(What’s Left of) Our Economy: The Latest Details Still Don’t Justify Trump’s China Trade Deal

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agriculture, China, Clyde V. Prestowitz, dispute resolution, enforcement, managed trade, manufacturing, Phase One, trade deal, trade war, Trump, U.S. Trade Representative, USTR Rpbert :Lighthizer, World Trade Organization, WTO, {What's Left of) Our Economy

Because the Trump administration has for some reason been putting out the specifics on its new “Phase One” trade deal with China in dribs and drabs, information has come out since Friday’s post panning the agreement suggesting that it might be better than first impressions indicated. At the same time, the case for continued skepticism still looks considerably stronger.

Grounds for optimism can be seen in the Fact Sheet on the deal put out late Friday afternoon by the office of the U.S. Trade Representative (USTR). Most promising: This administration indicates that the President has finally adopted a strategy urged by me last month, originally articulated by former U.S. trade negotiator Clyde V. Prestowitz, Jr. back in the 1980s, and oddly endorsed by a former senior Chinese official recently – in an interview he would never have given had he not been certain that Beijing would at least receptive.

The strategy has been denigrated by critics as “managed trade” – a supposedly foolhardy departure from the standard free trade approach followed by pre-Trump Presidents. Rather than trying to persuade foreign governments to open their markets to American exports and put in effect other free market practices, managed trade seeks to persuade foreign governments to reduce their surpluses with the United States by boosting their purchases by designated amounts. The big advantage: Managed trade efforts permit negotiators to avoid getting bogged down in philosophical debates about the virtues of economic liberalism, or in mudslinging matches over which economies are “fair” and “unfair.” Instead, they focus on unemotional bargaining over numbers. In addition, as Prestowitz has noted (and the senior Chinese official recently confirmed), Asian governments in particular are much more comfortable haggling over “how much” than preaching ethics and other intangibles.

The President’s interest in managed trade has been evident since he began pushing the Chinese to resume by certain amounts blocked purchases of soybeans and other agricultural commodities. But according to the Fact Sheet, China has not only consented to hit specific targets in its imports of farm products and energy goods like natural gas. (USTR Robert Lighthizer on Friday told reporters that Chinese farm products imports would rise over the next two years by a total of some $16 billion a year over the 2017 figure of $24 billion.) Beijing has also committed to “import various U.S. goods and services [including the agricultural buys] over the next two years in a total amount that exceeds China’s annual level of imports for those goods and services in 2017 by no less than $200 billion.” Even better, these purchases will include manufactures.

If these promises are kept, the massive U.S. merchandise trade deficit with China will shrink considerably, and American output and employment will grow. And the greater the share of manufactured products in this total, the higher quality the growth and the better the jobs.

But what will the manufacturing numbers be? Lighthizer has said that broad target figures will be released. But if it can already quantify China’s pledges to boost agriculture imports, why not for industry? Is it because Chinese promises in these areas haven’t been nailed down? And what’s the deal with the reference to targets? Does it mean that China is free to fall short for certain reasons? For any reasons?

Lighthizer explained the failure to divulge more detailed, product-by-product numbers even for agriculture by pointing to the need to “avoid distorting markets.” On the one hand, this worry isn’t unreasonable. On the other, the secrecy won’t make it any easier for any Americans without a vested political stake in claiming victory or success to assess progress with any precision.

More ominously, Lighthizer said that China would be free to buy things when “it’s the perfect time in the market to buy things.” That sounds suspiciously like the objection China originally raised when pressed to buy more farm products as part of the Phase One deal – i.e., purchases that ignored levels of Chinese domestic demand would make no economic sense, “might be hard for the domestic market to digest,” and would sharply depress local prices.

Of course, the response to these points needs to be that China has never let free market forces interfere with its mercantile trade policy goals before. Therefore, this is no time to start swallowing this kind of excuse. Indeed, if Beijing is so worried about supporting the prices received by local producers for any good, it can keep them off the market by stuffing the excess imports into warehouses. That’s not America’s problem.

Unfortunately, the Lighthizer statement indicates that the Trump administration has decided to accept this bogus Chinese rationale – which threatens to permit China to insist indefinitely that the time just isn’t ripe to buy all those extra American products called for in the deal. And with China’s growth likely to slow further for the foreseeable future, expect this claim to be trotted out frequently.

Also suspicious: If the United States has secured Chinese agreement to ramp up agriculture imports greatly, why did the agreement need to address “a multitude of [Chinese] non-tariff barriers to U.S. agriculture and seafood products…including for meat, poultry, seafood, rice, dairy, infant formula, horticultural products, animal feed and feed additives, pet food, and products of agriculture biotechnology.”

After all, as long as the promised results keep coming in for American agricultural producers, who cares what Chinese trade barriers remain officially in place? And if the U.S. team did bother to negotiate these provisions to ensure adequate market access for U.S.-based producers once the two years apparently covered by the agreement run out, then this is more a temporary fix than a big win for the American sectors affected.

What about the other structural issues – the intellectual property theft, the technology extortion, and other predatory Chinese practices that threaten both American national security as well as prosperity? The Fact Sheet remains distressingly vague.

For the former, we’re told only that the agreement “addresses numerous longstanding concerns.”

For the latter, the administration claims the establishment of “binding and enforceable obligations to address several of the unfair technology transfer practices of China that were identified” by its prior investigation of Chinese economic predation.” These entail Chinese agreement to end demanding cutting edge knowhow in return for access to the Chinese market and other benefits, and a Chinese commitment “to provide transparency, fairness, and due process in administrative proceedings and to have technology transfer and licensing take place on market terms.”

But how will these Chinese promises be monitored and enforced? How will “transparency, fairness, and due process” be defined?

And speaking of enforcement, it’s encouraging that the agreement “establishes strong procedures for addressing disputes related to the agreement” and in particular “allows each party to take proportionate responsive actions that it deems appropriate.”

Yet how long will it take for the procedures to reach the point at which Washington gains the right to punish Chinese violations with tariffs? One major criticism of the World Trade Organization (WTO) has been that many years often have passed between the initial filing of complaints till judgments were handed down determining that transgressions had indeed taken place, and authorizing tariffs unless the offending actions were halted. Although the Face Sheet promises resolving disputes “expeditiously,” it’s far from clear yet that the Phase One arrangements will be able to achieve this goal.

In addition, will Beijing enjoy similar authority to determine American violations of Phase One, and to levy punitive tariffs if it’s “deemed appropriate” by China? Moreover, whenever either side concludes that a violation has taken place, what in the agreement, if anything, will prevent the other side from retaliating.

And if the answer is “nothing,” then how would post-Phase One U.S.-China economic relations differ from those relations today – since each country would appear to be as free legally speaking as it is now practically speaking to deal with problems it blames on the other however it wishes, and to respond to any resulting tariffs with whatever countermeasures it chooses? 

The Phase One deal is no cave-in to China, as many have claimed. The high tariffs remaining on most products imported from China belie that description. Nor does it matter whether China’s dictators believe they’ve outwitted or intimidated Mr. Trump, and therefore that they can keep resisting his demands for improved behavior – since the towering obstacles will prevent adequately verifying even the most forthcoming Chinese promises of reform. 

Instead, the deal is mainly a lost opportunity; indeed a big one. Moreover, it raises the crucial question of when the President will finally start downplaying – at least – the consequently futile efforts to negotiate a better trade and broader economic relationship between the United States and China, and start emphasizing the need to keep moving down the road toward what should be the overriding goal of decoupling.      

(What’s Left of) Our Economy: Trump-Like China Trade War Advice – from China!

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America First, Asia, China, Clyde V. Prestowitz, free trade, globalism, Japan, Long Tongyu, managed trade, protectionism, South China Morning Post, Trade, trade talks, trade war, Trump, {What's Left of) Our Economy

When I first entered the trade and manufacturing world, I worked for a fellow named Clyde V. Prestowitz, Jr., who was shaking up American attitudes on international economic policy (in a good way) with sharp critiques of the prevailing dogma and often ingenious ideas for reform and even transformation. (The most complete statement of his views – this 1988 book.) 

And one of his most intriguing thoughts held that died-in-the-wool protectionist Asian governments like Japan’s would much rather deal with an openly economic nationalist U.S. President than with a standard preacher of free trade. So imagine my (pleasant) surprise to see this morning that a former senior Chinese economic official who still clearly retains much influence express substantial agreement – and in the process light the way for an American approach toward China’s trade transgressions that moves from what might be called a “Trump Lite” strategy that only partly reflects the President’s sharpest instincts to a much more thoroughly America First-oriented policy.

These views can be found in an interview in Hong Kong’s South China Morning Post describing the views of Long Yongtu. This retired Vice Minister led China’s successful decade-and-a-half effort to join the World Trade Organization (WTO) – a top Beijing priority because membership provided the People’s Republic with valuable insulation from unilateral and other foreign efforts to retaliate against its wide range of predatory practices. And although he’s no longer on active duty, he would never, ever make public statements at odds with the beliefs of current Chinese leaders. In fact, folks in his position often float trial balloons for the regime and serve in other ways as unofficial spokespeople.

According to the Post, Long stated that “We want Trump to be re-elected; we would be glad to see that happen.” And why would Beijing prefer to deal with a President who’s imposed tariffs on hundreds of billions of dollars worth of exports on which China depends to achieve adequate growth rates, rather than with Democratic rivals who oppose such measures?

As Long explained, “Trump talks about material interests, not politics.” Further clarifying, he contended that “He makes the US decision-making process efficient and transparent, because he basically says what it is. The pros of [having Trump] outweigh the cons. We don’t need to spend so much time figuring out what Americans want any more, or search for each other’s real thoughts in the dark, like we used to.”

Even more specifically, according to the Post‘s paraphrase, “Despite his fickleness, Trump is a transparent and realistic negotiator who is concerned only with material interests such as forcing China to import more American products, on which Beijing is able to compromise….”

Although Long didn’t use this phrases, it’s clear that he was lauding a Trump trait denounced by the President’s globalist critics – an approach to foreign policy described as “transactional.” In other words, Mr. Trump is more interested in securing relatively immediate, tangible, specific goals when dealing both with allies and adversaries than with more ambitious objectives valued by globalists for their supposed potential to promote U.S. interests most effectively over the long term, whatever the short-term risks or costs – like preserving American alliances and international institutions, and keeping other relationships (i.e., with China) on an even keel. (See this early post-Cold War article of mine for a more complete analysis of such conceptual differences.)

In the process, it’s clear that Long was also endorsing Prestowitz’ belief (which he based on his own personal experiences as a U.S. trade negotiator during the 1980s) that Washington could not hope to succeed with fundamentally different systems like Japan’s (his interlocutor) or, by extension, China, by demanding that these governments agree to American demands for more openness to imports, or broader structural changes that would lead indirectly to better sales for U.S. products and services.

Instead, Washington was much better advised to seek less grandiose but more concrete commitments – specifically, to increase imports by specific amounts.

This shift to “managed trade” or “results-oriented trade” ostensibly horrified the U.S. policy establishment. But the Prestowitz proposal was adopted by former President Ronald Reagan in 1986 in negotiations with Japan over semiconductors, and achieved its objectives of expanding American companies’ share of Japan’s market.

Further, Prestowitz’ main rationale was also echoed in Long’s remarks. He didn’t justify managed trade mainly for the relatively easy verification challenge it presented – although he did emphasize that Washington would be much better able to monitor promises to boost buys of specific products than foreign promises to convert to free trade principles. Nor did Prestowitz stress that such sweeping U.S. demands were unrealistic, and that protectionist countries would respond by simply stonewalling.

Rather, Prestowitz contended that Asian protectionists were genuinely bewildered and frustrated by standard American positions, primarily because the ideas behind them were so alien to their experiences. Similarly, and in line with Long’s views, they didn’t comprehend how negotiations could resolve or bridge differences that ultimately are philosophical or ideological. They much more clearly understood pragmatic haggling over quantities, and Prestowitz argued quite sensibly that superior U.S. leverage could be counted on to persuade these export-dependent economies to treat American imports more generously.

As a result, the implications for Trump trade policy couldn’t be clearer. The United States should drop its demands that China change its policies fundamentally, whether on the intellectual property front or the technology extortion front or the illegal subsidy front or various other non-tariff barrier fronts. (As I’ve previously written, there’s no chance of verifying even genuine Chinese compliance satisfactorily.)

A much better response would be a combination of (1) severely punitive tariffs to make sure that Chinese products benefiting from these practices don’t enter the American market, and harm American-owned producers; and (2) other threatened or imposed tariffs aimed at obliging Beijing to purchase much greater amounts not only of agricultural products, but the full array of advanced manufactured products.  The first set of tariffs would center on those advanced manufactures, the second on more labor-intensive Chinese products – which Beijing relies on heavily to keep employment high enough to keep China’s masses content economically.  

That first set of tariffs would not only prevent U.S.-owned producers from having to deal with heavily subsidized and/or copycat Chinese competition. It would surely prompt China to send these exports elsewhere – and finally pressure the rest of the world to get its own act together in responding to China’s excess capacity building and dumping, rather than relying on the United States to soak up these surpluses.

The second set of tariffs would need to be accompanied by a resolve not to let Beijing off the hook with claims that its own economy simply can’t absorb greater supplies of American goods across the board. Rather than enable China to use free market-oriented excuses after decades of (continuing) state planning and other interventionism, Washington should tell Beijing that, for all the United States cares, it can stick these products into warehouses if genuine customers can’t be found.

This new approach shouldn’t represent the totality of a smarter new U.S.-China economic policy. In particular, the Trump administration should keep sharply restricting Chinese purchases of American hard assets, whether defense-related or not – because why should a basically free market economy welcome state-controlled and bankrolled entities that can only further distort free market forces? And controls on exports or other transfers of advanced technology to Chinese entities will need to be further tightened.

But a shift to managed trade is nothing less than essential. And assuming that Long Tongyu reflects Beijing’s thinking, with enough American consistency and resolve, China would go along before too long.

Im-Politic: Why I’m Not a Think Tank Hypocrite

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business groups, Clyde V. Prestowitz, Economic Strategy Institute, Google, idea laundering, Im-Politic, John B. Judis, Jr., manufacturers, New America Foundation, The New Republic, think tanks, Trade, U.S. Business and Industry Council, USBIC Educational Foundation

Freelance journalist and author John B. Judis is a long-time professional friend. He’s also a pioneer in the study of think tanks and how they’ve added to the corruption of America’s policy-making process, especially in Washington, D.C., where so many of them are headquartered and concentrate their efforts.

So it’s with a double dose of regret that I write this dual-purpose post – which will aim to explain why he’s recently done me a not-trivial injustice in describing me and my relationship with the think tank complex, and in the process contributed to the mis-impression that all organizations that seek to influence policy are alike in their basics.

The problem was created last week in John’s otherwise insightful New Republic article on the uproar kicked up by the news last month that the New America Foundation think tank fired a prominent researcher (and his entire team at a particular program) because their work had begun threatened to antagonize a major donor to the Foundation – Google. You can read my take on this super-revealing incident here.

Because his work on the subject has been so important, I was initially pleased to see John cover the controversy, and even more pleased that he decided to quote me. Unfortunately, he mysteriously decided to use the passage (from that above RealityChek post) in a decidedly and unjustly unflattering way. As John wrote:

“The controversy over New America…has prompted hand-wringing among Washington’s policy community, but some of it seems self-serving. ‘Slowly, and not so surely, the American media is waking up to the pervasiveness of corporate corruption of the nation’s think tank complex,’ wrote Alan Tonelson, who did research for decades at the Business and Industrial Council, which got much of its funds from Roger Milliken and Milliken & Co.”

I don’t think I’m being overly sensitive in believing that this paragraph insinuates that I’m a hypocrite. That is, I’d belonged to that Think Tank World for decades, and now that it’s becoming fashionable, have decided to bite the hand that fed me.

What John didn’t seem to realize is that the work for my former long-time employer that he refers to was done for a business group, not a think tank. As a result, whereas I’ve criticized think tanks for their lack of transparency regarding their (corporate) funders, and accused them of “idea laundering” (that is, issuing materials that push the special interest agendas of their funders while garbing them in quasi-academic raiment), the U.S. Business and Industry Council (USBIC) can’t fairly be accused of this practice even it had been a think tank because its orientation has always been obvious from its name.

Unlike the case with the Brookings Institution or the Center for Strategic and International Studies or the Heritage Foundation or the Carnegie Endowment or the Peterson Institute, when a policymaker or journalist received some information from USBIC, it couldn’t have been clearer that it represented a particular perspective, rather than the work of some disinterested scholar esconced in a ivory tower.

Of course, we tried to be as accurate as possible – both because we were confident enough in the substance behind our viewpoints that we felt no need to exaggerate or soft-pedal or leave out context when such tactics might have strengthened our case, and because those who depart from the conventional wisdom nearly always receive greater and harsher scrutiny than those who stay comfortably inside it.

Moreover, we spent countless hours trying to publicize exactly who we were – an association of smaller manufacturers who had largely rejected an offshoring business model and sought to oppose its nurturing by government trade policies. The reason? We wanted to make sure that our audiences knew that not all businesses or manufacturers favored such policies.

In addition, because the organization wasn’t a household name, whenever we identified ourselves as authors of an article written for an outside publication, we included a brief description of USBIC – something on the order of “an association of small, mainly family-owned, domestically focused manufacturers.” The same went for whenever we were interviewed for an article or broadcast segment. And if we’d been given more space, we’d have been happy to go into more detail.

Now, to be completely accurate, I was employed by the Council’s think tank wing – which we called the USBIC Educational Foundation. And that doesn’t look like a terribly transparent name at first glance. But only at first glance, since even the most casual research effort will reveal the connection. 

Moreover, as with the Council, when the Foundation marketed materials and speakers (like me), it was made completely clear that the very purpose was to represent the views of this distinctive group of manufacturers. In other words, that was the point. I only wish we had been more successful in debunking the stereotype of all industrial companies as footloose multinationals that roamed the world in search of the lowest labor and other costs, heedless or uncaring about the impact on the domestic U.S. economy.

Much the same holds for the organization I worked for previously – the Economic Strategy Institute (ESI). Although the name was less transparent than USBIC’s, from the very start, founder Clyde V. Prestowitz, Jr. strove tirelessly to publicize ESI’s corporate backers, and for a reason very similar to USBIC’s – he wanted to inform policymakers and journalists that not all industries and companies that dissented from an orthodox free trade line were “losers” that were simply seeking government protection from superior competitors. Nothing made that point more clearly that noting that many of ESI’s supporters (like Intel and Motorola) were leaders in the world’s most advanced industries.

Indeed, John might have mentioned that I wound up leaving ESI after a few years precisely because these donors changed their tune on trade issues for various reasons – and unfortunately, the Institute for the most part changed with them, along with venturing into new areas. I was fortunate to find a more like-minded group in the form of USBIC precisely because the Standard Operating Procedure of the donor community have always ensured that organizations analyzing these international economic issues in unconventional ways would be few and far between.

As a result, the tale above should also make embarrassingly obvious that if an author like John wanted to use a policy analyst as an example of opportunistic tut-tutting about the system that long supported him and his family, I was anything but that guy. In that vein (as is clear from the above link), John might have mentioned that I have written about the practice of idea-laundering for more than ten years.

So I hope that John keeps training his eye on the think tank world and the troubling role it plays in the national policy and political worlds. I just hope that his next offerings make their points more carefully and precisely.

Making News: New Lifezette Op-Ed on Obama’s Pacific Trade and Security Fantasies – & More!

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alliances, Asia, Clyde V. Prestowitz, Lifezette.com, Making News, national security, no first use, nuclear weapons, Obama, The New York Times, TPP, Trans-Pacific Partnership

I’m pleased to announce the publication of my newest op-ed piece this morning:  a Lifezette.com article on a gaping, nuclear-related flaw in President Obama’s case for believing that his Trans-Pacific Partnership (TPP) trade deal will strengthen U.S. national security.  Click on this link to access the op-ed, which savvy RealityChek readers will see builds on my previous critiques of America’s military strategy in the East Asia-Pacific region.

Also, ICYMI, earlier this week, The New York Times op-ed page published a piece that shares my skepticism about the president’s arguments but critiques them from a different angle.  Here’s the link to the article, by Economic Strategy Institute founder and President Clyde V. Prestowitz.

And keep checking in with RealityChek for news of new or upcoming media appearances and other events.

Im-Politic: Meet the Real Trade and Jobs Know-Nothings

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2016 election, Bernie Sanders, Clyde V. Prestowitz, Donald Trump, Im-Politic, Jr., manufacturing, manufacturing jobs, Morris Chang, Ronald Reagan, Taiwan Semiconductor Manufacturing Company, The Race to the Bottom, Trade, transplants

Nothing during this wildly unconventional presidential campaign has anchored the economic conventional wisdom more strongly than the claim that only know-nothings like presidential candidates Donald Trump and Bernie Sanders could possibly think that better U.S. trade policies can bring back lots of high-paying manufacturing jobs from countries like China to the United States. And nothing during this same campaign has revealed more Establishment ignorance than this attack on these White House hopefuls.

An excellent recent op-ed in USA Today by former U.S. trade negotiator Clyde V. Prestowitz, Jr. explains why. As Prestowitz (with whom I worked in the early 1990s at the Economic Strategy Institute think tank he founded) writes, anyone thinking that free market forces have turned China, for example, into a major producer of advanced manufactured goods needs to get a clue. China’s natural manufacturing advantage lies in labor-intensive products like apparel and toys, because its workforce is so gargantuan and its technological development still has a long way to go.

But Beijing wasn’t content to keep making such low-value products an instant longer than necessary. So it’s used a raft of active policy carrots and sticks to lure even information technology manufacturing to its shores. My book on globalization, The Race to the Bottom, has exhaustively documented how these policies have long been standard operating procedure for governments all over the world – except America’s. And the supposedly all-powerful multinational companies they’ve mainly targeted? Instead of standing on their high horses, and refusing to jump, they’ve simply asked “How high?”

If you still doubt any of this, forget about what Prestowitz and I have reported. Listen to Morris Chang. He started up and still chairs the Taiwan Semiconductor Manufacturing Company (TSMC), which is the world’s largest contract manufacturer of computer chips, and in fact, pioneered the “foundry” model for the industry.

Chang’s company just announced that it’s building a $3 billion semiconductor fab in China, where it will produce advanced (if not leading-edge) semiconductors. How come? There’s no question that part of the reason is that so many of TSMC’s customers – in the information technology products industry – now manufacture so many of their goods in China. But as Chang also admitted, “We say that with some degree of assurance from the authorities, some degree of assurance that building a plant there will indeed enhance our access to the Chinese market. And reversely, not building a plant there will not enhance.”

That is, China’s policy is “Pay to play” – because it wants to develop its own semiconductor sector, regardless of what economic theory says it should be doing. And Chang doesn’t think he can afford to Just Say No.

Revealingly, no one is more aware than the Chinese that the United States is capable of playing this game effectively, too. As a Chinese company told Bloomberg last year, it chose Alabama as the site of a new factory both “to bring it closer to clients in the South and avoid anti-dumping tariffs on copper products.”

Also revealingly, American leaders haven’t always been brain-dead on this score. In 1981, for example, President Ronald Reagan successfully pressed Japan’s auto makers to curb their exports to the United States “voluntarily.” The following year, Honda began assembling cars in Ohio. By 1990, all the major Japanese auto makers had gone the transplant route.

Can using America’s market power bring back all production and jobs lost to trade? Of course not. Can it bring back or create lots? Of course it can, especially in high-value sectors where a technologically advanced country with well developed capital markets like the United States should be fully competitive. The actual trade know-nothings are those unfamiliar with the historic record and current global realities. Assuming of course that any of them really want to know.