Making News: Podcast On-Line on Biden’s Infrastructure Plan and China…& More!

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American Jobs Plan, Biden, CCP Virus, China, competitiveness, coronavirus, corporate taxes, COVID 19, Donald Trump, Gatestone Institute, Gordon G. Chang, green energy, green manufacturing, IndustryToday.com, infrastructure, Making News, manufacturing, recession, tariffs, tax policy, tax reform, taxes, The John Batchelor Show, Wuhan virus

I’m pleased to announce that the podcast is now on-line of my latest interview on John Batchelor’s nationally syndicated radio show. Click here for a timely discussion among John, co-host Gordon G. Chang, and me on whether President Biden’s infrastructure and competitiveness package really will strengthen America’s position relative to China. Oh yes – we also speculated about the fate of former President Trump’s China tariffs in the Biden era.  

In addition, yesterday, Gordon quoted my views on the matter in a post for the Gatestone Institute. Here‘s the link.

Finally, on March 31, IndustryToday.com re-published my RealityChek post on recent U.S. manufacturing data strongly indicating that those Trump tariffs have greatly helped domestic industry weather the CCP Virus pandemic and subsequent recession in impressive shape. Click here to read (or re-read!).

And keep checking in with RealityChek for news of upcoming media appearances and other developments.

(What’s Left of) Our Economy: Biggest Mid-Year U.S. Trade Winners & Losers II

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CCP Virus, competitiveness, coronavirus, COVID 19, intermediate goods, manufacturing, supply chains, Trade, Trade Deficits, trade surpluses, Wuhan virus, {What's Left of) Our Economy

Last Friday, RealityChek launched its midyear 2000 review of U.S. trade flows – which speaks volumes about which parts of the economy have held up best and have been hit harrdest by the CCP Virus. Today, following that post’s look at the goods sectors that have racked up the biggest trade surpluses and deficits between January and June, 2019, and this January and June, we’ll examine which industries have seen their trade balances improve and worsen the most during this period, and how these lists compare with those of full-year 2019.

Three big takeaways here: First, in contrast to the lists of biggest trade surplus and deficit sectors presented last week, which featured surprisingly little change on a year-to-date basis, the lists showing the sectors where the biggest changes in trade balances took place revealed enormous turnover.

Second, although a majority of the industries that saw the greatest improvements in their trade balances were already running trade surpluses, a significant number (seven of the 22 that could be counted in this way) were industries running deficits. (Because figures for crude oil and natural gas are now reported separately, as opposed to being lumped together, no such conclusion was possible for them.) Even better, one sector – miscellaneous metal containers – turned its deficit into a surplus. One plausible interpretation is that most of the most globally competitive industries in the nation have retained competitiveness so far during the pandemic, and some have improved lagging competitiveness. All the same, clearly at work here, especially concerning the sectors whose deficits have shrunk markedly, are virus-related effects that may be relatively short-lived.

Third, although most of the 21 parts of the economy whose trade balances deteriorated the most were industries already in deficit – indicating that sectors in competitive trouble pre-CCP Virus remain in such trouble – eight were running trade surpluses. That pattern indicates that the virus has damaged them.

One methodological point that needs to be made right away: These “Top 20” lists both contain more than 20 entries because of confusion caused by apparent duplication for aerospace-related sectors in the government industry classification system I’ve used. So I decided to present any aerospace data that the government figures indicate belong in these Top 20s, but also added other sectors to maximize the odds that each list contains 20 sectors that truly qualify.

But before getting too deeply into the methodological weeds, here’s the list of the Top 20 sectors that generated the greatest improvements in their trade balances between the first six months of 2019 and the first six months of 2020, along with the percentage changes. And as mentioned above, their ranking on the comparable full-year 2019 list is included. Industries that didn’t make that 2019 list are indicated with a hyphen. Industries in surplus and deficit are identified with Ss and Ds, respectively.

biggest trade balance improvers                                                               2019 rank

1. miscellanous metal containers:       $91m deficit to $72m surplus              –

2 miscellaneous grains:                             +503.71 percent                             –   S

3. semiconductor production equipment:  +245.18 percent                             –   S

4. iron ores:                                               +234.48 percent                              –   S

5. electronic connectors and parts:            +144.56 percent                            –    S

6. gaskets, packing and sealing devices:   +103.91 percent                            –     S

7. semiconductors:                                      +86.87 percent                            1     S

8. animal fats and oils:                                +82.00 percent                            8     S

9. crude oil:                                                 +60.24 percent               (new category)

10. misc measuring & control devices:       +54.06 percent                           –      S

11. heavy duty trucks and chassis:              +48.74 percent                           –      D

12. aircraft parts & auxiliary equipment:    +43.89 percent                           –      D

13. specialty canned foods:                         +42.37 percent                          20     S

14. cheese:                                                  +40.06 percent                           13     S

15. misc non-ferrous smelted metals:         +37.01 percent                            –      S

16. construction machinery:                       +36.34 percent                            –      D

17. peanuts:                                                +36.12 percent                            –      S

18. autos and light trucks:                         +35.76 percent                             –     D

19. aircraft engines and engine parts:       +35.55 percent                             –      D

20. iron and steel products:                       +34.99 percent                            –      D

21. male cut and sew apparel:                  +33.37 percent                             –      D

22. pulp mill products:                             +33.16 percent                             –      S

Let’s return to the methodology briefly. All the statistics in these mid-year trade posts cover goods industries. Service industries are left out because the government database I rely doesn’t report on the latter, and because comparably detailed data won’t be released for a while.

This database is maintained by the the U.S. International Trade Commission, which enables users to access them with its terrific Trade Dataweb interactive search engine. The specific goods categories used are those of the North American Industry Classification System (NAICS) – the federal government’s main way to slice and dice the U.S. economy. And the level of disaggregation I’m using is the sixth, since it’s the level at which you can keep the numbers of sectors analyzed manageable, and at the same time make distinctions between final products on the one hand, and their parts and components on the other (vitally important given much more specialized manufacturing has become).

Aside from the substantial degree of turnover, one prominent feature of this list is its domination by intermediate goods. Parts, components, and materials used in the production of final manufactured goods, or the machinery used in that production, account for 15 of these 22 sectors. Perhaps it’s a sign that global supply chains have proven more resilient during the pandemic than is commonly supposed, and that U.S. links on these chains have been performing exceedingly well?

In addition, 17 of the 22 are manufacturing industries, compared with 16 of the 20 on last year’s list. That’s a step backward for fans of U.S.-based manufacturing, but not a big one.

Nevertheless, two of the sectors that have improved their trade balances most are in the aerospace sector, and regardless of classification issues, since both those industries are deficit industries, their performance undoubtedly reflects both the drastic reductions in air travel imposed due to the CCP Virus (which affect orders for imported engines, their parts, and other parts)nd these goods), as well as the troubles at Boeing, which also reduce demand for foreign-made inputs.

A third deficit manufacturing sector – men’s and boy’s apparel – has also surely seen its trade shortfall shrink because American consumers are buying so few of these largely foreign-made goods. (In an upcoming post looking at export and import changes, we’ll see if this domestic demand-related hypotheses holds any water.)

Now it’s time for the list of those sectors in which trade balances worsened the most.

biggest trade balance losers                                                                2019 rank

1. misc non-ferrous extruded metals:       -1,354.67 percent                 7      D

2. smelted non-ferrous non-alum metals: -1,254.08 percent                 1      D

3. farm machinery and equipment:             -404.19 percent                  –      D

4. miscellaneous textile products:              -399.55 percent                  –      D

5. computer storage devices:                      -271.11 percent                  –      D

6. jewelry and silverware:                            -98.97 percent                  –      D

7. non-diagnostic biological products:         -61.67 percent                16     S

8. computer parts:                                        -60.12 percent                  –      S

9. misc electrical equipment/components:  -50.76 percent                 15    D

10. misc apparel & apparel accessories:     -46.82 percent                   –     D

11. non-anthracite coal/petroleum gases:   -44.91 percent                   –      S

12. cyclic crude & intermediate products: -40.48 percent                   –      S

13. motor vehicle bodies:                           -39.49 percent                  –       S

14. computer storage devices:                   -39.07 percent                   –      D

15. civil aircraft, engines, equip, parts:     -36.95 percent                   –      S

16. medicinal/botanical drugs/vitamins:   -28.40 percent                   –      D

17. perfumes, makeup, and toiletries:       -28.19 percent                   –      S

18. communication and energy wire:        -25.63 percent                   –     D

19. power distribn/specialty transformers: -24.03 percent                  –     D

20. misc electronic components:               -23.92 percent                   –     D

21. corrugated & solid fiber boxes:           -23.61 percent                   –     S

Turnover here has been even greater than on the improvers’ list, with only four of the 21 sectors appearing on the full-year, 2019 list. And talk about manufacturing-heavy! Industry represents all of the sectors save one (non-anthracite coal and petroleum gases). That’s more than the 17 of 20 on the full-year 2019 list of trade deficit growers.

Moreover the dominance of intermediate goods industries (only four of the 20 manufacturing sectors – medicinal and botanical drugs and vitamins; perfumes, makeup, and toiletress, apparel and apparel accessories’ and jewelry and silverware) looks like evidence that not all such U.S. supply chain-related sectors have performed relatively well during the pandemic.

But neither actual deficits and surpluses nor how they’ve changed tell the whole story about the CCP Virus’ impact on American trade flows and competitiveness. The export and import flows that comprise them need to be examined, too, and they’ll both be coming up on RealityChek.

(What’s Left of) Our Economy: A Fake News Attack on the Trump Metals Tariffs

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aluminum, Catherine Rampell, competitiveness, fake news, manufacturing, metals, steel, tariffs, The Washington Post, Trade, Trump, {What's Left of) Our Economy

Pundits like the Washington Post‘s Catherine Rampell have every right to warn that President Trump’s metals (and other) tariffs will ultimately harm the U.S. economy more than it helps. What they have no right to do is peddle demonstrably false claims like her contention that because of the price hikes so far seen for steel and aluminum since these levies came onto the American trade agenda earlier this year, companies reliant on these materials for their final products “are now less competitive.”

I call these claims demonstrably false because every month, the U.S. government publishes detailed statistics on the nation’s trade performance, and the data through April contain absolutely no evidence that domestic metals-using industries are on the ropes – or anywhere close.

Let’s examine what seems to be the national chattering class’ and policy establishment’s favorite measure of industrial competitiveness: American exports. If the Trump tariffs have indeed been pushing U.S. metals-using industries close to the ash heap of economic history, then their overseas sales for the first few months of this year (the tariffs became likely when the Commerce Department officially recommended them in mid-February), should be much lower than they were the first few months of last year – or at least growing much more slowly.

In fact, just the opposite has been seen, at least when it comes to three major sectors of the economy that are especially heavy users of steel and aluminum – transportation equipment, non-electrical machinery, and fabricated metals products.

Over the first four months of this year (the latest data available), America’s global exports in these categories were not only 5.83 percent greater than over the same period in 2017. The year-to-date growth rate was some 7.2 times higher than that for 2017 (0.81 percent).

Perhaps more significant, the difference between the January-April, 2018 export growth rates for these metals-using industries and their January-April, 2017 growth rates was much greater than for American manufacturing as a whole. During the first four months of 2018, total U.S. manufacturing exports have grown 7.45 percent year-to-date. That’s higher in absolute terms than the export growth for the metals-using industries, but this export increase has been only 2.12 times faster than their export growth rate for January-April, 2017 (3.52 percent).

But what about my favorite measure of American competitiveness – trade balances and how they’ve changed? I focus on these two-way flows because the theory of comparative advantage at the heart of all justifications for the freest possible global trade makes sense only if these surpluses and deficits have consequences for global production patterns.

After all, comparative advantage holds that trade is the best possible way to create the best possible global division of labor – meaning that in a world of unfettered commerce, countries that trade products and services most successfully will inevitably wind up making those products and providing those services most successfully, and that all countries will benefit on net. And the countries that trade products and services most successfully are those that amass the biggest surpluses in those products and services. The opposite propositions logically hold the impact of running deficits in various sectors.

As it happens, the trade balance figures don’t show or presage any apocalypse for America’s metals-using industries, either. During the first four months of 2017, their cumulative trade deficit with the rest of the world increased by 10.56 percent on year. For the comparable period this year, the deficit’s year-to-date growth rate was faster: 11.64 percent. But clearly, this trade shortfall didn’t grow much faster.

The comparison with trade deficits for manufacturing as a whole is instructive as well. During January-April, 2017, this trade gap increased by 10.19 percent on year. During January-April, 2018, the figure was 10.85 percent.

So the metals-using industries’ trade deficit did grow faster during both periods than the shortfall for manufacturing as a whole. But the difference in the rate of acceleration has been trivial. In the metals-using sectors, the deficit during the first four months of 2018 grew 1.10 times faster than it grew during the first four months of 2017. For manufacturing as a whole, the deficit during the first four months of 2018 grew 1.06 times faster than during the same period in 2017.

I’d be the last to argue that this situation will never change. The Trump metals tariffs haven’t been imposed very long. Moreover, they’ve been phased in, so the full impact of their final (for now!), most sweeping version hasn’t yet been felt.  

Nonetheless, the effects could also be swamped by the benefits metals-using sectors have gained from the new corporate tax cuts and the regulatory relief offered by the Trump administration – two policies that industry as a whole has hailed enthusiastically as major boosters of competitiveness.

What should be unmistakably clear, though, is that claims that U.S. metals-using industries are already suffering from the Trump steel and aluminum are no better than Fake News – and deserve nothing more than scorn from all fair-minded readers.

(What’s Left of) Our Economy: Former White House Economists Serve Up Steel Trade Fakeonomics

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competitiveness, durable goods manufacturing, imports, manufacturing, multi-factor productivity, national security, productivity, steel, steel-using industries, subsidies, tariffs, Trade, Trump, White House Council of Economic Advisers, {What's Left of) Our Economy

Just because none of the signers displayed the slightest ability to foresee the approach of an horrific national and global economic crisis is no reason to laugh off the letter released by former White House economists warning President Trump not to impose national security-related tariffs on steel imports. Instead, the letter should be laughed off because none of the signers appears to know anything about manufacturing competitiveness.

According to the letter, endorsed by fifteen former Chairs of the White House Council of Economic Advisers, steel tariffs of any kind “actually damage the U.S. economy” partly because they “would raise costs for manufacturers, reduce employment in manufacturing….”

If you think about it for just a minute, what these economists are really arguing is that American steel-using industries can’t possibly achieve reasonable levels of competitiveness without continuing supplies of a key input that are kept artificially cheap by massive subsidies from governments in China and elsewhere. That’s some recipe for preserving and extending free market and free trade practices around the world.

Even worse, however, is that even this dubious claim is directly contradicted by the best data available – including the newest multi-factor productivity statistics released by the Labor Department yesterday.

These data in particular strongly reinforce worries not only that American manufacturing is suffering major productivity problems, but that these problems have been worsening for many years. And just as important, they show that the steel users in particular have suffered from absolutely no shortage of artificially cheap steel.

For example, from 2009 (when the current economic recovery began) through 2015 (the latest data, multi-factor productivity in these industries (which measures the output resulting from a wide range of inputs, including materials like steel) has fallen by 2.17 percent. In durable goods industries as a whole (a super-sector that uses a lot of steel), it rose by 3.92 percent, which sounds OK. But it’s much weaker multi-factor productivity growth than these sectors achieved during the last recovery (which was considerably shorter): 22.27 percent.

What happened to steel imports from 2009 through 2015, measured by value? They surged by 71.87 percent. And these purchases were kept at that level mainly because during the last year of that stretch, steel imports sank by 20.91 percent. In other words, between 2009 and 2014, steel imports jumped by 117 percent – and presumably left over lots of steel for use by durable goods manufacturers the following year.

Steel imports soared during the previous, 2001-2007 recovery as well (by 156 percent). But whereas they increased at roughly double the rate during the first six years of the current recovery, steel users recorded multi-factor productivity gains that were 5.7 times greater.

During the long 1990s expansion (which technically lasted from 1991 to 2001), steel imports increased by only 28.67 percent. And even so, durable goods manufacturers managed a total productivity gain of 22.72 percent – just about the same improvement as during the import-happy early 2000s, even though import growth was only a seventh as great. And this productivity advance was orders of magnitude better than that of the current recovery, even though import growth has been less than a third as strong.

Now it’s true that durable goods productivity numbers have been boosted significantly by the spectacular performance of the information technology hardware sector (whose use of steel is relatively modest). But examining multi-factor productivity trends for much bigger steel users also yields head-scratching results if you take the former White House economists as gospel.

For example, during the first six years of the current recovery, when steel imports rose by nearly 72 percent, multi-factor productivity for fabricated metal makers actually sank by 4.02 percent. In machinery, it was down 0.93 percent. In electrical equipment, appliances, and components, multi-factor productivity dipped fractionally.

Transportation equipment is the only big steel-using sector where multi-factor productivity grew impressively during this period – by a total of 11.09 percent. But during the final year – 2014-15 – it dropped by 4.39 percent. And again, these companies were benefiting from plenty of artificially cheap steel.

So it’s clear that the former White House advisers’ steel trade analysis is anything but data-dependent. That leaves as their only anti-tariff argument their fears about setbacks in American diplomacy – where they possess no special expertise or even knowledge. Far better for these macro-economists to stick to macro-economics – though again, the overall U.S. performance here should inspire no confidence in their judgment, either.

(What’s Left of) Our Economy: Laughable NAFTA Defenses from the New York Fed

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Canada, competitiveness, Federal Reserve, intermediate goods, intra-industry trade, Mexico, NAFTA, New York Fed, North America, North American Free Trade Agreement, rules of origin, supply chains, tariffs, The Race to the Bottom, Trade, Trump, {What's Left of) Our Economy

Although the Federal Reserve Bank of New York says that posts on its Liberty Street Economics blog “do not necessarily reflect the position” of either this branch of the federal reserve system or the system itself, it’s hard to avoid the conclusion that the bank has gone to war against President Trump’s announced plans to renegotiate NAFTA (the North American Free Trade Agreement). Why else would it have run items critical of these plans on consecutive days last week?

Even more important, it’s hard to avoid the conclusion that these posts aren’t vetted seriously for basic knowledge of America’s international trade situation, or even common sense. Key examples from each of these posts should suffice to establish the New York Fed’s combination of bias and ineptitude here.

The first post, by a New York Fed official and an economist from the offshoring interests-funded Institute for International Economics, purported to show that “An underappreciated benefit of … (NAFTA) is the protection it offers U.S. exporters from extreme tariff uncertainty in Mexico….Without NAFTA, there is a risk that tariffs on U.S. exports to Mexico could reach their bound rates, which average 35 percent. In contrast, U.S. bound rates average only 4 percent. At the very least, U.S. exporters would be subject to a higher level of policy uncertainty without the trade agreement.”

But it quickly becomes clear that even the authors are skeptical about this outcome. Their main stated reason hints at one main reason: “”Given the large and well-documented benefits from low trade barriers, particularly those stemming from access to a wider variety of imported intermediate inputs and lower prices of intermediate inputs, it would not be in Mexico’s interest to raise all of its MFN tariffs to their bound rates.”

This argument is only a hint, however, because it jaw-droppingly softpedals some of the main characteristics of U.S.-Mexico trade – specifically, the hugely outsized role played in this commerce by intra-industry trade. As I first described at length in The Race to the Bottom, a large share of U.S.-Mexico trade has little to do with the exchange of finished goods that dominates the textbook models. Instead, it consists of parts and components and other inputs of finished goods that travel through international production chains until they’re turned into final products.

And because there’s so little consumer purchasing power in Mexico, and so much in the United States, the lion’s share of this bilateral intra-industry trade in turn consists of intermediates being sent from U.S. factories to Mexican facilities, where they’re assembled into final products for export back to America.

Sure, in principle, a U.S. scrapping of NAFTA (which of course is not the Trump administration’s stated intention) could enable Mexico to substitute non-U.S. parts and components etc for the American-made intermediates that current make up so many of its exports. But without NAFTA, Mexico would also lose much and probably most of its current, unconditional access to the U.S. market. And since that market currently buys nearly 80 percent of Mexico’s exports, and since Mexico’s economy relies so heavily on those exports, it should quickly becomes obvious how self-defeating such a Mexican effort at hardball playing would be.

How bizarre that neither the article’s authors, nor anyone else involved in producing Liberty Street Economics, recognized these longstanding realities. Even weirder: The importance of this intra-industry trade in U.S.-Mexico trade was the major theme of another post from the same authors (plus a third) on this same blog that appeared the very next day.

Yet the NAFTA-related follies of the authors and of Liberty Street Economics hardly end there. In that second post, readers are warned that stricter rules of origin (ROO) for NAFTA could “disrupt supply chains” and in particular backfire on U.S.-based businesses by increasing the costs of their imported inputs and undermining the competitiveness of their exports outside North America.

To which someone who actually knows something current U.S. NAFTA renegotiating plans can only reply, “Seriously?”

For what the authors and the rest of the Liberty Street crowd seem to miss is that the only ROO revamping that would make any sense from a U.S. standpoint is also precisely the kind of revamping that the Trump administration seems to be considering: not only tightening the ROO (to confine duty-free treatment for goods traded inside the NAFTA zone to goods with higher levels of content produced inside the zone), but increasing the tariff penalties imposed on goods with relatively low levels of non-North American content.

In other words, the North American supply chains created by NAFTA wouldn’t be weakened. They’d be strengthened and greatly expanded.

Now the authors could still be right in arguing that such measures would raise the prices of goods made inside North America and thereby undermine their competitiveness outside North America. But they completely neglect two counter-arguments.

First, because the (U.S.-dominated) North American market is already so vast, and because intermediate goods industries in the three NAFTA countries are already so enormous, external tariffs that encourage North American businesses to use even more North American content could well bring gains inside the NAFTA zone that exceed whatever non-NAFTA losses are incurred.

Second, NAFTA as it currently exists was touted as a major boost to U.S. and North American global competitiveness, but there’s no evidence that this goal was achieved. Quite the contrary, at least according to World Trade Organization data.

They show that in 1993, the year before NAFTA went into effect, North America’s share of global goods exports was 17.9 percent. By 2015, it had shrunk to 14.4 percent. The U.S. share during this period fell from 12.6 percent to 9.4 percent, and the Canadian share decreased even faster – from 3.9 percent to 2.6 percent (no doubt, however, largely due to falling prices for the oil it exports so abundantly).

Mexico’s share of global exports did increase – from 1.4 percent to 2.4 percent. But surely that improvement stemmed mainly from selling to the United States, not to any non-North American customers.

The North American share of world merchandise imports did decrease during this period as well. But the decline was much smaller, and one quick look at the U.S. trend makes clear that the lion’s share of this improvement has resulted from the recent, dramatic turnaround in American energy trade patterns – which have nothing to do with NAFTA or any other supply chains.

The Federal Reserve system, and especially its crucially important New York branch, have long been renowned for employing premier economists and sponsoring first-rate economic analysis. But these Liberty Street Economics posts indicate that, at least when it comes to NAFTA, the New York Fed is better described as the Gang that Can’t Shoot Straight.

(What’s Left of) Our Economy: In Case You Thought China is Finished….

Tags

China, competitiveness, consumption, exports, Financial Crisis, Global Imbalances, high value manufacturing, IMF, imports, International Monetary Fund, labor-intensive manufacturing, manufacturing, rebalancing, Trade, {What's Left of) Our Economy

A new International Monetary Fund report on China’s changing trade patterns has challenged so many comforting myths propagated recently by cheerleaders for America’s trade and broader economic policies that it’s easy to lose count.

These myths matter greatly because if you buy them, then it’s logical to buy the approach to globalization pursued by American presidents and Congresses in both parties for the last quarter century. Rather than worry that this U.S. strategy has permitted China to steal the march on America economically, its proponents confidently assert that Beijing’s export- and investment-heavy economic blueprint is reaping rapidly diminishing returns, and urgently needs replacement. Reasons cited focus on soaring Chinese wages and resurgent American competitiveness.

Even better, insist the optimists (which include the authors of this new IMF report), China has already learned this lesson and is “rebalancing” its economy to seek growth led by consumers – which will prove a bonanza for its trade partners. And no need to fret about China mortally threatening America’s domestic manufacturing – with all that’s boded ominously by that possibility for the whole economy as a whole and for national security. The PRC remains stuck turning out mainly labor-intensive goods, or at best simply slapping together more sophisticated stuff from imported high-value components.

Not that the Fund is necessarily the last word on the subject. But its new China trade study sure presents copious evidence for the following conclusions:

>Instead of hitting a wall, China’s exports are more competitive than ever. As I reported earlier this week, calculations based on the IMF’s data show that these shipments are grabbing more global market share than ever. This success, in the meantime, debunks another example of hopium regarding China’s future – that slowing global growth in and of itself means that Beijing’s policies urgently need changing. Such analysis has always ignored China’s potential to keep growing through exports by winning ever larger shares of a stagnant and even shrinking worldwide pie.

China’s exports have indeed been falling lately on a year-on-year basis, as has its worldwide trade surplus. But both remain at lofty levels, indicating that trade’s role in powering the country’s growth is still impressive. These statistics also indicate that if and when global growth revives significantly – as the leaders of the world’s major economies keep trying to achieve – China will be the paramount beneficiary. As a result, the imbalances that helped set the stage for the financial crisis will head back to dangerous proportions again.

>Despite the clearly stunning increase in household wealth throughout China’s population and workforce in recent decades, not only is rebalancing progress painfully slow when gauged by trade’s role in the economy. It’s been at least as slow in the sense that matters most to companies and workers in other countries who hope to supply this larger and potentially immense Chinese consumer market.

For as the Fund observes, (a) “While Chinese consumption is on an upswing, imports of consumption goods and services remain modest except for tourism….” and (b) “even as China succeeds in rebalancing toward consumption, it could be that this increased demand is satisfied by production from within China, and not from other countries.”

>Finally, as I’ve written previously, the IMF and the World Bank have found that China’s manufacturing keeps moving steadily up the technology and value chain – i.e., from low-cost, labor-intensive products to capital- and knowledge-intensive goods. This trend, moreover, includes providing ever more Chinese-made parts and components of advanced manufacturing products. In fact, as the new Fund reports, a higher share of the content of China’s exports is now Made in China than is the Korean content of Korean exports and the Taiwanese content of Taiwan’s exports.

Not that China isn’t experiencing major economic problems – notably, a soaring ratio of the whole economy’s debts to the size of its economy, and state-run or dominated financial institutions and markets that are too easily manipulated – sometimes incompetently so – by the government. But the IMF findings add to the case that the productive sectors of China’s economy are passing the test of global competitiveness – and with increasingly impressive marks. In fact, the only major relevant points omitted are that much of this progress keeps being made in violation of global commercial rules and norms, and at the expense of America’s productive sectors.

(What’s Left of) Our Economy: China Import Price Puzzles

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China, competitiveness, currency, currency manipulation, dollar, import prices, imports, Little Murders, manufacturing, multinational companies, productivity, subsidies, technology transfer, Trade, value-added taxes, VAT, yuan, {What's Left of) Our Economy

One of my favorite literary passages of all times comes from “Little Murders.” If you’ve never seen the stage or film version, I strongly recommend both, and for me, the high point of this late-1960s Jules Feiffer 1967 black comedy about life in a rapidly deteriorating New York City comes when Detective Miles Practice exasperatedly describes his frustration at solving a massive ongoing wave of violent crime.

The 345 unsolved homicides he and his colleagues are investigating have three characteristics in common, Practice explains. “A – that they have nothing in common; B – that they have no motive; C – that, consequently, they remain unsolved.”

I’ve felt a little like Detective Practice today as I’ve tried to dig deeper than usual into this morning’s new Labor Department data on the prices of imports bought by Americans in April. And it’s not just that the figures seem to undercut an argument I’ve made consistently during the ongoing debate over U.S.-China trade policy. It’s that the differences among various industries defy anything close to easy explanation.

As many of you surely know, since early in the previous decades, Chinese government policies that determine the value of its currency, the yuan, versus that of the U.S. dollar have been major bones of contention between the two countries. Essentially, many Americans have accused Beijing of keeping the yuan artificially weak, which gives Chinese-made goods unwarranted price advantages over their U.S.-made counterparts in markets all over the world. And if Made in China goods are outselling Made in America goods for reasons having nothing to do with market forces, then American production and jobs will be penalized for reasons having nothing to do with free markets, or free trade, either.

Because this issue has loomed so large for so long, I’ve been following the import prices figure closely in order to see how the yuan’s changing value has affected the actual price of Chinese-made products in the American market. And what I’ve found indicates that, although currency values matter a lot, these prices doubtless change for a variety of other reasons, too – including other forms of Chinese government interference with trade, but not limited to such protectionism.

For example, if the Chinese are making growing quantities of relatively advanced manufactured goods and selling them to Americans, and de-emphasizing less advanced goods, then the effects of Beijing’s currency policies could be (at least partly) masked by the higher prices these more sophisticated products presumably command. And in fact, I’ve shown that precisely this shift in Chinese manufacturing and exporting has been taking place, and argued that, as a result, precisely this masking effect is influencing the prices of Chinese imports. To me, it’s strong evidence that China’s yuan is still too cheap – even though for reasons we needn’t delve into now, China is now trying to prop up the yuan’s value.

Now, however, I’m not so sure. Because the detailed, product-by-product figures kept and reported by the Labor Department show that in many cases, prices of advanced manufactured products sold by China to Americans are falling faster than the prices of less advanced goods. Moreover, the prices of many Chinese products in the U.S. market are falling more slowly than those of comparable imports from other countries – which supports the idea that Beijing’s new currency stance is harming Chinese products’ price competitiveness.

Some caveats need to be made at this point. First, the number of manufacturing industries in which direct comparisons can be made between the prices of Chinese and other imports is relatively small – because the Labor Department issues detailed data for many more U.S. imports overall than for U.S imports from China. Second, some of the missing China data concerns industries where Beijing has encouraged massive overcapacity – notably steel – and clearly helped create significant (and worrisome) deflation.

All the same, most of the statistics I’ve found are real head-scratchers. For example, since the business press has been filled in recent years with articles on strongly rising Chinese wages, it’s not entirely surprising to see that the cost of imports of Chinese garments – a labor-intensive industry – have actually increased a bit since 2012 (the earliest China-specific figures available), whereas overall garment import prices are down.

But why have the prices of Chinese-made clothing been so much stronger, and less internationally competitive, than the prices of Chinese made machinery – an admittedly broad category but one in which the output is very capital-intensive, complex, and (I thought) relatively expensive? (Think boxer shorts versus machine tools.) In fact, on the whole, the more technologically advanced a Chinese product is, the faster its price is falling and the more price competitive it is with foreign rivals.

Rapidly rising productivity could easily explain this trend for Chinese information technology products like computers and semiconductors and communications equipment. But if that’s the case, then why do goods that are less advanced but hardly primitive – like fabricated metal products and household appliances – display the opposite characteristics? This is a special puzzle given that fabricated metal products contain so much steel – which has been so rock-bottom cheap in China for so long. And why are China’s chemical products (another broad category) able to cut prices so impressively and gain on their competition in the U.S. market, but not plastics products – which are a major category within chemicals?

Some tentative conclusions and possibilities:

First, these figures are a valuable reminder that even manufacturing industries that seem closely related can have enough differences to produce widely varying results

Second, some of this variation in Chinese manufactures could reflect their positions on the government’s priorities scale. In principle, the products that perform best price-wise could be the beneficiaries of the biggest government subsidies (including value-added tax rates, which are extremely granular) and research budgets. They could also be the sectors where Beijing exerts the greatest pressure on foreign investors to transfer their best technology.

Third, since much foreign tech transfer in China is still voluntary, the price gap illustrated above also could stem at least partly from different tech transfer approaches taken by multinational companies from different countries. For example, it’s widely believed that American companies that operate in China – and which are especially active in information technology – share their know-how with Chinese partners much more freely than do firms from Japan and Germany.

Even so, however, these import price figures raise many more questions than they answer, and they seem to be telling us that all of us need to be paying a lot more attention to them.

(What’s Left of) Our Economy: The Times’ Trade Deficit Pollyannaism

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bubbles, business investment, capital flows, capital spending, China, competitiveness, currency manipulation, global division of labor, global financial system, investment, manufacturing, Neil Irwin, subsidies, The New York Times, Trade, Trade Deficits, U.S. dollar, {What's Left of) Our Economy

At least Neil Irwin’s New York Times article yesterday on the real meaning of trade deficits made two points rarely seen in journalistic examinations of the subject. He acknowledged that these shortfalls subtract from an economy’s size. (And should have added that worsening trade balances slow an economy’s growth – a big problem for the slow-growing United States these days.) And he noted that the foreign investment inflow triggered by deficits should be put to productive uses. Otherwise, it can create dangerously bubbly effects, as with U.S. housing and personal consumption during the last decade.

What Irwin didn’t discuss were the real-world obstacles created by trade deficits to using those capital inflows wisely, and unfortunately, they’re much more important and germane to policymakers and the public.

For example, let’s say that a country’s trade deficit is heavily concentrated in manufacturing (which America’s is). And let’s say that it partly reflects not only the dollar strength resulting from the central role played by the United States in the global financial system, but foreign countries’ policies of artificially undervaluing their currencies. If Washington didn’t respond adequately, wouldn’t many prospective investors balk at pouring money into domestic manufacturing for fear of having to compete not only with foreign companies, but with foreign treasuries? And wouldn’t a turn-the-other-cheek American policy toward other foreign subsidies produce similar effects?

Alternatively, a large manufacturing-centered trade deficit could inhibit productive domestic investment by killing off large numbers of manufacturing jobs – which have long been among the economy’s best-paying. Investors considering building new factories in America could understandably be dissuaded by the resulting reductions in family incomes – which could well ripple far beyond manufacturing as displaced industrial workers began competing for the jobs remaining in the service sector, and undermined its own wage growth.

Another live possibility: If U.S. trade deficits significantly reflected the offshoring activities of multinational companies, and American trade policy encouraged the supply of the high price U.S. market from much lower cost (and lightly regulated) foreign markets, wouldn’t many of these multinationals take the hint and send much of their capital abroad?

Nor are these scenarios hypotheticals. If you look at the business investment share of the U.S. economy, as pointed out by Dean Baker of the Center for Economic Policy Research (in a recent email), it grew steadily between 1950 (when it was 9.99 percent of pre-inflation gross domestic product) to 1980 (when it hit 14.21 percent). By 2007, the last year before the Great Recession struck, it had fallen back to 13.27 percent. Last year, it stood at 12.83 percent. (Unfortunately, the inflation-adjusted data only go back to 1999.)

Of course, such capital spending is driven by many forces. Baker, for example, emphasizes the destructive effects of financial deregulation, which greatly increased the rewards of short-term-focused speculative activity versus the longer-term gains generated by funding production and innovation. But can it be a total coincidence that domestic American business investment peaked just as imports – especially from predatory trading powers like Japan – were starting to make big inroads into U.S. markets?

Even more suggestive: Research published in 2014 by analyst Aaron Ibbotson of Goldman Sachs showed that U.S.-owned multinationals have not simply stopped or slowed investing in new plant and equipment. Instead, they’ve increasingly channeled such investment overseas, especially to emerging market countries like China, in order to supply their industrial needs.

Not that these are the only problems potentially and actually created by running trade deficits – especially big, chronic ones – that Irwin missed. For instance, when foreign interests buy American assets with trade surplus earnings, they buy control over the U.S. economy. This arguably is not a significant issue when the buyers are other private companies, or when they come from countries that are allied or friendly with the United States, or neutral. When a large and growing share of these acquisitions are made by China – which is neither friendly, nor private sector dominated – threats emerge ranging from market distortions (created by heavily subsidized financing arrangements) to national security dangers.

Irwin should have also mentioned that changing trade balances are crucial indicators of global competitiveness, and in fact signal which countries are likely to be major and minor producers of various goods and services. Indeed, the ostensibly most efficient possible global division of labor that results is a principal justification for encouraging trade. If manufacturing, to take one sector, is judged to create no special advantages for the American economy, then it’s fine to be indifferent to trade deficit signals that U.S. industry’s world-class status is at risk. If manufacturing is prized, then the deficit is indeed a valuable scorecard, and one that’s sending a troubling message.

Of course, Irwin’s column also argued that the strong dollar that puts constant upward pressure on the trade deficit creates major diplomatic and national security benefits for the United States, and there are respectable, if not dispositive, arguments to be made along these lines. But when it comes to the domestic growth, employment, and wage impact of trade deficits – not to mention the effects on all the productivity growth and innovation fueled by manufacturing – portrayals of these shortfalls as close-calls or nothing-burgers belong in a set of political talking points, not in a supposed economic primer.

(What’s Left of) Our Economy: Trade Myths That…Aren’t

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chemicals, China, competitiveness, consumer electronics, Employment, gross domestic product, inflation-adjusted growth, machinery, Matt O'Brien, recovery, Robert Samuelson, Trade, Trade Deficits, U.S. International Trade Commission, Washington Post, {What's Left of) Our Economy

To say it’s been a bad week at the Washington Post for trade policy coverage and commentary would be a gross understatement. As I pointed out over the weekend, columnist Colbert King on Sunday tried to sell the contemptible idea that many critics of job- and wage-killing American immigration and even trade policies are motivated by racism. Yesterday, no one at the Post sank nearly that low, but the economic ignorance put on full display by two of its leading lights was nearly as depressing.

First came the latest offering by economics columnist Robert Samuelson, describing as “myths” the claims that “Persistent U.S. trade deficits reflect recent free trade agreements” and that “The large trade deficit ($540 billion in 2015) is an important cause of the U.S. economy’s slow growth.”

It seems that Samuelson isn’t familiar with the Census Bureau’s data on America’s non-petroleum goods trade flows. These measure imports and export flows that strip out oil trade (which hasn’t been an issue in trade negotiations and, until recently, in any aspect of trade policy) and services trade (where trade agreements have made only modest liberalization progress.)

As a result, these non-petroleum numbers present the trade flows that are heavily influenced by not only trade deals but by related policy decisions like dealing (or ignoring) currency manipulation. And the Census data show that since the onset of the recovery, it’s up from As made clear by my new article for Marketwatch.com, it jumped from $263.78 billion after inflation on an annualized basis to $681.74 billion in the fourth quarter of last year.

Early in his article, Samuelson attributes this trend to the dollar’s existential strength, but in his conclusion, he also blames policy mistakes – specifically, Washington’s failure to “police” currency manipulation and illegal subsidies. So it seems that this myth is far from mythical.

And as made clear by my Marketwatch.com piece, this strong recovery-era non-oil trade deficit rebound has slowed the growth rate of the current sluggish expansion by more than $400 billion in inflation-adjusted terms. The absolute numbers involved, as suggested by Samuelson, are indeed smallish compared with the size of the U.S. economy (currently $16.46 trillion in constant dollars).

But in calculating the trade deficit’s impact on growth, that’s not the number that counts. What matters is the growth itself, which since the recovery began in the middle of 2009 has been a bit less than $2.1 trillion. So that $400-plus billion trade deficit growth figure amounts to a nearly 20 percent slice – which sure sounds like it deserves adjectives bigger than the “modest” used by Samuelson. In fact, had the real non-oil goods deficit simply remained stable during the recovery, last year’s American inflation-adjusted growth would have been just over three percent, not just under 2.40 percent. That rate of expansion – the U.S. post-World War II norm – hasn’t been achieved in a decade.

Comparably uninformed was Matt O’Brien’s post the same day contending that the threat China’s economic rise has posed to American employment and wages “is slowly starting to go away.” O’Brien cites by-now familiar claims that China’s cost advantage over the United States is quickly vanishing, largely because the PRC ostensibly faces a labor shortage after decades of glut.

I’ve already poked numerous holes in the “overpriced China” meme; if you’re curious, start with this post. But what’s also missed by O’Brien – and so many others – is the threat posed by surging Chinese competitiveness in capital- and technology-intensive industries where labor costs by definition are secondary. It’s easy to measure this rising competitiveness by examining the detailed U.S.-China trade data put out by the U.S. International Trade Commission. And for numbers showing astonishing catch-up – and more – there’s no need to go back to 2001, when China was admitted to the World Trade Organization. Even developments since 2009, the start of the current American recovery, have been stunning.

Here are how America’s trade balances with China in major advanced manufacturing industries have worsened from that point through the end of last year in pre-inflation dollars):

telecommunications equipment: 160.68 percent

farm machinery and equipment: 65.32 percent

construction equipment: $33 million surplus to $953 million deficit

search, detection and navigation instruments: 65.82 percent

semiconductors: 407.85 percent

iron and steel: 34.50 percent

relays and industrial controls: 182.42 percent

ball and roller bearings: 265.62 percent

turbines and turbine generator sets: 62.41 percent

electro-medical equipment: 313.40 percent

metal-cutting machine tools: $118.71 million surplus to $3.68 million deficit

plastics materials and resins: 20.87 percent

And P.S. to O’Brien: These sectors remain very important American employers.

Not that encouraging data is lacking. Here, for example, are some representative high value manufacturing sectors where the U.S. trade balance with China improved between 2009 and 2015, and the size of the improvement:

semiconductor manufacturing equipment: 297.66 percent

pharmaceutical preparation: 483,530 percent (not a misprint!)

analytical laboratory instruments: 106.18 percent

electricity measuring and testing devices: 528.43 percent

surgical and medical instruments: $90.44 million deficit to $248.80 million surplus

metal-forming machine tools: 75.68 percent

aerospace: 195.10 percent

One further problem, though, is that with the prominent exception of aerospace, the trade numbers of the worsening sectors are much bigger than those of the improving sectors. So surely the employment numbers are bigger, too.

Indeed, if you move out to broader manufacturing groupings, you find rapidly deteriorating American competitiveness in areas far removed from widely acknowledged Chinese areas of advantage like smart phones and other consumer electronics products, as well as electronics components. For instance, in non-electrical machinery, the U.S. bilateral deficit has risen by nearly 147 percent since 2009, and in chemicals, a $2-plus billion surplus is now a $468 million deficit. Curiously, the former have been described in the Wall Street Journal as “global champions” and the latter was thought destined for a huge competitiveness boost from cratering prices for natural gas, a key feedstock.

There may of course still be plenty of facts and figures to marshal on behalf of the case that American workers and voters have little to fear from and lots of reasons to support current trade policies. But if these two Post pieces are any indication, supporters of these strategies will need to work much harder to find them.

(What’s Left of) Our Economy: Manufacturing Insourcing is More Grimly Comic in Fact than in Fiction

Tags

"The Campaign", "Trading Places", Boston Consulting Group, China, competitiveness, Dan Aykroyd, insourcing, manufacturing, renaissance, reshoring, wages, Will Ferrell, Zach Galifianakis, {What's Left of) Our Economy

Here’s a TV-watching tip for the upcoming holiday – and No, it’s not the college football championship games. Catch or stream the 2012 Will Ferrell comedy “The Campaign.” And it’s not mainly because I’m a big Will Ferrell fan. Rather, the film deals with the idea of manufacturing insourcing in an especially funny way. In fact, make that “two funny ways” – only one of which the scriptwriters seems aware of.

“The Campaign” is about a Congressional race in a small-town North Carolina district between the worthless – though sort of lovable – gadabout of an incumbent (Ferrell). and a humble, endearingly wholesome political novice unwittingly fronting for ruthless tycoons. The puppet is played perfectly, touchingly old-fashioned sense of honor and all, by (get this) Zach Galifianakis. Special casting bonus for fans of the near-classic “Trading Places”:  Dan Aykroyd, whose arrogant young financier character in that 1983 feature was chewed up and spit out on a bet by his bosses, the nefarious Duke brothers, plays one of the equally villainous “Motch Brothers” in “The Campaign.”

I’m betraying no momentous secret by revealing that the climax involves the challenger indignantly refusing to go along with the Motches’ plan for the district. But the scheme itself was striking (at least for a policy wonk) and creative: The moguls need a pliable Congressman to help them buy up huge tracts of land, build factories on them, and then sell them for a ginormous profit to a Chinese manufacturer. He, in turn, would staff them not with the locals, but with 50-cent-an-hour workers shipped in from the PRC. As the Motches proudly announce, “We call the concept ‘insourcing.’”

The writers obviously viewed the term as a simple pun that would elicit laughs from an audience by-then largely familiar with the term “outsourcing.” They also seem to have known that insourcing (along with “reshoring”) was a term that had begun to be used by analysts who believed that the United States was on the verge of an historic manufacturing renaissance. Production and jobs would increasingly be brought home, they confidently predicted, because wages in outsourcing destinations (like China) were rising, along with the freight costs of shipping the output to American customers. In fact, just like the insourcing cheerleaders, the Motches explain that their plan would combine labor savings with the transportation savings from producing close to their market.

But here’s what the “Campaign” writers couldn’t have known: As dependent as insourcing has been on cheap labor, lower costs on this front haven’t required using workers from China. Thanks to the always available option of re-outsourcing (which has continued to undermine workers’ bargaining power), Americans – especially in the non-union South – have accepted sufficiently abysmal pay to supercharge profitability.

In fairness, the pioneers of real-world insourcing claims – the Boston Consulting Group – made clear from the start how the South’s low wages were keys to the U.S. manufacturing renaissance. But although the journalists and politicians who believed such predictions seemed neither surprised nor dismayed about this low-road route to restoring competitiveness, “The Campaign’s” story line apparently assumed that American wages could never sink low enough to attract much investment. I wonder if the writers realize that, once again, truth has been stranger than fiction. And in a final irony, not even rock-bottom wages have been enough to cure what’s ailed U.S. manufacturing.