Our So-Called Foreign Policy: Big Decisions Coming on Asia

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Asia, Asia-Pacific, Central America, China, containment, currency manipulation, deterrence, East Asia-Pacific, Japan, Mexico, New Journalism, Norman Mailer, nuclear deterrence, Our So-Called Foreign Policy, semiconductors, South Korea, Taiwan, tripwire, U.S. Army, Vietnam, Walker D. Mills, Western Europe

Whenever I think about what to blog about, I ask myself a question that I first heard one of my all-time writing idols raise many years ago when he faced similar decisions. The occasion came during a college writing seminar where the guest lecturer was none other than Norman Mailer.

The seminar probably took place sometime in 1974, and one of my fellow students asked Mailer why he hadn’t turned out anything about the Watergate scandal. I had been wondering this myself, since Mailer’s world renown by then stemmed both from his novels and from his forays into the “new journalism” that was emerging in that era, in which gifted writers tried to employ some key techniques from fiction (especially their keen insights into human nature and their considerable descriptive and narrative skills) ito shed light on the events of the day. On top of turning out numerous important non-fiction works, Mailer had also run (unsuccessfully) for Mayor of New York City in 1969. So he was by no means shy about sounding off on headline subjects, and I’m sure I wasn’t the only one of his fans anxious to hear about the Nixon-centric drama.

But his answer was disarmingly simple. He decided to give Watergate a pass because he couldn’t think of anything distinctive and important to say.

And that’s an (admittedly roundabout) way of explaining why today’s post won’t be about any aspect of President Trump’s contraction of the CCP Virus. At the very least, events are moving so quickly that it’s hard to know the score. Instead, I’m focusing on foreign policy, and in particular two major, under-reported developments in U.S.-Asia relations that are underscoring the return of Cold War-like challenges across the Pacific, but that should be teaching American policymakers very different lessons.

I’ve already dealt to some extent with the first here on RealityChek: The U.S.’ loss of global leadership in the manufacture of cutting-edge semiconductors to companies in South Korea and especially Taiwan. In a journal article scheduled for publication this week, I’ll be laying out the key the technical details and some of the main policy implications. But in brief it amplifies my argument that the location of the world’s most advanced producers of the vital building blocks of modern economies and militaries right at China’s doorstep means that the defense of Taiwan in particular has now become a vital U.S. national security interest that requires the kinds of military forces and strategies (including a threat to use nuclear weapons) employed to protect major treaty allies like Japan and Western Europe both during the Cold War decades and since.

After all, those Cold War commitments – which exposed the United States to the risk of Soviet and to a lesser extent Chinese nuclear attack – were reasonably justified by the belief that Japan and Western Europe were centers of industrial and technogical power and potential that could create decisive advantages for the communist powers if they gained control or access to their assets. The importance of advanced semiconductors today means that Taiwan now belongs in the same category.

As I detail in the upcoming article, Washington has rightly been building closer diplomatic and military ties to Taiwan in response (though I also argue that it’s ultimately far more important for the United States to restore its semiconductor leadership ASAP). But this fall, an article in an official journal of the U.S. Army argued for taking a net step that, however logical, would be nothing less than momentous – and comparably sobering. In the words of Marine Corps Captain Walker D. Mills,

“The United States needs to recognize that its conventional deterrence against [Chinese military] action to reunify Taiwan may not continue to hold without a change in force posture. Deterrence should always be prioritized over open conflict between peer or near-peer states because of the exorbitant cost of a war between them. If the United States wants to maintain credible conventional deterrence against a [Chinese military] attack on Taiwan, it needs to consider basing troops in Taiwan.”

To his credit, Mills goes on to make explicit that such troops would in part be performing the kind of “tripwire” function that similar units in South Korea serve – ensuring that aggression against an ally ensures the start of a wider war involving all of America’s formidable military capabilities. The benefit, as always, would be to prevent such aggression in the first place by threatening consequences the attacker would (presumably) find prohibitive.

Where Mills (like U.S. strategists for decades) should have been much more explicit was in explaining that because the threatened major conflict could easily entail nuclear weapons use, and since China now in particular, has ample capability to strike the U.S. homeland, the deployment of tripwire forces can result in the nuclear destruction of any number of American cities.

So this course of action would greatly increase at least theoretical dangers to all Americans. But what’s the alternative? Letting Beijing acquire knowhow that could eventually prove just as dangerous? As my upcoming article demonstrates, the blame for this agonizing dilemma belongs squarely on generations of U.S. policymakers, who watched blithely as this dimension of the nation’s technological predominance slipped away. And hopefully, as I just stated, this predominance can be recreated – and dangerous new U.S. commitments to Taiwan’s security won’t become permanent.

But that superiority won’t come back for years. Therefore, it seems to me that, as nuclear deterrence provided for Western Europe and Japan succeeded in creating the best of both possible worlds for the United States, this strategy could well work for protecting Taiwan for essentially the same reasons.

I’ll just insist on one proviso: At some point before it becomes a fait accompli, this decision should be run by the American people – as has never been the case.

Unfortunately, as I’ve also pointed out, Taiwan has become so important to the United States that even an America First-inclined U.S. President will have to look the other way at its longstanding trade protectionism and predation in order to maintain close ties – just as it winked at German, Japanese mercantilism in particular during the Cold War. But that kind of linkage needn’t apply to other countries in East Asia (and elsewhere in the world), who lack the kinds of assets Taiwan possesses, and in that vein, I hope the Trump administration (and a Biden presidency, if the former Vice President wins in November) won’t let strategic considerations prevent a thoroughgoing probe of Vietnam’s possible exchange rate manipulation and one other trade offense.

The former concern, of course, stems from the effects of countries’ sometime practice of keeping the value of their currencies artificially low. An under-valued currency just as artificially lowers the prices of a manipulator’s goods and services in markets all over the world vis-a-vis their U.S.-origin counterparts, and therefore makes the latter less competitive for reasons having nothing do with free markets.

The argument against the investigation (which I’ve so far seen only on Twitter, but by folks who are thoughtful and well-informed) is that in an economic conflict with China, the United States needs all the friends it can get. In addition, these critics point out, if tariffs are placed on Vietnamese goods, then companies thinking of leaving China because of the Trump levies on hundreds of billions of dollars’ worth of Beijing’s exports will face greater difficulties exiting, since Vietnam is such a promising alternative for so many products.

What these arguments overlook, however, is that, as a neighbor of increasingly aggressive China, and a country that’s struggled for centuries to prevent Chinese domination, Vietnam has plenty of powerful reasons of its own to help with any anti-China efforts initiated by the United States So it’s highly likely that Vietnam will keep cooperating with American diplomacy and other policies regardless of what the United States does on the trade front.

Moreover, Vietnam lacks Taiwan-style leverage over and value to the United States because it’s not a world-class producer of anything. So there’s no need for Washington to grin and bear Vietnamese trade abuses that may be harming the U.S. domestic economy.

And finally, although it’s great that Vietnam has been a prime option for companies thinking of moving factories and jobs out of China, it would be even better for Americans if those companies seeking low-cost production sites moved to Mexico or Central America, since greater economic opportunity for those Western Hemisphere countries will be so helpful to the United States on the immigration and drugs fronts.

Mark Twain is reputed (possibly incorrectly) to have said that “History doesn’t repeat itself but it often rhymes.” That is, it holds important lessons, but discovering them can be challenging, and both American security and prosperity are about to depend heavily on U.S. leaders getting them right.

Im-Politic: Biden’s Massive China Fakery

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2020 election, Biden, CCP Virus, CDC, Centers for Disease Control and Prevention, China, China trade deal, coronavirus, COVID 19, currency, currency manipulation, Hunter Biden, Im-Politic, Joe Biden, Obama, Trade, travel ban, WHO, World Health Organization, World Trade Organization, WTO, Wuhan virus, xenophobia

Imagine the gall that would’ve been required had Republican nominee Mitt Romney campaigned for President in 2012 by blaming incumbent Barack Obama for the financial crisis and Great Recession of 2007-09. Not only did these economic disasters erupt well before Obama took office, but the White House at that time had been held for eight years by the GOP. (The Democrats did win control of the House and Senate in the 2006 midterm elections, but still….) 

Multiply that gall many times over and you get this year’s presumptive Democratic candidate for President, Joe Biden, charging that Donald Trump is largely responsible for the devastating hit the nation is taking from the CCP Virus because Mr. Trump has been too soft on China. The Biden claims are much more contemptible because whereas Romney played no role in bringing on the Wall Street meltdown and subsequent near-depression, Biden has long supported many of the China policies that have both greatly enriched and militarily strengthened the People’s Republic, and sent key links in America’s supply chains for producing vital healthcare-related goods offshore – including to a China that has threatened the United States with healthcare supplies blackmail.

The Biden campaign’s most comprehensive indictment of President Trump’s China and CCP Virus policies was made in this release, titled “Trump Rolled Over for China.” Its core claim:

“We’d say Trump is weak on China, but that’s an understatement. Trump rolled over in a way that has been catastrophic for our country. He did nothing for months because he put himself and his political fortunes first. He refused to push China on its coronavirus response and delayed taking action to mitigate the crisis in an effort not to upset Beijing and secure a limited trade deal that has largely gone unfulfilled.”

More specifically, the Biden organization claims that even long before the pandemic broke out, Mr. Trump has “never followed through” on his 2016 campaign’s “big promises about being tough on China” and simply conducted “reckless trade policies that pushed farmers and manufacturers to the brink” before he was “forced to make concessions to China without making any progress toward a level playing field for American industry.”

I’d say “the mind reels” but that phrase doesn’t begin to capture the mendacity at work here. Not to mention the sheer incompetence. After all, the trade deal was signed on January 15. It was only two weeks before that China told the World Health Organization (WHO) that an unknown illness had appeared in Wuhan. On January 3, China officially notified the U.S. government. It was only the day before the trade deal signing that WHO broadcast to the world China’s claim (later exposed as disastrously erroneous – at best) that no evidence of person-to-person transmission had been found. It wasn’t until the very day of the deal signing that the individual who became the first known American virus case left Wuhan and arrived in the United States. It wasn’t until January 21 that the U.S. Centers for Disease Control and Prevention (CDC) confirmed him as the first American victim.  (See this timeline for specifics.)

So evidently the Biden folks don’t know how to read a calendar.

Meanwhile, in early January, The New York Times has reported, CDC offered to send a team of its specialists to China to observe conditions and offer assistance. China never replied. On January 7, four days after Washington received its first CCP Virus notification, but two weeks before it identified the first U.S. virus case, the CDC began planning for tests. We now know that it bungled this challenge badly.

But did Trump coddle China in order to keep Beijing from terminating the agreement? Surely Biden’s team isn’t calling that failure an effort to appease China. It’s also true that on February 7, the Trump administration announced its readiness to provide Beijing with $100 million worth of anti-virus aid to China (and other countries), and had just sent nearly 18 tons of medical supplies (including protective gear) to help the People’s Republic combat the pandemic. But is the Biden campaign condemning these actions? From its indictment, it’s clear that its focus instead is on the numerous Trump statements praising China’s anti-virus performance and transparency, and reassuring the American public that the situation was under control.

Where, however, is the evidence that these remarks amounted to the President treating China with kid gloves, and stemmed from desperation to save the trade deal? Just as important, here we come to a fundamental incoherence in Biden’s treatment of the agreement – descriptions that are so flatly contradictory that they reek of flailing. After all, on the one hand, the Phase One agreement is dismissed as a fake that fails to safeguard American trade and broader economic interests adequately. On the other, it assumes that China has been eager from the start to call the whole thing off. Yet if Phase One had accomplished so little from the U.S. standpoint, wouldn’t Beijing actually have been focused on sustaining this charade?

But even if the Biden read on trade deal politics is correct, how to explain the January 31 Trump announcement of major restrictions on inbound travel from China that went into effect February 2? Clearly China didn’t like it. Or were these reactions part of a secret plot between the American and Chinese Presidents to snow their respective publics and indeed the entire world?

How, moreover, to explain such Trump administration policies as the continuing crackdown on Chinese telecommunications giant Huawei, and its effort to kick out of the U.S. market  Chinese services provider China Telecom? Or the ongoing intensification of the Justice Department’s campaign against Chinese espionage efforts centered on U.S. college and university campuses? Or yesterday’s administration announcement that although some payments of U.S. tariffs on imports would be deferred in order to help hard-pressed American retailers survive the CCP Virus-induced national economic shutdown, the steep tariffs on literally hundreds of billions of dollars’ worth of prospective imports from China would remain firmly in place?

In addition, all these measures of course put the lie to another central Biden claim – that Mr. Trump is not only soft on China today, but has been soft since his inauguration. A bigger goof – or whopper – can scarcely be imagined.

Unless it’s the companion Biden insistence that the Trump trade wars have devastated American agriculture and manufacturing? When, as documented painstakingly here, U.S. farm prices began diving into the dumps well before the Trump 2016 victory (when Biden himself was second-in-command in America)? When manufacturing, as documented equally painstakingly, went through the mildest recession conceivable, when its output was clearly hobbled by Boeing’s completely un-tradewar-related safety woes), and when every indication during the pre-virus weeks pointed to rebound? When the raging inflation widely predicted to stem from the tariffs has been absolutely nowhere in sight?

Which leaves the biggest lies of all: The claim that Biden is being tough on China now – the promise that he’ll “hold China accountable,” and the implication that he’s always been far-sighted and hard-headed in dealing with Beijing

According to the campaign’s Trump indictment, the former Vice President “publicly warned Trump in February not to take China’s word” on its anti-virus efforts. But this Biden warning didn’t come until February 26. As to making China pay, the campaign offers zero specifics – and given Biden’s staunch opposition to Mr. Trump’s tariffs (and silence on the other, major elements of the Trump approach to China) it’s legitimate to ask what on earth he’s talking about. In addition, Biden insinuated that the Trump curbs on travel from China were “xenophobia” the very day they were announced – before pushback prompted him to endorse them.

Finally, the Biden China record has been dreadful by any real-world standards. In the words of this analysis from the Cato Institute, “he voted consistently to maintain normal trade relations with China, including permanent NTR in 2000” – meaning that he favored the disastrous decision to admit China into the World Trade Organization (WTO), which gave Beijing invaluable protection against unilateral U.S. efforts to combat its pervasive trade predation. He did apparently vote once for sanctions to punish China for its currency manipulation (which has artificially under-priced goods made in China and thereby given them government-created advantages against any competition), but many such Senate trade votes were purely for show. (I apologize for not being able to find the specific reference, and will nail down the matter in an addendum and post as soon as possible.)  

Revealingly, once he was in the Obama administration, he failed to lift a finger to continue the battle against this Chinese exchange-rate protectionism, and served as the President’s “leading pitchman” for the Trans-Pacific Partnership, whose provisions would have handed China many of the benefits of membership without imposing any of the obligations. More generally, there’s no evidence of any Biden words or actions opposing an Obama strategy that greatly enriched the People’s Republic, and therefore supercharged its military potential and actual power. 

For good measure, despite constant bragging that his personal contact with numerous foreign leaders during his Senate and Vice Presidential years, he completely misjudged Xi Jinping, writing in a 2011 article that the Chinese dictator (then heir apparent to the top job in Beijing) “agrees” that “we have a stake in each other’s success” and that “On issues from global security to global economic growth, we share common challenges and responsibilities — and we have incentives to work together.”

There clearly are many valid reasons to support Biden’s Presidential bid.  But if China’s rise and its implications worry you (as they should), then the former Vice President’s record of dealing with Beijing just as clearly shouldn’t be one of them. 

(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?

Tags

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

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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.