. imports on net because American purchases from other countries didn’t make up for those chips. Second, his restrictions on the sale of American-made semiconductors to Huawei led the Chinese telecommunications gear giant and other Chinese tech companies to start hoarding chips from everywhere for fear of inadequate overall supplies, and left fewer semiconductors for other users to buy. Third, these curbs on sales of U.S.-made semiconductor to such an enormous customer discouraged chip-makers from all over the world from investing in production capacity in the United States in favor of building factories that could supply China from elsewhere.

But even though, as noted above, Bown admits that other culprits deserve responsibility as well, he not only downplays their effects. He completely ignores the impact of much more fundamental, indeed root, causes. Highly conspicuous, for example, are the consequences of decades of the kinds of offshoring-happy trade policies so strongly supported by Bown and his Offshoring Lobby-funded think tank, the Peterson Institute for International Economics. These policies persuaded U.S.-owned semiconductor manufacturers to move to China and the rest of East Asia much production capacity that could have been installed in America – in large part because they sent to China and the rest of East Asia so much production of the infotech hardware production that buys so many semiconductors.

Nor does Bown mention the dangerously shortsighted decisions of so many U.S.-owned semiconductor companies to eschew manufacturing for a “fabless” business model of researching and designing chips and then farming out the production “foundries” run by separate contract companies – mainly in Asia. Largely as a result, the growth of inflation-adjusted American semiconductor output fell by fifty percent between the U.S. economic expansion of 2001-2007 and the longer expansion of 2009-2019. (See my National Interest article on the subject from last October for the statistics presented above and below.) 

The growth during the latter period (73.68 percent) seems impressive in isolation. But it wasn’t nearly enough to prevent the U.S. share of global semiconductor manufacturing capacity from sinking to 12 percent – less than half the percentage in 1990. And it’s not like the growth of this global capacity has been killing it lately, especially considering it’s an archetypical “industry of the future.”

You wouldn’t know this if you if you were relying solely on Bown, but by one key measure, this capacity’s 2013-2019 cumulative expansion (14.29 percent, as shown in the chart below (which comes from the main trade association of the global semiconductor manufacturing equipment industry) was actually slower than the after-inflation growth of total global output of everything (18.29 percent). And if that’s not a surefire formula for a global shortage to me, tariffs and export controls or not, I don’t know what is. Nor do Chad Bown, or the Foreign Affairs editors who published a diatribe that’s factually unhinged even by the rock bottom standards of Mainstream Media coverage of U.S. trade policy.      

(What’s Left of) Our Economy: The Atlantic’s Hatchet Job on Trump’s Trade Policy and Trade Negotiator

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Chad Bown, China, globalization, James Bacchus, Matt Peterson, Merit Janow, multinational companies, Peterson Institute for International Economics, Robert Lighthizer, The Atlantic, Trade, trade war, Trump, U.S. Trade Representative, World Trade Organization, WTO, {What's Left of) Our Economy

I wish I could say that, in the process of ringing out the old year, America is ringing out incompetent or willfully ignorant journalism about U.S. trade policy. But a looooong article just published by The Atlantic on U.S. Trade Representative Robert Lighthizer makes painfully clear that that point remains as far away as ever.

The article, by Atlantic Senior Editor Matt Peterson, would deserve quick dismissal simply due to one of its major themes: that Lighthizer, President Trump’s chief trade negotiator, takes a hard line on the issue in general, and on China in particular, because he’s long been in the pocket of the domestic steel industry as one of its principal trade lawyers.

This smear is especially rich because a trade policymaker lionized by Peterson as a strong opponent of such conflicts of interest and consequent paragon of policy virtue – another American trade lawyer named Merit Janow – followed her stint as a senior magistrate at the World Trade Organization (WTO) – by accepting a position as “a charter member of the International Advisory Council of China’s sovereign wealth fund, China Investment Corporation or CIC.” That is, she jumped onto the payroll of the Chinese government.

But more fundamentally troubling about Peterson’s piece is its – sadly, standard – description of the WTO as an institution that defends and promotes the interests of the entire American economy. How so? By creating a U.S.-style court of law that would impartially mete out commercial justice but that could be used especially effectively by American diplomats highly skilled in working with such systems. One genuine contribution made by Peterson is reporting evidence that Lighthizer himself once apparently bought into this argument.

These views, however, completely ignore two related, alternative interpretations of the WTO’s creation that at deserve consideration at least because one of them is so regularly repeated by journalists and WTO supporters. That interpretation portrays the WTO as an arrangement that aimed primarily at restraining America’s ability to combat predatory foreign trade practices by enmeshing the United States in a simple majoritarian legal system in which all countries – including the vast majority of members who relied heavily on such mercantilism for their growth.

Chad Bown of the (pro-WTO) Peterson Institute for International Economics, one of the American media’s “go to” trade policy commentators made this point abundantly clear when he told The New York Times that the main foreign impetus for establishing the WTO was a determination to find ways of resisting America’s (successful) 1980s unilateral efforts to frustrate their trade predation and pry open their markets to U.S.-made goods.

Former WTO official (and U.S. Member of Congress) James Bacchus made a similar point earlier this year when he criticized Lighthizer (and other American economic nationalists) for their belief that the United States was better off under the pre-WTO world trade system.  Why?  Because it left the (democratically elected) U.S. government “free to go on the offence aggressively in trade by taking unilateral trade actions without any international legal constraint.”

The second, related alternative interpretation of the WTO’s creation focuses on the U.S. multinational corporations that dominated U.S. trade policymaking under Mr. Trump’s immediate predecessors: They strongly favored subjecting unilateral American power in trade diplomacy because their overseas operations – especially those geared toward supplying the American market – benefited immensely, often at the expense of domestic competitors, from many of the predatory foreign practices targeted by many American leaders who don’t shill for these offshoring interests. China’s longstanding beggar-its-neighbors currency policies have been only one example.

The Atlantic is rightly proud of its long history of publishing “iconic thinkers” and “covering ideas that matter.” Many more articles like Peterson’s, and it will also be known for hatchet jobs.

(What’s Left of) Our Economy: With Friends Like This, Today’s World Trade System Doesn’t Need Enemies

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Bill Emmott, Chad Bown, dispute resolution, free trade agreements, Peterson Institute for International Economics, Project-Syndicate.org, The Economist, Trade, Trump, unilateralism, World Trade Organization, WTO, {What's Left of) Our Economy

One of the best pieces of advice I’ve ever received about analytical and opinion writing is “Let your adversaries hang themselves with their own words.” So on the eve of Thanksgiving, 2017, I’m especially grateful to Bill Emmott, the former editor-in-chief of The Economist magazine, for making clear why President Trump and other nationalist critics of U.S. trade policy have been exactly right in slamming as a huge mistake America’s decision to join the World Trade Organization (WTO) – the linchpin of the global trade order for the past two-plus decades.

Writing on the Project-Syndicate.org website, Emmott reports that the Trump administration has embarked on a campaign to cripple the operations of the WTO, which went into business at the beginning of 1995 and which possesses unprecedented internationally recognized authority not only to develop rules for governing many kinds of global commerce, but for enforcing them.

As with other efforts to subject countries to some legal-type checks, the ostensible purpose of the WTO was to remove power from the picture when countries negotiated trade arrangements, and especially when they dealt with the disputes over such arrangements that inevitably arise.

Many powerful critiques of the WTO have been advanced by trade policy critics across the spectrum, but I’ve always viewed two interlocking objections as supremely convincing. First, despite its lofty stated legalistic objectives, the WTO has always been as quintessentially a political organization as other international organizations, like the United Nations. Second, the politics of the WTO has always been decidedly anti-American – for the overwhelming majority of its members depended heavily on amassing big trade surpluses with the United States in order to generate adequate growth for themselves.

So Washington’s decision (backed by Democratic and Republican leaders alike of course) to spearhead the WTO’s creation and become a founding member achieved none of its promised major advantages for the U.S. economy (an impartial forum for handling trade disputes), and saddled the country with all of the major drawbacks of such a system (nullifying most of its ability to use its immense market power to resolve most of these disagreements favorably).

And wouldn’t you know it? Emmott, whose former publication was created in the mid-19^th century precisely to advocate for so-called free trade principles, strongly agrees! As he wrote in an essay yesterday:

“With the WTO essentially out of the picture, the US will launch a new initiative to strike bilateral deals on trade rules – an approach that Trump advocated in his APEC [Asia Pacific Economic Cooperation forum] speech. Given that the US remains a vital market for most exporters, such an initiative will have clout.”

Even Emmott’s suggestion that these U.S. moves will fail unwittingly confirms the case that American leverage will secure the best possible outcomes for Americans. “Asian and European countries,” he writes, “should be preparing for the worst by negotiating their own trade agreements with one another to preempt American mercantilism. After all, taking the initiative to boost trade and other commercial contacts is the best way to resist a trade war.”

What the author apparently misses is that the United States is such “a vital market for most exporters” precisely because the latter countries simply don’t believe in opening their economies to others’ goods and services any more than is absolutely necessary. It’s entirely possible that the dramatically altered circumstances created by new unilateralist U.S. policies could imbue these mercantile economies with some free trade religion. But decades- – and in some cases, centuries- – old approaches generally don’t die so easily. Moreover, if such market-opening did indeed take place, and it could be adequately monitored and enforced, why wouldn’t the United States want to take part?

Until then, however, it would make the most possible sense for Washington to proceed along the unilateralist lines Emmott dreads. For thanks in large measure to its transparent political system and strong rule-of-law tradition, the reciprocal market-opening promises offered by America in bilateral trade diplomacy will be much more credible than those made by Japan, or China, or Germany, or other major protectionist economies. The days of selling the United States much more than they buy from it would come to an end. But genuinely intelligent foreign leaders will recognize that receiving a half a loaf from dealing with Washington on this new basis is the best trade bet they can realistically hope for.

As for countries that stubbornly refuse (possibly egged on by free trade zealots like Emmott) the United States – with its considerable present degree of self-sufficiency and matchless potential for much more – will be more than capable of shrugging its shoulders and moving on.

Incidentally, as RealityChek regulars may recall, Emmott isn’t the first globalization cheerleader unintentionally to reveal that the WTO was a pig in a poke for U.S. economic interests, and indeed was created expressly to neuter American power. Chad Bown, a former World Bank economist now with the Offshoring Lobby-funded Peterson Institute for International Economics, handed trade policy critics, and the American people, a similar gift just last August.

(What’s Left of) Our Economy: The World Trade Organization Unmasked

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Chad Bown, China, Foreign Affairs, Keith Bradsher, multinational companies, Peterson Institute for International Economics, Ronald Reagan, Section 301, The New York Times, Trade, trade law, Trump, World Trade Organization, WTO, {What's Left of) Our Economy

It isn’t every day that Washington’s offshoring-happy economic policy establishment reveals one of its dirtiest secrets in public (unwittingly, of course!). So anyone – and especially U.S. political leaders – with any interest at all in trade, globalization, manufacturing, employment, and related issues (e.g., the economy, getting re-elected) urgently needs to read the final paragraphs of Tuesday’s New York Times article reporting that President Trump will soon greatly ramp up trade pressure on China.

But it’s vital to read the passage intelligently, because the point is made in in the kind of Washington-speak intended to conceal its real meaning.

As Times reporter Keith Bradsher wrote, a key feature of Mr. Trump’s alleged new China strategy will be the use of a provision of America’s national trade law system called “Section 301.” It’s a provision that grants a president broad authority to respond with punitive tariffs to foreign trade practices considered to be damaging the U.S. economy in “unfair” ways, and to respond pretty quickly. (It’s still not nearly quick enough for me, but that’s a separate issue.) And as he made clear, it’s a trade law provision with a noteworthy history. In Bradsher’s words:

“The United States used Section 301 energetically against other countries during the Reagan administration and the administration of President George Bush. Mr. Lighthizer [the current chief U.S. Trade negotiator] was a deputy United States trade representative in the Reagan administration and has been an advocate of shielding the American industrial base from government-assisted foreign competitors.

“But the cases then thoroughly antagonized America’s trading partners.

“‘It was really the aggressive uses of this in the late 1980s and early 1990s that prompted the rest of the world to set up the dispute resolution system’ of the World Trade Organization [WTO], said Chad P. Bown, a senior fellow at the Peterson Institute for International Economics here.”

Bown – whose Peterson Institute home is heavily funded by the offshoring lobby – no doubt meant his statement to reinforce the standard establishment description of and rationale for the WTO-centered world trade system that’s been in existence for the last quarter century. That is, the international economy had too long operated on a law of the jungle basis that bred continual and dangerous conflict, and that in an act of enlightened self-interest, the world’s economies recognized these perils and created a global trade court that would mete out justice according to objective legal standards and thereby serve every countries’ long-term interests.

In fact, Bown wound up confirming a very different description of the WTO and the motives behind its creation that I have advanced since it was first proposed: It’s an arrangement supported by America’s trade partners in order to prevent the United States from using its matchless market power to promote and defend its legitimate international economic interests. P.S. – because U.S.-based multinational companies supply the American market from so many overseas factories, undercutting Washington’s unilateral power to restrict imports mattered crucially to them, too.

For the Reagan-era uses of Section 301 cases that Bown (and Bradsher) mention were noteworthy not mainly because they were “energetic” or “aggressive”. (Unless you view most of America’s trade partners as snowflakes or strong champions of the rule of law.) These 301 uses were noteworthy because they worked. All the evidence is contained in this article I published in Foreign Affairs in 1994. And as Bown made clear, this success was completely unacceptable to “the rest of the world” – most of which, like China, relies heavily on selling to America in order to grow and develop satisfactorily. As a result, these economies, along with the multinationals, became convinced that handcuffing the United States was essential. And official Washington dutifully went along.

Although Section 301 is still on the books, it’s been U.S. policy under Democratic and Republican presidents alike to avoid it in favor of WTO procedures (just as most foreign governments, including allies, and the multinational companies want). And legally speaking (a term I use advisedly when it comes to the WTO and international law generally), that approach seems to dovetail with WTO rules.

But the Trump administration appears to be considering the contention that the United States retains the unfettered authority to use 301 at least in certain instances. The administration further seems confident that, whether it’s right or wrong on the law, the WTO membership collectively will shrink from a frontal challenge for fear of completely destroying a dispute-resolution system that still might serve its interests well going forward – at least much of the time. 

Nevertheless, the reports of a Trump course change on China trade – which could eventually be broadened – are still just reports. All that’s certain now is that, if they’re accurate, the president will wind up showing the his own compatriots and the rest of the world what a real America-First trade policy would look like.