(What’s Left of) Our Economy: Now What in the U.S.-China Trade War?

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agriculture, allies, China, decoupling, Democrats, election 2020, forced technology transfer, Hong Kong, Huawei, impeachment, intellectual property theft, National Basketball Association, Phase One, Steven Mnuchin, subsidies, supply chains, Taiwan, tariffs, Trade, trade talks, Uighurs, verification, {What's Left of) Our Economy

This is the second working day since the United States and China reached what the Trump administration is calling a “Phase One” trade deal with Beijing last Friday, and the questions surrounding the agreement still far outweigh what’s known. That alone should tell you that towering obstacles continue blocking any confident assessment of where the President’s so-called trade war stands, much less where the conflict is likely to go. Even so, here are some observations I hope are useful.  (Teaser:  One major point concerns tonight’s Democratic presidential candidates debate.)

First, the absence of any written statements or documents from the U.S. side describing or even summarizing what’s actually in the agreement justifies big doubts that anything deserving the term “deal” has been reached at all. Further reinforcing legitimate skepticism is China’s long record of broken promises on trade.

Second, especially strong skepticism is warranted about U.S. claims that any meaningful progress has been made on the so-called structural issues focused on from the very beginning by the Trump administration. For it as I’ve long argued, China’s government is so vast and secretive, and leaves such scanty written records of key decisions, that it will simply be impossible for the United States to monitor and enforce even the most promising Chinese commitments on intellectual property theft, technology extortion, discriminatory Chinese government procurement, and Beijing subsidies that shaft U.S.-owned and other foreign businesses vis-a-vis their Chinese rivals.

Third, even if China currently means to keep its alleged promises to binge buy American agricultural products, any number of external events could upset the apple cart. They include the Hong Kong picture becoming uglier (its becoming prettier can’t be totally ruled out, but seems highly unlikely); new Chinese crackdowns on other protests that may emerge (especially among the Uighur Muslim population) or revelations of new Chinese atrocities against the Uighurs or other minorities or other protesters; more attempted Chinese bullying of high-profile U.S. businesses like the National Basketball Association; a major flare-up of tensions over Taiwan or China’s aggressive moves in the South China Sea; a step forward in the Huawei case that increases the chances that the CFO daughter of the founder of this Chinese telecommunications giant will be extradited to the United States from Canada for sanctions-busting; and Chinese moves that persuade Washington that Beijing has no intention of keeping its perceived agriculture or other promises.

Moreover, the longer China takes to ramp up its buys from American farmers, the greater the potential for these kinds of shocks to bring this “Phase One” agreement crashing down.

Fourth, the less impressive the “mini-deal” keeps looking, the more convincing my view that its apparent modesty reflects President Trump’s belief that his domestic political position has weakened significantly – both because of the new impeachment threat and signs of an economic slowdown.

It’s true that Treasury Secretary Steven Mnuchin has suggested that if the deal hasn’t been finalized by December 15, the Trump administration will go ahead with a previously vowed 15 percent increase on $156 billion worth of levies on Chinese imports. But that’s anything but a concrete threat. In addition, it’s important to note this report suggesting (the specifics are really sloppily described) that China wants the sequencing to work in the opposite way:  First, tariffs get rolled back (or frozen in place?), then the agriculture buys begin. 

Moreover, no one in the administration has said anything about reversing its Phase One-related decision to suspend a big tariff increase (to up to a formidable 30 percent on some products) previously announced to begin on October 15. So even though U.S. duties on some $360 billion worth of Chinese goods would still remain in place if China blows Mr. Trump off, there’s a real chance that Beijing won’t incur any further punishment – doubtless because the President believes that tariffs above and beyond current levels and coverage could panic investors again and further soften economic growth.

Some kind of blow-up in Hong Kong or elsewhere could yet change Mr. Trump’s calculations. But the more important point so far is that events, not the President, are now in charge of the trade talks track of his China policy.

Fifth, at the same time, none of the above means that the United States is devoid of leverage versus China and in particular the kind of clout that can keep advancing its economic as well as closely related technology and national security interests, and this is where a second, arguably more important, track of the Trump China policies needs to be remembered. As I’ve written, the President has sought not only to end the threat of China’s economic predation by forcing Chinese policy changes through tariff pressure. Although he rarely speaks of it, he’s also been trying to repel Chinese threats to U.S. security and prosperity through a series of unilateral measures aimed at decoupling the United States from China economically.

By crimping trade, investment, and technology flows, these decoupling steps are reducing America’s vulnerability to China by significantly reducing the access to the U.S. market so crucial to the success of China’s advanced industries; by shrinking the footprint of China’s state-controlled economy in America’s largely free market system; and by cutting off a Chinese tech sector that could be become highly dangerous from critical supplies of U.S. components.

Decoupling has also been advanced by those tariffs so far imposed on $360 billion worth of Chinese products (amounting to nearly 86 percent of all goods imports from China last year). They haven’t done much to achieve their stated aim of improving China’s behavior, but they have decreased China’s importance to the U.S. economy by prompting an exodus of global manufacturing supply chains out of the People’s Republic.

Further, the Trump decoupling campaign has also helped awaken many foreign governments to the China tech and broader economic threat – though because so many other countries (including major American treaty allies), were profiting so handsomely from the pre-Trump globalization status quo, progress on this front has been uneven and disappointing. (See here for why Germany, for example is so conflicted.) 

Sixth and finally, one major set of actors in this drama, though, hasn’t been very woke on China issues:  most of the Democratic presidential candidates. Sure, many have supported a policy of “doing something” on China (though rarely involving tariffs – or any other concrete measures). But so far, none seems to view China’s multi-dimensional challenge to America as a major concern – and all the top-tier contenders and most others now support impeaching the President. 

Consequently, they could greatly strengthen not only Mr. Trump’s position, but the American position, with firm declarations in tonight’s debate that China will stay squarely in Washington’s cross-hairs if they win the White House, and that therefore there’s no point in stonewalling in hopes of easier post-2020 U.S. policies. Not that any confidence looks well founded that any of them will.        

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(What’s Left of) Our Economy: What the Mini-Deal Says About Trump’s China Policy

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agriculture, business investment, censorship, China, decoupling, democracy, Democrats, election 2020, Elizabeth Warren, Hong Kong, Hong Kong protests, human rights, impeachment, Populism, Republicans, tariffs, Trade, trade talks, trade war, Trump, Uighurs, Ukraine, Ukraine Scandal, {What's Left of) Our Economy

The “Phase One” min-deal reached by the United States and China tamping down bilateral trade tensions for the moment, speaks volumes about the three major forces that are now driving President Trump’s China policy, and that will keep shaping it through the next U.S. election – though not always in consistent ways. They are:

>the President’s evident belief that his reelection hopes are being threatened mainly by revived impeachment threats but also by an economic slowdown that has unmistakably been influenced by the so-called trade war with China;

>his consequently increased need for political support from the establishment Republicans so numerous in Congress who have never boarded the Trump Tariff Train and who are worried about their own reelection chances next year; and

>Mr. Trump’s consistent (though generally unstated) belief that no matter how the formal trade talks proceed, America’s national security as well as economic interests require the U.S. economy to continue steadily decoupling from China’s.

The strength of the impeachment drive faced by the president is now indisputable. Some polls are even showing growing Republican support for not only impeachment by the House but removal by the Senate. Moreover, this political challenge comes at a time when the President’s strongest suit by far (at least according to polls) – his economic policy record – is looking somewhat weaker.

Few signs point to a recession breaking out by Election Day, much less during the preceding weeks or months. But growth has been slowing to levels that Mr. Trump himself has deemed unacceptable – in no small measure because they were the rates that prevailed for most of the Obama administration.

The tariff-heavy Trump trade policies hardly deserve all the blame. (See, e.g., this recent post.) But the failure of business investment to stay elevated following passage of major tax cuts for business is especially telling. It buttresses claims that both the President’s various sets of tariffs and the inconsistency with which they’ve been both threatened and applied have inhibited companies from approving big new expenditures on new factories and other facilities.

As a result, nothing that can reasonably be expected from Washington (in other words, ruling out a big infrastructure spending bill) is likelier to boost the economy more than a nerve-calming trade truce with China mainly featuring some Chinese market opening or re-opening (especially for agricultural products) in return for some U.S. tariff cuts, promises to refrain from new levies, or some some combination of such moves. At the least, such an agreement would in theory help growth maintain the momentum it has remaining.

A mini-deal along these lines would also please the Senate Republicans who might ultimately judge the President’s fate, and who generally have lagged far behind the GOP base in turning against pre-Trump China and broader trade policies. Moreover, as I’ve written, impeachment politics have greatly magnified their sway over Mr. Trump before. Despite his sky-high popularity with Republican voters, the President was heavily dependent on their political backing until this spring in order to neutralize any impeachment chances while his Russia ties were being investigated. That’s surely why his early policy initiatives were dominated by traditional Republican priorities, like tax cuts and repeal of former President Barack Obama’s healthcare overhaul, rather than by populist priorities like an infrastructure bill and the prompt imposition to tariffs.

Once the Special Counsel and other investigations flopped for various reasons, Mr. Trump had a much freer hand. But because of the emergence of “UkraineGate,” for now, those days are over. Probes growing out of those events are certain to last for months. Therefore, continued, much less higher, tariffs on China that could further drag on the economy and further frustrate the rural constituencies so crucial to the President and many other Republicans seem out of the question.

The President is so hamstrung that he’s been unable to marshal greater public support for staying the tariff course even though China is antagonizing American public opinion with its harsh suppression of the Hong Kong protests and the Muslim Uighur minority, and with its heavy handed efforts to extend its censorship practices to the National Basketball Association and other U.S. businesses. And don’t forget: These developments have placed China in a much weaker position, too.  

One reason that the President hasn’t been able to capitalize could well be his reluctance to declare publicly the functional equivalent of economic war, or his intent to decouple – presumably because any such statements would prompt the Chinese to crack down even further on American companies even doing business in the PRC that have nothing to do with job and production offshoring aimed at serving the U.S. market from super-cheap and highly subsidized Chinese facilities, as opposed to serving Chinese customers. And that reasoning has been entirely understandable.

Much less understandable – the President’s insistence that a trade war with China would be easy to win and inflict no economic harm on Americans, rather than choosing to challenge his compatriots to endure some sacrifices in order to beat back a mortal threat to their national security as well as prosperity. No wonder public support for so-called hard-line policies remotely strong enough to offset the opposition and reservations of the Congressional Republicans and most Democratic politicians is nowhere to be seen.

And don’t doubt that the Chinese fully understand. Whatever problems they initially experienced in figuring Mr. Trump out, they surely have concluded that they’re best advised to play the waiting game on the broader and deeper so-called structural issues dividing the two countries (e.g., intellectual property theft, technology extortion, massive subsidies) until the President is replaced by a Democrat who’s much easier to deal with.

Indeed, the evidence for this conclusion is abundant. China issues have played a small role in the Democratic primary campaign so far – even when it comes to long-time critics of pre-Trump trade policies like Democratic Socialist Vermont Senator Bernie Sanders, and Massachusetts Senator Elizabeth Warren. One likely explanation: In recent years, Democratic voters and leaners have markedly flipped on those pre-Trump approaches, from deep dislike to general approval. This shift in public opinion (matched in part by a trade flip in the other direction among Republicans and leaners) may also warrant some Chinese confidence that even a President Warren might prove a more acceptable interlocutor than Mr. Trump.

Nonetheless, the formal talks are not the only track on which the Trump administration’s China trade policies are running. And the other track – featuring unilateral U.S. moves to restrict Chinese involvement in the American economy, and thereby foster decoupling – is much less controversial than the trade talks and especially the tariffs and tariff threats clearly required to spur any meaningful progress.

Highly revealing on this score (in terms of the importance attached in Washington to decoupling): Even as a high level Chinese delegation was jetting to Washington, the President approved actions against Chinese tech companies and Chinese officials that were justified by human rights concerns, but that in the first case clearly advanced decoupling. Just as revealing (in terms of possible Chinese acceptance of a more skeptical new bipartisan U.S. consensus on China policy): Despite the provocative timing, the Chinese didn’t turn around and head back home once they heard the announcement.

Reinforcing the new American consensus on decoupling has unmistakably been the growing realization by the U.S. corporate sector that its heavy bets on China have dangerously increased its vulnerability not only to the whims of American politics, but to a Chinese regime that’s turned out to be much less hospitable than expected. As a result, “Phase One” is not only a suspiciously convenient-looking term being used by the President to describe his new deal. It also looks suitable for describing where his administration’s overall China policy stands right now.     

(What’s Left of) Our Economy: The Real Deal with that U.S.-China Decoupling

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China, decoupling, national security, tariffs, Trade, trade war, Trump, {What's Left of) Our Economy

“Decoupling” is a word that’s started to pervade news reports and commentary about the U.S.-China trade war. And it’s even at long last been mentioned as a possible goal by President Trump. So this seems like a good time to explain what it really means, and why it’s strongly in both American economic and security interests.

Simply put, decoupling refers to the idea (which I’ve strongly endorsed) that the United States should start disengaging from the Chinese economy. It’s based on the conviction that the closer bilateral commercial ties that have developed between the two countries since China’s economic reform efforts began in the mid-1980s – and that have been avidly sought by U.S. Presidents and lawmakers from both major political parties – have backfired disastrously. They’ve not only greatly strengthened the military power of an increasingly belligerent dictatorship. They’ve also needlessly damaged America’s domestic “real economy” (the businesses and their employees that produce everyday goods and services in the United States – as opposed to the fortunes of the multinational corporations that make goods in China, and of the American financial sector).

In addition, as I’ve explained, major economists have written (albeit in veiled terms) that the grossly lopsided nature of U.S.-China trade and consequently capital flows helped set the stage for the near-global economic meltdown experienced in 2007 and 2008, and the ensuing worst economic downturn suffered by Americans since the Great Depression of the 1930s.

Of course, it would be great if Washington and Beijing could reach a trade deal that solved all these problems, or even greatly mitigated them. But as I’ve also explained, verification problems render this goal impossible. China’s record of violating agreements is simply too long, and its government (including the state-owned and controlled entities that dominate China’s economy) is simply too big and too secretive to warrant any realistic hope that Chinese compliance could be monitored effectively.

So since decades of experience now demonstrate overall that mutually beneficial trade and investment with China simply isn’t possible – at least under this regime in Beijing – the only logical alternative is to start loosening ties. Just as important, as I’ve documented, decoupling has already begun and proceeded to a noteworthy extent.

As a result, the questions before American leaders now entail how much further such disengagement should continue, where it should be actively encouraged, and where – if any place – American policy should try to slow it down or at least try to preserve the status quo.

One of the big arguments against decoupling holds that American businesses (and their employers) can’t afford to deemphasize China because its own domestic market has become so enormous, and because growth potential remains considerable. A related point: China boasts manufacturing strengths for which companies that produce in China for its own or foreign markets (including America’s) simply can’t find adequate substitutes.

But these claims overlook some crucial realities about U.S.-China trade. For example, few U.S.-based businesses export from the United States to the Chinese consumer market. After all, it’s been decades since consumer goods have represented domestic U.S. manufacturing’s strong point, and those firms that remain prominent in the field have long been supplying the Chinese market mainly from China itself.

Moreover, other major exceptions to this rule (like Boeing wide-body airliners, and advanced semiconductors) sell the Chinese products China simply can’t yet make itself. That’s why such aircraft haven’t been tariff-ed by Beijing – and won’t be for the foreseeable future. And even though the Chinese could in principle replace their Boeing purchases by buying from Europe’s Airbus, the result would be complete Chinese dependence on a single source for this crucial product – a situation China rightly seems determined to avoid.

Motor vehicles, interestingly, are another major American consumer export to China – and the PRC is now the world’s largest automotive market as well as the top customer for General Motors and the second biggest for Ford in terms of vehicles sold. But if you look at these firms’ financial statements, you see that the former makes little money in China, and Ford is actually operating at a loss.

Just as important, U.S. and other foreign automotive manufacturers urgently need to come to grips with China’s ultimate intentions – not to remain dependent on non-Chinese products and services one moment longer than necessary. That’s why China remains such a huge extorter and outright thief of intellectual property. Its national business model is to welcome foreign capital in sectors where China has an inadequate presence, use the funds to create one, strong-arm or steal the knowhow to get up to foreign standards, and then spit out non-Chinese firms ASAP.

And China’s apparent rationale (so far) has looked completely reasonable. The country represents one-sixth of humanity, it’s full of smart people. Why should it rely on foreign supplies of anything longer than necessary? Even better – foreign firms and governments, including pre-Trump America’s have seemed all too willing to help out.

As for the tech companies, national security now clearly means that the United States can no longer afford to enable them to supply Chinese entities like telecoms giant Huawei with the chips needed to run their systems. So it’s time to tighten their ties with leading non-Chinese competitors like Nokia and Ericsson, and over the longer term, pitch in and make sure that there’s a major U.S. presence in such internet and global communications markets once again.

Moreover, no one should be deterred by warnings that such decoupling would fracture the global internet. China’s censorship and privacy-threatening practices have already made that outcome inevitable – at least if American leaders take free speech and privacy concerns seriously. And if other countries want to cast their lot with the Chinese, and expose their populations to these Chinese threats, good riddance and good luck to them. They were never likely to be reliable customers for U.S.-based companies anyway.

It’s also necessary to debunk the anti-decoupling claim that the tech companies, and especially the semiconductor manufacturers, earn most of their global profits in China, and as a result would face disaster if much more decoupling takes place. The basis of this claim is the outsized share of their global profits these firms book in China. But an accounting illusion is at work here.

The tech firms book profits in China whenever they sell a computer chip (often assembled, packaged, and tested in China) other product to a China-based assembly plant for computers or smartphones, etc. And the scale of these recorded profits results of course from China’s current dominance of global electronics product assembly. But in a large percentage of cases, the final demand for these goods isn’t China – it’s overseas. And much of that demand of course is American. That’s why more than half of the semiconductors China buys from overseas (including from U.S.-based facilities) get re-exported as parts of final products.

Clearly, the Chinese themselves buy lots of these consumer electronics, too. But their importance is just as clearly overestimated, and as long as firms like Intel and Qualcomm keep making products the Chinese can’t match, their China-based so-called back end semiconductor operations should remain viable.  In that vein, they’d have better odds of preserving their competitive positions if they stopped voluntarily transferring technology and even investing in Chinese-owned tech entities. And even if Mr. Trump’s tariffs help shift much electronics assembly out of China, those operations will still need U.S.-brand insides.

The anti-decouplers are right to argue that both U.S. consumers and businesses still rely on huge flows of low-cost imports of China to help stretch their paychecks and to maintain their global competitiveness. But although China’s ability to produce shoes and toys and clothing and consumer electronics remains peerless, and will not be duplicated easily or immediately elsewhere, that’s no reason to believe that China’s advantages will endure indefinitely.

As widely reported, companies in these industries are already leaving, or planning to leave, China in substantial numbers. Yes, bottlenecks have emerged in alternative production platforms like Vietnam. But if what most Americans believe about economics is true, the new demand will create its own supply – and the businesses involved will have plenty of incentive to make the shifts as quickly as possible.

Even better, decoupling could help Americans solve the pressing problems they face from the economic woes of their hemispheric neighbors. As I’ve written, flows of illegal aliens and drugs could be staunched if the United States prioritized regionalizing its trade arrangements and overhauling the North American Free Trade Agreement (NAFTA) even further to turn North America (including Central America) into a trade bloc – thereby fostering more job creation, development, and prosperity generally.

The role played by Chinese parts, components, and materials in American domestic manufacturing, meanwhile, has been seriously misunderstood. First, since many of these products are fairly capital- and technology-intensive, they’re goods in which domestic producers should be fully competitive, and would be but for massive Chinese government subsidies that depress the China price. Offsetting these subsidies with trade curbs, therefore, would create a huge new opportunity to supercharge domestic American manufacturing and employment.

Second, there’s evidence that the widespread use of these Chinese intermediates is exacting a big long-term cost on U.S.-based manufacturing, by knee-capping its productivity growth. For as I’ve shown, the productivity data indicate that the widespread availability of these artificially cheap products has undermined domestic firms’ incentives to increase their efficiency by developing new and better products and especially processes.

Finally, Chinese direct investment plays a similarly distorting role in the American economy by permitting the presence of government-owned or controlled entities that simply aren’t responsive to pricing signals. If Americans really believe that markets, and their entire economy, work best when participants enjoy the maximum freedom to discover prices and thereby create the optimal terms for competition, a big Chinese footprint is the last thing they should want. And because the United States is having no problem creating its own capital or attracting it elsewhere from abroad, this Chinese presence clearly isn’t needed. It should, additionally, go without saying that any Chinese investment in any U.S. tech or advanced manufacturing companies should be verboten for national security reasons alone.

None of this is to say that U.S.-China decoupling can or should be complete. In fact, the success of Starbucks and, more recently, Costco in China indicate that American consumer companies will continue doing well in the PRC as long as they maintain strong brands (although a Chinese rival is challenging the former). And short-term costs are inevitable when disruption of an immense bilateral economic relationship is on the table. 

But the verdict has long been in: Greater U.S. engagement with the Chinese economy has failed on an epic scale for American prosperity and national security. If the United States wants to avoid the ever greater dangers of continuing endlessly down this road, President Trump should treat decoupling as his top China economic policy priority.         

Our So-Called Foreign Policy: Putting the “Dip” in U.S. Diplomacy

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bailouts, Brazil, China, China meltdown, China stock markets, CNN, Congress, coupling, decoupling, Denise Labott, emerging markets, Exim, Export-Import Bank, export-led growth, free trade agreements, global leadership, Hillary Clinton, IMF, International Monetary Fund, international organizations, Iran, Iran deal, Jackie Calmes, Obama, Our So-Called Foreign Policy, Russia, The New York Times, TPP, Trans-Pacific Partnership, Wendy Sherman

It was unintentional to be sure, but the establishment media should get some credit for providing the following two reminders of how positively dippy American foreign policy, and the analysis of this diplomacy, has become.

The latest came just yesterday, in New York Times correspondent Jackie Calmes’ article titled “I.M.F. Breakthrough Is Seen to Bolster U.S. on World Stage.” And in the likely case that Calmes isn’t responsible for the headline, the thrust of the piece is clear from the lead paragraph:

“A string of agreements between the White House and Congress, capped by last month’s surprise accord that ended a five-year impasse over the International Monetary Fund [IMF] has eased, though not dispelled, concern that America is retreating from global economic leadership.”

I’ve already explained here and here (among other places) why Calmes decision to include on this list Mr. Obama’s Trans-Pacific Partnership trade deal and Congress’ decision to restore to life the Export-Import Bank makes no sense. So I’ll concentrate on the development she focuses on: Congress’ agreement to approve reform of the International Monetary Fund that grants more voting power to so-called “emerging market” (EM) countries like Russia, India, and especially China.

The IMF decision itself is idiotic enough. The rationale – supported by virtually every other member of the Fund – has been that these countries represent the rising powers in the global economic system, and therefore deserve more clout in one of the international organizations charged with overseeing this system. The trouble is, these countries’ wherewithal was greatly exaggerated even when they were growing strongly. The main reason is that their growth depended heavily on exporting to wealthier countries like the United States.

They’re still largely export-dependent, but rather than global growth leaders, they’ve become global growth laggards. Brazil, for example, is facing the prospect of its worst recession in more than a century. On top of its geopolitical trouble-making, Russia’s an economic mess. And China looks not only to be slowing dramatically, but completely incompetent in regulating its financial markets (not to mention its own aggressive regional moves). Even acknowledging that the United States, the European Union countries, and Japan haven’t been economic standouts either for many years, what’s the merit case now for augmenting these countries’ international influence?

But Calmes’ thesis is inane on many more fundamental levels, too. Chiefly, it parrots a series of commonplaces that, though endlessly repeated by mainstream foreign policy analysts and the politicians that bewilderingly still listen to them, keep undermining the effectiveness of American diplomacy. They start with the idea that the IMF, or any other international organization, has counted for much in world affairs. These institutions are logistically useful in providing fora (i.e., “buildings”) in which leading powers that communicate, negotiate, and otherwise deal with each other. But they have no autonomous ability to affect the course of events.

The Fund is often seen as an exception even by avowedly realist thinkers who normally take a dim view of international organizations, but contrary to Calmes’ claim, it per se has never served as “an international lender of last resort to foster global stability.” After all, it has no capacity to create wealth or other resources. In the last analysis, its lending function has always been carried out by the United States and the other major powers, who have used the Fund as a conduit. For two decades starting in the 1970s, the Fund addressed a series of financial crises in developing countries with a series of bailouts (again, financed ultimately by its members) that were conditioned on economic reform programs. But even the Fund’s staff now acknowledges that much of the advice it dispensed was lousy.

And since institutions like the Fund don’t serve as significant force multipliers for strong, wealthy countries like the United States, they’re anything but indispensable for American world leadership, economic or otherwise. As with the case of all countries aspiring to this goal, that flows from America’s own capabilities. Indeed, given America’s still crucial role as the world’s market and consumer of last resort, we’ll know that its economic leadership is at risk when its trade partners figure out another way to grow adequately.

Finally, there’s the question of whether the United States needs world leadership in the first place. I’ve explained in detail why a country this strong, wealthy, and geographically secure can remain more-than-adequately safe and prosperous even in a deeply troubled world. Indeed, America’s matchless capacity for self-sufficiency nowadays argues for less of what foreign policy types call world leadership by Washington – and therefore less exposure to the world’s woes – not more. I’m not saying that these views are beyond criticism. I am saying that they were worth debating even during the Cold War, they’re worth debating more now, and it’s dismaying that no one relying on Calmes or her Mainstream Media counterparts for their news in 2016 would have a clue that it’s not still 1956 strategically.

The second example of foreign policy dippiness came during the summer, from CNN’s Denise Labott’s August profile of Wendy Sherman, the chief staff-level U.S. negotiator of the nuclear weapons deal signed with Iran. Although I’m not enthusiastic about the agreement, I still view it as the best possible option available to America to keep Iran bomb-free short of military strikes. My confidence, however, has definitely been shaken having read Labott’s cheery revelation that “Her first career as a social worker and community organizer may seem like odd training for nuclear negotiations. But Sherman said she actually drew upon those experiences with her Iranian counterparts.”

Continued Labott : “Her ‘caseload’ may be more global, but she said the work is similar — involving the complex relationship and budding detente between Washington and Tehran, as well as managing a series of clients both inside and outside the meeting room.

“‘That skill set came in handy,’ she said. ‘You have to see all the parts in front of you. You really learn how to understand people.'”

Meaning no disrespect for the profession, but I can’t think of a background less suitable than social work for dealing with regimes like Iran’s (or North Korea’s – which was a Sherman responsibility under former President Clinton). Unless you think that the ruthless mullahs in Tehran or the arguably sociopathic leadership in Pyongyang have anything in common with a troubled American individual or family? And that the assignment is providing relief?

From another standpoint, social work and comparable activity are defined by enhancing a client’s well-being. Self-interest doesn’t even enter the picture. Is that how Sherman viewed her priorities? At least judging from this article, that’s how it seems. And Labott apparently considered this nothing less than delightful.

An optimist could finish Labott’s profile relieved that Sherman is now esconced in the academic world. A pessimist, though, could note that she’s a close confidante of her former Foggy Bottom superior, Hillary Clinton, and that she’s being talked about as a possible Secretary of State herself should the Democratic front-runner win the White House.

(What’s Left of) Our Economy: If Larry Summers Really Wanted to End Secular Stagnation….

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allies, Asian Infrastructure Investment Bank, Ben Bernanke, China, decoupling, emerging markets, Financial Crisis, Global Imbalances, globalization, Great Recession, International Monetary Fund, international organizations, Larry Summers, secular stagnation, World Trade Organization, {What's Left of) Our Economy

Former chief Obama economic advisor & Clinton Treasury Secretary Larry Summers has almost uniquely come quite a way in analyzing the major problems caused for the American economy by U.S. trade and other globalization policies. But the latest of his widely syndicated newspaper columns shows that in the most crucial respects, he has a long way to go, suggesting that the rest of the America’s economic policy establishment undoubtedly has even more rethinking to do.

Once a prominent champion of trade deals that have needlessly sent so much of the nation’s productive economy overseas, Summers has had at least two important second thoughts. Lately, he’s been pushing the idea that an American economy unquestionably shaped by Washington’s international economic policies is suffering from “secular stagnation.” This malady is defined as an inability to grow adequately without inflating dangerous financial bubbles. Although Summers doesn’t blame America’s recent approach to the international economy, it’s an especially striking indictment given how significant the globalization strategies he favored were supposed to be in shaping the country’s economic future – not to mention how much triumphalism they fostered.

In addition, as I’ve reported, Summers now agrees that unless it responds effectively to currency manipulation by foreign governments, proposed U.S. trade agreements like the Trans-Pacific Partnership could be more bane than boon for America.

His newest offering adds another useful insight: Too many participants on both sides of the debate on trade and globalization policies are neglecting the needs of the middle and working classes in the United States and other industrialized countries. As he writes:

“It sometimes seems that the prevailing global agenda combines elite concerns about matters such as intellectual property, investment protection and regulatory harmonisation with moral concerns about global poverty and posterity, while offering little to those in the middle.”

Summers strangely adds “rising urban populations” in developing countries to the list of overlooked constituencies, but I fully agree with his claim that approaches that remain so blinkered “are unlikely to work out well in the long run.”

But the larger point made by Summers here shows that he remains utterly clueless as to the real dangers created by U.S. trade failures. Indeed, his proposed solutions would make matters far worse. According to Summers – who’s now back teaching at Harvard – China’s successful creation of a new infrastructure financing bank over American objections shows that “This past month may be remembered as the moment the United States lost its role as the underwriter of the global economic system.” Consequently, “a comprehensive review of the US approach to global economics is urgently needed.”

As Summers sees it, the United States must reestablish its bona fides for global economic leadership by encouraging, not resisting, the creation of a “new global economic architecture” that reflects the rise of China and other emerging market countries; and by subordinating itself to the same international rules that it insists others obey.

I have my doubts as to whether an objective as gauzy as “global economic leadership” deserves any priority in Washington – if it’s defined, as Summers seems to, as the ability to steer the world economy toward goals that would benefit all countries. Not that I object in principal to win-win global outcomes.  But where’s the evidence that even America’s allies are interested in anything more than free-riding on U.S. economic largesse, and in continuing to grow mainly by wracking up trade surpluses with the United States? China and the rest of the so-called emerging world, more growth-starved than ever these days because their own economies are slowing dramatically, are even further off the reservation.  

Moreover, as dreary as its performance has been since the financial crisis struck, the U.S. economy has been the world’s pace-setter among industrialized countries and it’s outgrown even many developing countries. Combined with its still decent outlook amid a weakening international recovery, this development keeps strengthening the case that the United States is “decoupling” from the rest of the world – and by extension, that any form of leadership is less and less necessary.  

But if I did value leadership, I’d be mindful, unlike Summers, that the only dependable foundation for this role is the kind of unquestionably superior economic and financial strength that the United States has spent nearly a quarter century squandering – largely through offshoring-friendly trade policies. This kind of predominance is essential either to lead through historically traditional muscle-flexing, or to lead in line with Summers’ conception – which happens to have been Washington’s general approach for most of the post-World War II period – by providing “public goods,” like wide, asymmetrically open import markets and lots of liquidity. Without such a margin of superiority, Leadership Version Number One will be all too easy to resist, and Leadership Version Number Two will founder for the very reasons it’s failed since the early 1970s – its over-magnanimity will degrade its material basis.

Further, as I’ve argued here, giving developing countries – especially China – more authority in international institutions is bound to deepen the economic woes faced by not only America, but by the entire world. For it will strengthening the forces of the secular stagnation that so alarms Summers. After all, in their understandable but shortsighted determination to grow at all costs, these countries will surely use organizations like the International Monetary Fund like they’ve used the World Trade Organization.  They’ll enable ever more economic free-riding, mainly by curbing Washington’s ability to respond. The inevitable result will be ever more third world export-led growth at the expense of America’s manufacturing base, and a deepening need for U.S. leaders to sustain phony prosperity through easy money.

As a result, even more ominously, this Summers strategy will contribute to fueling the kinds of global imbalances that triggered the last financial crisis, ensuing Great Recession, and current feeble recovery.

The lessons couldn’t be more clear. Whether you favor a broader or narrower view of U.S. leadership, there’s no substitute for rebuilding American wealth and power. And if you’re interested in creating a global economy that’s more stable, less crisis-prone, and better positioned to foster the greatest prosperity for all countries over the longest run, an America capable of administering some tough love, and of course wise enough to do so, is your very best bet as well.  

By the way, Summers, former Fed Chairman Ben Bernanke, and many other leading economists have been engaged in a vigorous blogging debate over both the global and domestic implications of secular expansion, and the related issue of whether the notion is valid to begin with.  Although they and the commentary they’ve inspired has generally ignored this dimension, these new writings bear strongly on the trade deals Congress is evaluating, and I’ll put my two cents in as soon as I digest their analyses.

 

(What’s Left of) Our Economy: Have Americans Lost too Much Confidence?

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autarky, China, confidence, decoupling, foreign policy, Gallup, global leadership, national security, public opinion, Trade, {What's Left of) Our Economy

A new Gallup poll on how Americans perceive their country’s position in the world economy can be summed up with the classic “good news/bad news” formula, but encouragingly, the former outweighed the latter. At the same time, for anyone believing that major changes are needed in the nation’s approach to the world, the results are much more mixed.

First, the encouraging data – the latest survey showed the highest share of Americans believing “that it’s important for the United States to be No. 1 in the world economically” since the firm started studying the matter in 1993. This year’s 50 percent level easily beat the low point of 39 percent recorded in 2007 – when the last such poll was taken. Recall that 2007 was a year when major housing market problems had become apparent, but that the last recession officially began only at its very end. In 1993, 46 percent of the public considered global economic leadership important.

At the same time, 49 percent regarded “being No. 1” as “not that important, as long as the U.S. is among the leading economic powers.” The share of respondents offering that answer not surprisingly peaked in 2007 (at 60 percent). In 1993, 53 percent of respondents downplayed the importance of unquestioned number one world economic status.

The Gallup results also reveal a wide recent political gap on this question, with Republicans this year much more likely (64 percent) to emphasize top dog status economically than independents (48 percent) or Democrats (41 percent). Yet the changes over time are at least as interesting. Back in 1993, majorities of none of these groups prized their country being the world’s top economy. Views began diverging notably right around 2000, with the biggest changes being the steady surge starting that year of Republicans valuing America as number one economically. Independents grew less likely to value this status through 2007, but since then, their valuation of global leadership has jumped from 29 percent to 48 percent. Democrats’ views on the issue have changed least, varying between 49 percent viewing such leadership as important in 1993, and 38 percent agreeing with the proposition in 2007. Since 2000, the Democratic numbers have remained virtually unchanged.

Less encouraging – in part because it’s simply not tracking with the facts – is how Americans have viewed their economy’s actual standing in the world. Since 2010, only 17 percent of total Gallup respondents have considered the United States as the world’s leading economy, and since the firm began asking this question, the share believing that the nation held this status has peaked at only 40 percent, around 2000. During the 1990s – or at least starting in 1993 – popular belief in America as the world economic leader grew steadily from the 21 percent level.

In other words, according to Gallup, Americans don’t recognize that, in the last few years, the U.S. economy has outperformed most major competitors by most measures. Indeed, in separate results, China has been credited with world economic leadership. Because there’s no question that China has narrowed the gap with America dramatically since its economic reforms began roughly three decades ago, it seems clear that changes in global rankings – especially related to China – have made powerful impressions on U.S. public opinion. Going forward, I’ll be interested to see whether and how greatly American awareness of China’s mounting list of economic troubles grows – and how it compares with judgments about America’s own fortunes.

Overall, it’s heartening to see Americans increasingly appreciating the importance of world economic leadership – especially given their leaders’ continuing determination to define the nation’s security interests in practically limitless, and indeed utopian, terms. There’s no one-to-one correlation between a country’s economic performance and its foreign policy record. But there’s no doubt that, especially over time, a country losing ground in not only growth but in innovation and productivity will be harder pressed to achieve ambitious security goals, especially in a world of strengthening rivals.

In fact, economic out-performance is especially important for a country with broadly representative government like the United States. In the absence of dire and prolonged national security threats and other emergencies, the public is unlikely to support needed defense budget levels unless domestic spending programs remain generously funded as well. A robustly growing economic pie, in other words, greatly eases the competition between guns and butter.

I’m less happy, however, with Americans’ apparent belief in their country’s current economic weakness, or at least ordinariness. Although the recovery’s future is far from guaranteed, the United States recently has been the best looking house on a block of shabby properties, and in national security terms, relative economic growth and performance is at least as important as absolute growth and performance. And despite new evidence that it will keep military spending levels strong, China’s economic momentum has unmistakably flagged, and it depends heavily on debt for growth. So the Gallup results indicate that Americans are significantly underestimating their country’s power and influence globally, or at least its potential, and overestimating the degree to which its prosperity depends on (or to use the fashionable lingo, is “coupled to”) prosperity abroad.

This seeming misjudgment could be troubling for reasons that, strangely, are diametrically opposed. First, a nation that shortchanges its capacities could falter unnecessarily in the face of security challenges or opportunities. And on the economic front, by wrongly viewing itself in a weak bargaining position, it could settle for needlessly adverse trade deals and other policy outcomes.

Just as important, the Gallup results indicate that Americans don’t even remotely recognize their country’s enormous potential for achieving security and prosperity at much lower levels of risk and vulnerability than those created by regnant strategies of deep global engagement in both spheres. Nor, as a result, do they understand the possibilities of economic and foreign policy approaches that simply seek to reduce risks and vulnerabilities, as opposed to the radical step of seeking substantial autarky.

Gallup speculates that until the financial crisis struck, “Having been the world’s largest economy since the 1870s, Americans — at least in recent decades — may have taken their country’s leading economic stature for granted.” Gallup adds that, as other powers have risen, notably in the developing world, “Americans have begun to value being the world’s dominant economic power more highly.”

That sounds positive, because although Gallup provides no insights as to why economic preeminence is prized, its numbers suggest that the public is focused on its tangible benefits, not intangibles like bragging rights. At the same time, the poll also indicates that, since the admittedly subpar American recovery began, the public’s views of their country’s strengths and its policy implications have swung too far toward the opposite extreme.

(What’s Left of) Our Economy: Does Jack Lew Believe in America Decoupled?

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currency, decoupling, dollar, Financial Crisis, G-20, Global Imbalances, globalization, Jack Lew, recovery, TPP, TPP. Trans-Pacific Partnership, Trade, {What's Left of) Our Economy

Is the Obama administration starting to recognize that, contrary to decades of willful blindness and therefore needlessly counterproductive policies, the United States can do quite nicely economically without much help from the rest of the world? That’s surely an exaggeration. But some awfully suggestive clues can be found in Treasury Secretary Jack Lew’s testimony to Congress today.

At first glance, the relevant passages in Lew’s prepared remarks on President Obama’s new budget sounded like the longstanding conventional wisdom about America’s economic fate being inseparable from the world’s. The Financial Times certainly thought so, headlining its report on the House Ways and Means hearings, “US economy cannot go it alone, says Jack Lew.”

Dig deeper though, and you see how misleading (though not necessarily intentionally) the FT phrasing was. Lew decidedly did not say that America couldn’t go it alone because its own growth would falter without better growth abroad. He said that:

“While the recovery in the U.S. economy has helped to drive global growth, the rest of the world cannot depend on the United States to be the sole engine of growth.  At the recent G-20 meeting in Brisbane, there was agreement that more needs to be done to stimulate domestic demand around the world.  Our strength allows us to maintain our leadership in the global community, and while we must lead by example, we cannot do it alone.”  

The reference to the G-20 – a quasi-formal grouping of the world’s 20 largest economies – may have amounted to Lew simply repeating a longstanding American warning (which never seems to go beyond rhetoric) that the United States can’t long power global growth without producing the kinds of record economic imbalances that can lead to financial crises – and did so in 2008.  But Lew never referred to any of those considerations.

What’s left is a declaration by the Treasury Secretary that what the United States is unable to accomplish by itself isn’t sustaining its own recovery. In fact, in sync with President Obama’s assessment in his State of the Union address, Lew said that this recovery “appears” to be self-sustaining. The only remaining obstacle he mentioned was domestic – the lingering effects of recent Washington political gridlock. Instead, what’s left is a Lew statement that what America can’t do singlehandedly is stoke the rest of the world’s recovery.  At least by implication, he suggested that the U.S. economy has in fact become decoupled from the world economy.  

As I’ve written, given the nation’s immense wealth (both natural and human-made) and still-dynamism-friendly social structure and economic institutions, America’s capacity for such decoupling (i.e., domestic-based prosperity) has been staring policymakers in the face for its entire history, but has only been studiously ignored since the 1930s. Nowadays, it seems at least as strong as ever. Yet so far, globalist dogma still seems to be trumping the facts.

Thus the president’s policy continues taking a tack exactly opposite the one suggested by Lew’s words (assuming they were carefully chosen). Although the rest of the world is lagging America economically, Mr. Obama is working to tie the nation more closely to the slowpokes with the Trans-Pacific Partnership (TPP) and the rest of his trade policy agenda. Lew of course incongruously endorsed these measures as an “important component of our growth strategy.” In addition, there’s no sign that the administration is entertaining second thoughts about a thoroughly boneheaded decision reported by The New York Times last fall – to allow the dollar to keep rising against the currencies of America’s leading trade partners.

For a country believing itself to be tightly tied to growth elsewhere, this approach – which would enable other economies to trade their way to faster growth by ramping up sales to the United States while reducing their U.S. imports – at least embodies a certain logic. But for the country described today by Lew, the decision makes no sense – unless you believe that the U.S. economy is just strong enough to keep growing short-term without better global growth, but not strong enough to keep up the pace over any significant timespan.

Indeed, if this is their thinking, how do Lew and the president think they’ll continue even the current recovery’s lackluster pace if they wink at trade-and currency-related hits to growth? Are they counting on faster global recovery to kick in just in time? These would add up to one heckuva riverboat gamble.

So the burden of proof remains squarely with the optimists to show that some genuinely strategic lights are going on in the ranks of senior U.S. leaders. Conveniently, the upcoming TPP fight will be a genuinely momentous test. If the administration flunks – meaning that it finishes the deal and successfully steers it through Congress – the links between America’s economy and the world’s could grow broad and deep enough to ensure sluggish-at-best domestic growth for many more years.