(What’s Left of) Our Economy: Trade War(s) Update

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Argentina, Bloomberg.com, Brazil, business investment, China, CNBC, consumption, currency manipulation, debt, Democrats, digital services tax, election 2020, EU, European Union, export controls, Financial Crisis, France, Huawei, internet, investors, manufacturing, production, steel, steel tariffs, tariffs, Trade, Trade Deficits, trade enforcement, trade war, Trump, Wall Street, Wilbur Ross, Xi JInPing, {What's Left of) Our Economy

The most important takeaway from this post about the current status of U.S. trade policy, especially toward China, is that it may have already been overtaken by events since I began putting these thoughts together yesterday.

What follows is a lightly edited version of talking points I put together for staffers at CNBC in preparation for their interview with me yesterday. I thought this exercise would be useful because these appearances are always so brief (even though this one, unusually, featured me solo), and because sometimes they take unexpected detours from the main subject. .

Before presenting them, however, let’s keep in mind this new Bloomberg piece, which came on the heels of remarks yesterday by President Trump signaling that a trade deal with China may need to await next year’s U.S. Presidential election, and plunged the world’s investors into deep gloom. This morning, however, the news agency reported that considerable progress has been made despite “harsh” rhetoric lately from both countries. It seems pretty thinly sourced to me, and the supposed course of the trade talks seems to change almost daily, but stock indices are up considerably all the same.

Moreover, even leaving that proviso aside, what I wrote to the CNBC folks yesterday seems likely to hold up pretty well. And here it is:

1. The President’s latest comments on the China trade deal – which he says might take till after the presidential election to complete – seriously undermines the claim that he considers a deal crucial to his reelection chances because it’s likely to appease Wall Street and thereby prop up the economy. Of course, given Mr. Trump’s mercurial nature, and negotiating style, this latest statement could also simply amount to him playing “bad cop” for the moment.

2. His relative pessimism about a quick “Phase One” deal also seems to reinforce a suggestion implicitly made yesterday by Commerce Secretary Wilbur Ross when he listed verification and enforcement concerns as among the obstacles to signing the so-called Phase One deal. I have always argued that such concerns are likely to prevent the conclusion of any kind of trade deal acceptable to US interests. That’s both because of China’s poor record of keeping its commitments, and because the Chinese government is too secretive and too big to monitor effectively even the most promising Chinese pledges to change policies on intellectual property theft, illegal subsidies, discriminatory government procurement, and other so-called structural issues.

3. Recent reports of the United States considering tightening (or expanding) restrictions on tech exports to Chinese entities like Huawei also support my longstanding point that the US and Chinese economies will continue to decouple whatever the fate of the current or other trade talks.

4. In my opinion, the President is absolutely right to play hard-to-get on China trade, because Chinese dictator Xi Jinping is under so much pressure due to his own weakening economy, and because of the still-explosive Hong Kong situation.

5. I’ll be especially interested to learn of the Democratic presidential candidates’ reactions to Mr. Trump’s latest China statement, as well as the announcement of the reimposed steel tariffs on Argentina and Brazil, and the threatened tariffs on French “digital services” [internet] taxes. With the exception of Massachusetts Senator Elizabeth Warren and Vermont Senator Bernie Sanders, the candidates’ China policies seem to boil down to “Yes, we need to get tough with China, but tariffs are the worst possible response.” None of them has adequately described an alternative approach. The reactions of Democratic Congress leaders Nancy Pelosi in the House and Charles Schumer will be worth noting, too. The latter has been strongly supportive of the Trump approach in general.

6. The new steel tariffs, as widely noted, are especially interesting because they were justified for currency devaluation reasons, with no mention made of the alleged national security threats originally cited as the rationale. Nonetheless, I don’t believe that they represent a significant change in the Trump approach to metals trade, because the administration has always emphasized the need for the duties to be global in scope – to prevent China from transshipping its overcapacity to the US through third countries, and to prevent third countries to relieve the pressures felt by their steel sectors from Chinese product by ramping up their own exports to the US. Obviously, all else equal, countries with weakening currencies (for whatever reason) will realize big advantages in steel trade, as the prices of their output will fall way below those of competitors’ steel industries.

7. Regarding the tariffs threatened in retaliation for France’s digital services tax, they’re consistent with Trump’s longstanding contention that the US-European Union (EU) trade relationship has been lopsidedly in favor of the Europeans for too long, and that tariff pressure is needed to restore some sustainable balance. In this vein, I don’t take seriously the French claim that the tax isn’t targeting U.S. companies specifically. After all, those firms are the dominant players in the field. Second, senior EU officials have started talking openly about strengthening Europe’s “technological sovereignty” – making sure that the continent eliminates its dependence on non-European entities in the sector (including China’s as well as America’s). The digital tax would certainly further the aim of building up European champions – and if need be, at the expense of US-owned companies.

By the way, this position of mine in no way reflects a view that more taxation and more regulation of these companies isn’t warranted. But it’s my belief that these issues should be handled by the American political system.

Also of note: Trump’s suggestion this morning that the French tax isn’t a big deal, and that negotiations look like a promising way to resolve the disagreement.

Finally, here are two more points I wound up making. First, I expressed agreement that the President’s tariff-centric trade policies have created significant uncertainties in the economy’s trade-heavy manufacturing sector in particular – stalling some of the planned business investment that’s essential for healthy growth. But I also noted that much of this uncertainty surely stems from the on-again-off-again nature of the tariffs’ actual and threatened imposition.

As a result, I argued, uncertainty could be significantly reduced if Mr. Trump made much clearer that, whatever the trade talks’ fate, the days of Washington trying to maximize unfettered bilateral trade and investment are over, and a new era marked by much more caution and many more restrictions (including tighter export controls and investment restrictions, as well as tariffs), is at hand.

Second, at the very end, I contended that President Trump deserves great credit for focusing public attention on the country’s massive trade deficits in general. For notwithstanding the standard economists’ view that they don’t matter, reducing them is essential if Americans want their economy’s growth to become healthy, and more sustainable. For as the last financial crisis should have taught the nation, when consumption exceeds production by too great a margin, debts and consequent economic bubbles get inflated – and tend to burst disastrously.

Making News: National Radio Podcast on Trump, China, and Currency Now On-Line

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China, currency, currency manipulation, electronics, Gordon G. Chang, supply chains, tariffs, The John Batchelor Show, Trade, {What's Left of) Our Economy

I’m pleased to report that I was interviewed on John Batchelor’s nationally syndicated radio show last night on the Trump administration’s decision yesterday to absolve China of charges of manipulating its currency to gain trade advantages.

The opportunity (as is often the case lately) came up too late to preview last night, but fortunately, the podcast is available, and you can access it at this link.  The conversation – which also included co-host Gordon G. Chang – also covered the crucial question of whether companies can and will move their supply chains out of China in response to the Trump tariffs.

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

(What’s Left of) Our Economy: So Far, Trump’s New NAFTA Only Deserves an “Incomplete”

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automotive, China, currency manipulation, dispute resolution, domestic content, exports, globalization, imports, light trucks, NAFTA, non-market economy status, North American Free Trade Agreement, passenger cars, rules of origin, SUVs, Trade, Trump, U.S.-Mexico-Canada Agreement, USMCA, value-added taxes, VATs, {What's Left of) Our Economy

“What was all the fuss about?” is a question that supporters and especially critics of conventional, pre-Trump trade policies are entitled to ask after reading the text of the new “U.S.-Mexico-Canada Agreement” – the brand new revamp of the North American Free Trade Agreement (NAFTA) just agreed to by the three signatories.

Although President Trump has repeatedly called NAFTA “the worst trade deal ever,” the new pact seems to retain the previous deal’s fatal flaw. Interestingly, though, the very modesty of “USMCA’s” departures from NAFTA means that, because U.S. trade is so worldwide in scope, the best chance for Mr. Trump to keep his campaign promises to turn U.S. trade policy into an engine of domestic growth and employment rather than of offshoring depends on two additional steps. The first is following through with his threat to impose stiff tariffs on automotive imports from the rest of the world. The second is expanding his already substantial tariffs on imports from China.

As I’ve explained repeatedly, that fatal NAFTA flaw entailed the treaty’s failure to provide significant incentives to producers outside the free trade zone to supply U.S., Canadian, and Mexican customers with goods – mainly in the automotive sector – produced in the United States, Canada, and Mexico, not in Europe, Asia, or elsewhere.

USMCA does create stricter “rules of origin” governing trade in vehicles and parts – by phasing in increases in the share of inputs provided from inside North America that vehicles and parts will need to contain in order to qualify for tariff-free treatment when traded among the three countries. The new treaty also mandates that a certain percentage of these products be made in factories paying workers wages much higher than prevail in Mexico currently. But the penalties non-North American producers face for ignoring these requirements, at least for duty-free treatment in the U.S. market, by far North America’s largest, are exactly the same sorely inadequate tariffs imposed by NAFTA – 2.5 percent for passenger cars and nearly all parts, and 25 percent for sport-utility vehicles (SUVs) and light trucks.

In other words, non-North American companies and entities (such as are found in China) will find it just about as easy to absorb or evade the costs of exporting to rather than investing in North America – through increased subsidies, currency devaluation, or accepting slightly lower profits – as they have for NAFTA’s entire 24-year history.

Automotive-wise, as previously reported in the news media, USMCA does differ from NAFTA in one seemingly important respect:  The Trump administration won the right to increase greatly tariffs on passenger cars, SUVs, and light trucks from Mexico if these shipments to the United States exceed certain levels (1.6 million vehicles) and on auto parts if these shipments exceed $108 billion per year. Interestingly, no such limits are imposed on automotive imports from Canada.

The catch is that these thresholds significantly exceed current American import levels, so they’ll provide no noteworthy relief for U.S. autoworkers and domestic production facilities for the time being.

The good news for these beleaguered American workers and companies is that major incentives to move non-North American production to the continent can still emerge.  But their fate will turn on whether President Trump imposes stiff tariffs on automotive products from outside North America under Section 232 of U.S. trade law, and whether he keeps curbing American trade with China.

Canada and Mexico have won major exemptions in the USMCA from these threatened levies (see here and here for the relevant side letters), but such new barriers to imports from Germany, Japan, South Korea, China, and others should create plenty of new work and sales opportunities for facilities in all three USMCA countries.

Section 232 auto tariffs alone wouldn’t achieve my own favored goal of turning all of North America and its economy into a genuine trade bloc, which would require non-continental industries across the board to supply North America from North America. In one fell swoop, this approach would solve nearly all of America’s longstanding trade problems with all of the aforementioned non-North American countries along with a host of others. But given the prominence of automotive products in the North American trade and broader economic landscape, it would be an important first step. And more China-specific levies would help as well, given the huge and rapidly growing shares of U.S. manufacturing markets grabbed by the People’s Republic in the last 25 years.

To be sure, other features of USMCA look worrisome to me. Principally, the deal does nothing to eliminate the problems caused by the Canadian and Mexican use of value-added taxes (VATs) and America’s lack thereof. These levies serve as hidden barriers to the Canadian and Mexican markets, and hidden subsidies for exports from Canada and Mexico to the United States.

The Trump administration also has granted Canada’s demand to preserve the old NAFTA’s dispute-resolution process, which greatly helps Canada and also Mexico to frustrate U.S. efforts to curb dumped and illegally subsidized imports from those countries.

On the plus side, the agreement contains enforceable prohibitions against currency manipulation – a first for an American trade deal.  And the administration won for the United States the right to withdraw from the trilateral USMCA and substitute a bilateral deal if one of the parties signs a separate trade agreement with a “non-market economy.”  Since that clearly means, “China,” it’s one more barrier to non-North American economies enjoying some of the benefits of the free trade agreement without incurring any of the obligations.   

But the origin rules have always been central to the promise of integrating the three North American economies for truly mutual benefit. And since the auto tariff decision has now become the development that can make or break the effectiveness of these rules, the only grade merited so far by President Trump’s NAFTA rewrite is “incomplete.”

(What’s Left of) Our Economy: Will Trump Fall for an Old Chinese Trade Trick?

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Asian financial crisis, Canada, China, currency manipulation, Mexico, NAFTA, North American Free Trade Agreement, Reuters, tariffs, Trade, trade war, Trump, value-added tax, VAT, {What's Left of) Our Economy

Three cheers for Reuters! In a September 7 report that I somehow missed, the news agency provided a valuable reminder about a protectionist trick that China has trotted out once again to offset the impact of new U.S. tariffs. In fact, this ploy can be so important that failing to address it could negate many of the benefits created either by the American levies or by any potential agreement by Beijing to curb or eliminate its predatory economic practices. Worse, this stratagem has created loopholes capable of undermining the impact of other recent Trump trade initiatives, like the effort to renegotiate the North American Free Trade Agreement (NAFTA).

The trick in question entails China increasing the value-added tax (VAT) rebates it provides for exports of literally hundreds of products. VATs, of course, are imposed by countries on any goods and services consumed within their borders (including imports), but rebates (refunds) are typically provided to companies for domestically produced goods that are exported. As a result, VATs act as a tariffs and as export subsidies.

China has long used this system for promoting exports, and according to Reuters has just decided to tweak the policy in order to offset the impact of new and impending American tariffs by increasing the rebates that will be received by exporters of 397 categories of goods. As a result, Chinese entities relying on sales of these products to the United States will be relieved of at least some of the new costs these products will ultimately carry. And the export flows could survive relatively intact.

At this point, you might be wondering why the World Trade Organization (WTO) hasn’t been used to combat this subterfuge. Two related reasons: First, nearly all its member states (along with those of its predecessor organization, the General Agreement on Tariffs and Trade) use it. And second, no doubt as a result, the contemporary global trading regime has always viewed VATs as purely domestic taxes that lie beyond its purview.

China, incidentally, has successfully employed VATs to keep prospering at other economies’ expense and escape any global opprobrium in one major instance two decades ago. When much of East Asia fell into financial crisis, and export-reliant economies throughout the region were devaluing their currencies in a frantic effort to stay afloat, fears emerged that financially healthier but just as export-dependent China would follow suit to preserve its global market share. After all, Beijing’s dramatic weakening of its yuan several years earlier played a big role in triggering the crisis to begin with.

In 1997 and 1998, however, the peak crisis years, China held the line – and actually received copious praise for good global citizenship. What almost no one noticed was that the Chinese maintained their newly grabbed export competitiveness by boosting VAT rebates.

Today, this move could not only benefit Chinese trade flows, but enable Beijing to realize many of the gains of further currency devaluation without incurring any of the costs – e.g., triggering major new capital flight; increasing the costs of imported inputs still needed by the Chinese manufacturing base to turn out finished goods; and risking a defeat in the global propaganda wars.

Failure to deal adequately with VATs moreover, could endanger President Trump’s objective of improving NAFTA from a U.S. standpoint. For both Mexico and Canada use this system, too, and there’s no public record of American negotiators even raising the subject.

Fool me once, shame on you, fool me twice, shame on me, goes an old adage. It will apply in spades to the Trump administration if it allows its needed efforts to overhaul U.S. trade policy to be weakened by a continued failure to face up to foreign VATs.

(What’s Left of) Our Economy: The New York Fed Whiffs on Tariffs and Trade Policy

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China, currency manipulation, imports, intermediate goods, New York Fed, non-tariff barriers, subsidies, tariffs, Trade, Trade Deficits, Trump, Trump tariffs, value-added tax, VAT, {What's Left of) Our Economy

Do you want to know how slipshod a new post from the New York branch of the Federal Reserve on tariffs and trade deficits is? I’m not a Ph.D. economist, and it took me about thirty seconds to spot no less than four fatal flaws.

The post, written by a senior Fed economist and three academic colleagues (including one from a Chinese university), argues that President Trump’s tariff-heavy trade policies are likeliest to backfire on the administration and the entire U.S. economy by widening, not narrowing, the country’s trade deficit. Their main evidence? The experience of China after it entered the World Trade Organization (WTO) at the end of 2001.

According to the authors:

“While more costly imports are likely to reduce the quantity and value of imports into the United States, the story does not stop there, because we cannot presume that the value of exports will remain unchanged. In this post, we argue that U.S. exports will also fall, not only because of other countries’ retaliatory tariffs on U.S. exports, but also because the costs for U.S. firms producing goods for export will rise and make U.S. exports less competitive on the world market. The end result is likely to be lower imports and lower exports, with little or no improvement in the trade deficit.”

The Chinese example, they claim, supports this hypothesis because China significantly reduced its tariffs following WTO entry (i.e., pursued a policy exactly the opposite of that sought by Mr. Trump), and both its exports as well as its imports soared. Moreover, the authors found that

“Focusing on China’s exports to the United States…shows that by lowering its own tariffs on imported inputs, China reduced its production costs and increased productivity, enabling Chinese firms to enter the U.S. export market and compete with other firms. With a fall in production costs, Chinese firms charged lower prices on goods exported to the United States and increased their U.S. market shares.”

But the weaknesses in this analysis are positively jaw-dropping. First, the data supporting that latter key finding is no less than a dozen years out of date.

Second, the post completely fails to take into account the possible effects over time of a U.S. failure to provide trade protection for sectors, like steel, that represent key inputs for manufacturing. Although obviously the cheaper they are, the more competitive the industries that utilize them will be, intermediate goods sectors (including not only materials like metals but machinery and equipment of all kinds) could represent as much as nearly half of America’s entire manufacturing complex. Should the United States just sit back and watch those sectors trashed by foreign competition?

Third, and even more important, should the United States accept this result if much of the foreign competition faced by its manufacturers is predatory? In this vein, the Fed post contains not a single word about China’s currency manipulation – which kept the value of the yuan significantly and artificially suppressed throughout the early post-WTO admission years (and arguably still does) for reasons completely unrelated to trade liberalization, and which gave Chinese products a major and wholly artificial advantage in China’s own market, the U.S. market, and markets around the world.

Fourth, the authors similarly ignore the impact of China’s value-added tax (VAT) system, which not only surrounds the entire Chinese economy with high, tariff-like walls that nonetheless aren’t technically considered tariffs, but which provides comparably impressive subsidies for China’s exports.  Not to mention the other massive supports Beijing offers to manufacturing, or its still (and perhaps increasingly) formidable array of non-tariff trade barriers.

Indeed, all these non-market practices no doubt largely explain why China has both supercharged its exports since it entered the WTO and impressively raised the levels of Chinese inputs they contain. 

In baseball, three strikes means “you’re out.” At the New York Fed, by contrast, four strikes apparently earns a “well done.”

(What’s Left of) Our Economy: More Trade Derangement Syndrome – on China & Currency Wars

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China, currency, currency manipulation, currency wars, Financial Times, Martin Wolf, Paola Subacchi, Project Syndicate, renminbi, Trade, Trump, yuan, {What's Left of) Our Economy

Trade issues’ ability to completely muddle the thinking of supposed experts has never been more prominently displayed than in this recent column, from a leading European economist, on China’s manipulated currency.

Writing for the Project Syndicate website (which bills itself as “the world’s opinion page”), Paola Subacchi insists that China is not likely to turn the recent slide in the value of its renminbi (also called the yuan) into an “’engineered’ competitive devaluation” because “a weak renminbi has more costs than benefits” for the People’s Republic.

Of course, the case for worrying about a Chinese drive to weaken its currency stems from fears that a cheaper renminbi/yuan would give Chinese goods wholly artificial price advantages over U.S. and other foreign counterparts in markets the world over. The result would be a big trade lift for the Chinese economy at the expense of its competitors — and for reasons that have nothing to do with either free trade or free markets.

Anyone pretending to know what Chinese leaders are really thinking about such vital economic (or other) matters is blowing smoke. But it’s nothing less than absurd to suppose that the considerations Subacchi cite for her China currency optimism are taken the slightest bit seriously in Beijing.

For example, the author argues that “by increasing import prices and bolstering export sectors, a weaker renminbi would undermine the Chinese government’s goal of shifting away from export-led growth and toward a model based on higher domestic consumption.” But although it’s true that Beijing has long talked about this goal, it’s highly doubtful that China’s are prioritizing these days – if they ever have.

After all, as made clear in this new column from the Financial Times‘ Martin Wolf, China in recent years has been relying on domestic purchases (especially investment spending) supercharged by official stimulus policies to keep growth at satisfactory levels. This shift, however, has scarcely been voluntary. The choice was essentially forced on China by the sharp downturn in global trade triggered by the last global financial crisis and recession, which pummeled foreign markets for Chinese products. The results, Wolf shows, have not been a healthily rebalanced Chinese economy, but one that’s growing more slowly, and whose growth is dangerously reliant on an explosion in the country’s indebtedness. Is it really plausible that China is seeking more of the same?

According to Subacchi, “a weaker renminbi could [also] invite renewed US complaints about currency manipulation.” President Trump has just revived this charge. But the Chinese so far seem to be counting on blunting the new U.S. trade offensive by imposing their own retaliatory tariffs on American products (especially from politically important states and Congressional districts), and thus prompting a decisive counterattack by vulnerable political and economic interests. A continuingly weakening renminbi/yuan would plainly help, too. 

Moreover, Subacchi herself clearly regards Trump-ian U.S. trade policies as a major mistake, describing them (as well as China’s currency policies) as “not good for anyone.” Yet for those renewed U.S. complaints about currency manipulation to matter to Beijing, they’d need to be followed up with a credible threat of tariff responses – and, if needed, actual levies. Is she therefore suggesting that playing trade hardball makes no sense unless the target is China? Maybe she’ll explain in her next article.

“Finally, and more crucially,” the author writes, “a weak renminbi at the same time that dollar-denominated assets become more attractive could cause China to suffer capital flight.” She’s correct  – but oddly overlooks Beijing’s option of tightening capital controls – a policy that’s not exactly unprecedented for Chinese leaders.

Subacchi does deserve praise for spotlighting major actual and potential weaknesses in China’s economic and financial position. Unfortunately, the response she says she favors to the prospect of a full-fledged Chinese-launched currency war – “the world should call its bluff” – is wishful thinking. For the world as a whole – which remains heavily dependent on growing by selling to America’s gargantuan, wide open market – has displayed much more interest in protecting this convenient, though dangerously unsustainable, arrangement from vigorous U.S. responses than in imposing any significant disciplines on China.

In other words, the odds remain high that unless the prospect of a China-launched currency war is met with unilateral – i.e., Trump-ian – American counter moves, it won’t be met at all.

(What’s Left of) Our Economy: A New China Bill – & Trade Policy Realist? – Worth Watching

Tags

China, currency manipulation, economic nationalism, Fair Trade with China Enforcement Act, foreign direct investment, Gang of Eight, Immigration, Made in China 2025, Marco Rubio, national security, Populism, Republicans, subsidies, tech transfer, Trade, trade law, Trump, {What's Left of) Our Economy

One of the biggest questions surrounding the future of the Republican Party, and in turn of American politics, is how many leading GOP politicians learn the main lessons of the Trump victory in 2016. In my view, these include the political appeal and real-world imperative of a nationalist approach to American economic policy, especially in the realms of international trade and immigration.

President Trump’s capture of even most of his party’s establishment on the latter could not be clearer. But signs of populism’s growing appeal are also emerging in the former, and one of the biggest has just come courtesy of Marco Rubio. In fact, legislation recently introduced by the Florida Republican and Trump rival for the 2016 GOP presidential nomination strongly indicates that, when it comes to the crucial issue of China, Rubio is out-Trumping Mr. Trump.

Rubio’s journey has been a far as it has been high-speed. His voting record on trade policy overall has been awful – at least from an economic nationalist/populist standpoint. In fact, according to the libertarian Cato Institute, the only blemishes on his record so far have come from his support for federal subsidies for sugar – a crop grown in his home state. As a result, in the fall of 2015, I dismissed him as a typical Republican pseudo-hawk on China.

That is, he talked tough about the need to confront China’s expansionism in the East Asia/Pacific region. But he seemed oblivious to how decades of American trade policy had showered the People’s Republic with literally trillions of dollars worth of hard currency, along with cutting-edge technology voluntarily transferred by, and extorted with impunity from, American companies. In other words, he did and said nothing about U.S. decisions that unmistakably had helped China become a formidable military as well as economic power.

Fast forward to this year, and what a change – at least on China. In addition to criticizing President Trump for backing away from his own Commerce Department’s initial decision to all-but shut down the Chinese telecoms firm ZTE for (repeat) sanctions busting, he’s just introduced legislation that represents the most comprehensive effort I’ve yet seen to deal holistically with the intertwined Chinese threats to America’s economy and national security.

Rubio’s “Fair Trade with China Enforcement Act” contains numerous important measures to staunch the flow of money and defense-related tech to China. (Here’s a summary from his office.) Provisions that represent major and needed advancements in America’s strategy are:

> a prohibition on the the voluntary corporate transfer of technology to a wide range of explicitly named technologies subsidized by the Chinese government, including in the Made in China 2025 program aiming to achieve Chinese predominance in numerous economically and militarily critical technologies. That is, Rubio recognizes that tech extortion (conditioning access to the Chinese market on a company’s willingness to share knowhow with Chinese partners) isn’t the only way that Beijing has been closing the tech gap with the United States. American companies seeking to curry favor with China on their own, or simply recognizing the importance of locating R&D and related activities in close proximity to their manufacturing, have also fueled China’s power.

> a requirement that U.S. trade law recognize that any Chinese product headed for the American market that’s from an industry mentioned in any Chinese document even related to the Made in China 2025 plan is ipso facto receiving subsidies the kinds of subsidies that these statutes consider illegal; and that this same body of trade law just as automatically assume that such goods are actually injuring or threatening to injure U.S.-based competitors when they enter the American market. Translation into plain English: Rubio’s bill would dramatically lower the bar for imposing tariffs on imports from China deemed to be unfairly traded. Which would be one heckuva lot of imports from China.

> a ban on investors from China owning more than fifty percent of any American company producing goods targeted by Made in China 2025 – which would restrict another major channel of tech transfer to China;

> and a new tax on Chinese investments in the United States – including levies on Chinese purchases of American Treasury debt. The latter measure, in particular, would discourage China from buying excessive levels of U.S. government debt, which keeps China’s yuan weak versus the American dollar and therefore helps to put U.S.-made goods at price disadvantages versus their Chinese made counterparts wherever they compete.

Incidentally, a proposal along these lines was first made, to my knowledge, by Raymond, Howard, and Jesse Richman in their 2008 book Trading Away our Future. So they deserve a big shout-out.

Rubio’s bill isn’t perfect. For example, it should be clear by now that any Chinese entity permitted to bid for American assets is tightly controlled by the Chinese government. Therefore, I would favor banning all such takeovers. Even if existing acquisitions were permitted, Washington would at least be freezing the Chinese state’s economic footprint in the United States, and thereby preventing ever more American businesses from having to compete with rivals whose operations have nothing to do with the free market values the nation rightly values.

In addition, Rubio’s bill says nothing about American tech companies’ growing predilection for investing in Chinese tech “start-ups” and similar entities. Some of these investments are surely extorted, but others seem to be voluntary. But since all of them can help strengthen China’s tech capabilities, they should be banned as well if the recipients have any connection with Made in China 2025.

Finally, Rubio still seems pretty comfortable with the rest of America’s longstanding trade liberalization policies except for the impact of the North American Free Trade Agreement (NAFTA) on Florida produce growers. 

At the same time, China policy inevitably shapes so much of trade policy that Rubio’s single-minded focus to date can’t reasonably be criticized. Further, he seems to understand that it’s not enough simply to introduce a bill. Rubio’s been taking it the next step by lobbying for it, and for related China policy changes, actively in the media – both broadcast and print. He still needs to show a willingness to buttonhole his colleagues actively – the most important form of Capitol Hill lobbying. But (paradoxically) his leadership on 2013’s decidedly non-nationalist or populist Gang of Eight immigration bill at least indicates he recognizes the importance of this test. 

I’ve often wondered whether American politics can produce a leader with both the populist leanings of an outsider and the insider-type institutional expertise and contacts needed to turn these impulses into actual change. Rubio’s China bill and the policy migration it represents looks like major grounds for optimism.       

(What’s Left of) Our Economy: The Real Messages of that Business Letter Opposing Tariffs on China

Tags

American Chamber of Commerce in China, Business Roundtable, China, currency manipulation, National Association of Manufacturers, offshoring, protectionism, tariffs, Trade, Trump, U.S. Chamber of Commerce, US-China Business Council, {What's Left of) Our Economy

Forty-five American business groups have just sent a letter to top Trump administration officials urging them not to impose “sweeping tariffs” on China in response to its longstanding and widespread theft of U.S. “trade secrets and other intellectual property.” That’s not especially newsy, since large elements of the American business community have long opposed any measures that would rock what they consider to be a highly profitable boat – the business they do with the People’s Republic.

Here’s what’s much more newsworthy: The list of signers is missing some of the leading lights of the U.S. trade association world, including the Business Roundtable, the National Association of Manufacturers, and two leading China-specific groups – the US-China Business Council, and the American Chamber of Commerce in China (which is distinct from the U.S. Chamber of Commerce, an organization that did sign).

Since the membership of the U.S. Chamber in particular is so all-inclusive, it’s possible that its name on the letter was thought to suffice for many companies belonging to those other groups that are absent. But these companies have never been shy about practicing double- and even triple-counting. So it’s also possible that the above absences indicate that the American business community – and especially the multinational companies that have so powerfully influenced U.S. Trade policy with China for decades – is seriously divided on the tariff issue.

What’s also noteworthy is the letter’s statement that “Tariffs would not only affect Chinese shippers but also harm U.S. companies that sell component pieces of final products exported from China.” In other words, the letter is implicitly acknowledging that many of its signers have been among those companies that have long spearheaded the offshoring of American jobs and entire supply chains to China.

Their offshoring focus of course explains much of their staunch opposition to vigorous Washington responses to such cut-and-dry protectionist Chinese practices as currency manipulation: Although this trade predation has damaged America’s domestic production base, these businesses’ China-based operations have been major beneficiaries.

Similarly, the strong interest of so many of these companies in continuing to coddle China’s mercantilism at the domestic economy’s expense explains the seeming paradox of their main policy message to President Trump: On the one hand, they “continue to have serious concerns regarding China’s trade policies and practices” and admit that their persistence endangers “U.S. global competitiveness, innovation, productivity, and cybersecurity.”

And on the other, they insist that American countermeasures be limited to steps – like “measured, commercially meaningful actions consistent with international obligations” and working “with like-minded partners to address common concerns with China’s trade and investment policies” – that have been tried for years, and that so far have produced nothing but failure.

(What’s Left of) Our Economy: The Establishment’s Case for Free Trade Keeps Weakening

Tags

Center for Global Development, currency manipulation, Dani Rodrik, free trade, Joseph E. Gagnon, Lawrence Summers, non-tariff barriers, Paul Krugman, Peterson Institute for International Economics, protectionism, sovereignty, Trade, trade agreements, trade barriers, transparency, {What's Left of) Our Economy

Although they’ve long enjoyed benefits ranging from lavish financial support to nearly uncritical mainstream media adulation, I felt a twinge of pity this morning for establishment backers of current trade and globalization policies.

As made clear from a new report from one of their leading think tanks and a recent speech from one of their leading individual lights, they’re doubling down on the claims that there’s nothing fundamentally wrong with the trade liberalization priorities long held by the U.S. government, and that the trade barriers supported by populists and other critics will only backfire on the American and global economies. And as also made clear by the report and speech, they keep fighting a losing intellectual battle.

The report comes from the Peterson Institute for International Economics, and addresses the question “Do Governments Drive Global Trade Imbalances?” As emphasized by author Joseph E. Gagnon, the stakes of finding the right answer are towering:

“At current levels, these imbalances will push the net debt of deficit countries gradually toward unprecedented and unsustainable levels….Moreover, the domestic political consequences of persistent trade deficits are already evident in both the United States and the United Kingdom, having contributed importantly to the election of Donald Trump and the outcome of the Brexit referendum….”

In other words, if global trade flows continue getting more lopsided, they could set the stage for a repeat of the kind of global financial crisis they helped foster during the previous decade. And failing to calm populist political waters in the west could tempt key trading powers even more strongly to dabble in economically disastrous protectionism.

So Gagnon makes the case for a feel-good story: These major trade powers, especially the United States,

“have the necessary tools to achieve their stated goal of narrowing current account imbalances. President Trump and some members of his administration have proposed using trade barriers to narrow the US current account (trade) deficit. The data show that trade barriers have very little effect on a country’s trade balance. Fiscal policy and net official flows are the policies that matter for trade balances.”

One problem right at the outset: There’s nothing in the study whatever that explicitly measures the impact of (conventional) trade barriers. But even accepting this unusual methodology, it’s surely significant that he does conclude that “foreign exchange intervention” – i.e., currency manipulation – has an “important” affect on trade balances. That sounds like a trade barrier to me, at least in many instances.

And although fiscal (and related spending) policies aren’t normally considered examples of trade policies, they’ve clearly been used by numerous countries, especially Germany and throughout East Asia, to keep savings rates high, and therefore consumption (and imports) low. Why does Gagnon leave these out?

It’s absolutely true that fiscal and budget policies reflect the choices made by national societies, and therefore economies, and that as such, the presumption should be that they’re entirely legitimate. But at the same time, the nature of such choices can reveal whether these priorities can produce reasonably balanced trade with an economy like America’s – whose priorities on these fronts are substantially different but presumably just as legitimate.

As a result, trade policies that emphasize expanding commerce with countries regardless of their domestic priorities ipso facto can’t help but boost the trade deficit of the freer spending and/or more economically open country. And that description fits decades worth of American trade policies to a tee.

Lawrence Summers, President Obama’s former top White House economic adviser (among many other major government jobs), last month advanced an argument that’s somewhat more sophisticated than Gagnon’s, but no more convincing or useful to policymakers. In a speech to the Center for Global Development, Summers made the standard nod to the “compelling and persuasive case for free trade” and to the follow on view that “erecting tariff or quota barriers to trade between countries is usually a bad idea.”

But then, Summers’ line of argument actually became interesting. He sought to draw a distinction between the (unassailable) idea of free trade on the one hand, and the focus of many recent trade agreements – which he claimed “may be good or they may be bad, but they are not self-evidently and clearly good in the way that free trade is clearly good.” These concerns centered around goals like “securing intellectual property protection for global companies in a wider range of countries” and “achieving access for service companies to a wider range of countries” and “harmonizing rules in areas like safety standards or financial reporting standards.”

Supporters of such measures, he contended, have too often been arrogating

“the prestige of free trade…in support of a rather different agenda of better, more harmonized commercial rules” and expressed support for the view that “the participants in the debate about what constitute better, more harmonized commercial rules are mostly the kinds of people who appear in Davos rather than the kinds of people who work in the companies that are run by the people who appear in Davos.”

It’s hardly new for trade advocates to note critically that recent trade deals have dealt largely with non-trade issues, and more disturbingly, issues that the theory’s originators couldn’t imagine. Many left-of-center opponents of the Trans-Pacific Partnership (TPP) agreement nixed (at least for the United States) by President Trump made this very point, and Summers peers such as Dani Rodrik of Harvard University and Nobelist Paul Krugman have echoed these views as well.

But Summers’ indictment of this shift in the trade agenda seems unusually strong, so it’s a great opportunity to pose three major questions that these critiques keep avoiding. First, with standard trade barriers like tariffs whittled down to near-insignificance in most cases, and such non-tariff barriers (NTBs) becoming more popular, how can genuinely free trade be sustained without somehow grappling with the latter?

Second, since the United States maintains relatively few NTBs, since these barriers are easy to identify because they’re typically line items in a completely transparent federal budget, or regulations in other, equally transparent federal documents, and since the world’s NTB champs are known for opaque governing systems that generally hide their barriers effectively, how can the United States adequately safeguard its legitimate interests without threatening to put up or actually erecting its own barriers?

So without the possibility or reality of unilaterally closing off its own market in response, how can the United States avoid being disadvantaged by legalistic systems of harmonization that (understandably but unrealistically) depend on producing evidence for winning redress?

Third, and similarly, there’s no global consensus on what kinds of health and safety regulations are genuine and valid measures to protect the commonweal, and what kinds are designed primarily as trade barriers. Therefore, how – unless again through using the threat or reality of unilateral tariffs – can countries that play it straight (like the United States) adequately safeguard their interests versus the clandestine protectionists?

The only plausible answers to these questions are, “It can’t.” And the sooner globalization’s cheerleaders acknowledge these hard truths and the commonsense measures that logically flow from them, the sooner they’ll start winning back the trust of a public that’s rightly ignoring them.

(What’s Left of) Our Economy: The Case for Keeping it Simple with China Trade Just Got Stronger

Tags

China, currency, currency manipulation, exchange rates, Great Recession, import prices, imports, Labor Department, Robert Lighthizer, Trump, U.S. Trade Representative, yuan, {What's Left of) Our Economy

I haven’t been closely following the Labor Department’s import price data lately, and that’s been an oversight. As is clear from this morning’s figures (for August), they keep telling a fascinating and important tale about China’s ongoing manipulation of its currency and how it does and doesn’t impact U.S. trade with the People’s Republic. More specifically, examining the data over time reinforces a strengthens a point I’ve posted on previously – that as important as this currency protectionism is, it’s far from the only predatory Chinese practice that’s been shafting domestic companies and workers exposed either directly or indirectly to Chinese competition.

Just as a refresher, unlike most other trading countries and regions, China prohibits the free buying and selling of its currency. For most of the previous decade, Beijing’s aim has been to keep the value of the yuan artificially low versus most other currencies and especially the U.S. dollar – in order to give its goods and services price advantages over foreign rivals in markets everywhere. As a result, China’s exports got a government-aided boost worldwide, and its domestic industry was able to undersell imports in its home market – all for reasons having nothing to do with free trade or free markets generally.

Since the latter part of that decade, and especially earlier during the current economic recovery, the story has been more complicated. The main reason: China was getting worried about wealthy Chinese concerned about political stability or the economy’s future spiriting too much of their wealth out of the country, for stashing in countries (like the United States) considered a lot safer. These capital outflows began depressing the yuan’s value much faster than Beijing wanted, and even threatened to cause a worldwide crisis of confidence in the currency – and the broader Chinese economy. So for much of this latter period, China has been trying to prop up the yuan’s value to some extent – even as its wary that an overly strong yuan would jeopardize the exports on which its growth still heavily relies.

Trade policy critics have rightly focused much and even most of their anti-China ire on currency manipulation, and that’s been understandable for two main reasons. First, this policy affects the relative prices of everything sold back and forth between the United States and China; and second, currency manipulation is one of the few protectionist practices that even some of the globalization-happy economics and business establishment (and the latter’s political hired guns), can be convinced to combat. (Much of the rest of this group, though, will simply grandstand against this form of protectionism.)

Nonetheless, the import price numbers, coupled with the oscillation in China’s currency priorities, the consequent roller-coaster ride of the yuan’s value versus the dollar, and the actual trade flows, show that the cost of Chinese goods and services aimed for the American market stems from many other causes.

The Labor Department’s import price data for China goes back to 2004, and it shows that, in the 13 years since, on an August-to-August basis, the prices of purchases from China Americans can make has fallen in eight years and risen in five. As for the yuan’s value, it’s strengthened versus the U.S. dollar in nine of those 13 years, and weakened in four.

What happens when the two indicators are paired? The numbers reveal that in five of the 13 years, the prices of imports from China in the American market have fallen while the yuan has strengthened – which isn’t supposed to happen if you believe in currency uber alles. In another year, the prices of those imports rose while the yuan weakened – another counterintuitive result. In seven of the thirteen years, in other words, currency values and import prices seem to have behaved as they should have, but in six (nearly half the time), they didn’t.

Also important : In three of the four years when both import prices and the yuan went up, the yuan’s rise was much greater, most often by a factor of two to one. And in two of the three years when both indicators fell, the change in the yuan again was much greater. So at the very least, even when the relationship is looking like economists tell us it should, it takes a lot of yuan movement to generate significant import price changes. Clearly, therefore, other factors must be at work.

In this vein, the yuan’s value and the changes it undergoes doesn’t seem to have an especially strong relationship with the amount of goods that American imports from China. Of course, they have some effect. After all, all else equal, if U.S. customers buy a certain quantity of items and services from China one year, and the same quantity the next, and the price of those goods and services falls (for whatever reason), the value of those purchases will go down. And naturally, the converse is true as well.

This point matters because purchasing patterns rarely respond to price changes right away, and the lag can mean that the impact of currency changes on import values can take some time to materialize – and often more than a year. But even taking this reality into account produces a fuzzy picture. For example, between August, 2004 and August, 2005, U.S. goods imports from China (which make up the vast majority of American purchases from China) jumped by more than 24 percent even though import prices fell (by 1.10 percent) and the yuan rose versus the dollar (by 2.13 percent). The next year, Americans bought 19.14 percent more products from China, despite their prices falling yet again (by nearly as much – 1.01 percent), and the yuan rising again (also by nearly as much – 1.80 percent).

Between August, 2007 and August, 2008, import prices rose by a very large 4.95 percent and the yuan strengthened by an even greater 9.55 percent. Yet U.S. goods imports from the People’s Republic increased by double digits again (11.96 percent). The following year, however, import prices plummeted (by 3.08 percent), and the yuan weakened by 0.70 percent. And did American imports surge again? Not even close. They nosedived by 18.93 percent.

Sharp-eyed RealityChek readers will realize why: The Great Recession was intensifying in 2008 and lingered well into 2009. So Americans’ consumption of just about everything fell off a cliff for a while. Between the following Augusts, neither the prices of imports from China nor the yuan’s value moved much, and America’s goods imports from China nonetheless soared by more than 37 percent.

Yet you don’t need these kinds of extreme economic events for import prices, import amounts, and yuan movements to confound expectations, lag or not. From August, 2011 to August, 2012, both the prices of Chinese imports and the value of the yuan were up (both by a bit) and American imports from China dipped by 0.25 percent. Even stranger, the American economy grew by a pretty decent 2.39 percent (in inflation-adjusted terms) during that period.

The following year, U.S. growth was down to 1.69 percent, prices of imports from China dropped (by a meaningful 1.24 percent), the yuan rose (by a much greater 3.61 percent), and American purchases from China jumped from a small dip to more than five percent growth.

The point here is not that China’s currency policies don’t matter, but that the prices of Chinese goods and services, and therefore America’s trade performance with the People’s Republic, are influenced by a wide array of factors. Some are legitimate – for instance, if China keeps selling Americans greater amounts of relatively pricey advanced goods (like industrial machinery and high tech products), and less in the way of cheaper, simpler products (like clothing and toys), as has been the case, the price of the average import from China is going to rise. But many reasons are much less legitimate (e.g., changing levels of subsidies like value-added tax rates), and these can be so numerous, so fungible, and therefore so difficult to document that trying to isolate them and attack them piecemeal is a fool’s quest.

Far better is to decouple American tariff policy completely from specific items of evidence of individual predatory trade practices and impose these levies proactively, until they produce the desired effects on bilateral trade flows. In fact, the case for such a sweeping approach was made just yesterday, and is worth quoting at length:

“[T]here is one challenge on the current [trade] scene. It is substantially more difficult than those faced in the past, and that is China. The sheer scale of their coordinated efforts to develop their economy, to subsidize, to create national champions, to force technology transfer and to distort markets, in China and throughout the world, is a threat to the world trading system that is unprecedented.”

This speaker also argued that “The years of talking about these problems has not worked, and we must use all instruments we have to make it expensive to engage in non-economic behavior.”

His name is Robert Lighthizer, he’s President Trump’s chief trade negotiator, and the devilishly complex relationships between currency values, import prices, and trade flows just add to the case for the administration to start following this advice pronto.