(What’s Left of) Our Economy: U.S. Manufacturing’s Not Only Decoupling from China

Tags

737 Max, aircraft, Boeing, China, Commerce Department, decoupling, GDP-by-industry, manufacturing, output, Trade, Trade Deficits, {What's Left of) Our Economy

The Commerce Department’s GDP-by-Industry series is almost always overlooked by followers of the economy, and partly that’s the Commerce Department’s fault. Its updates are invariably a quarter behind, so it’s what analysts call a (seriously) lagging indicator that says relatively little about the more important question of what’s in store.

Nonetheless, even when they’re lagging, distinctive and detailed indicators can clarify long-term trends considerably, and that’s why I like GDP-by-Industry and track it so closely. Because it sheds lots of light on some of the most important economic and trade-related issues of the day – and especially on the impact of President Trump’s tariff-heavy policies. Specifically, the latest set of figures, which were issued January 9, reveal that during the Trump administration, the United States has continued to progress toward the worthy goal of reducing domestic manufacturing’s dependence on imports (and especially imports from increasingly hostile countries like China) for acceptable levels of growth. 

In other words, the People’s Republic isn’t the only country from which American manufacturing is decoupling. 

According to the new data, the latest year-on-quarter results show that between the third quarter of 2018 and the third quarter of 2019, U.S. manufacturing output (measured according to a gauge called gross value added) increased by 1.21 percent. That’s not much. But the manufacturing trade deficit during this period rose by only 2.55 percent. (Both figures are in pre-inflation dollars, because inflation-adjusted manufacturing trade figures aren’t available.)

Although this growth rate is lower than that achieved between the second quarter of 2018 and the second quarter of 2019 (2.03 percent), that figure was accompanied by a much faster increase in the manufacturing trade deficit (7.83 percent). The first quarter to first quarter results? Manufacturing production growth of 2.76 percent, and manufacturing trade deficit increase of 1.29 percent. That is, manufacturing output actually grew faster than the trade deficit. So from that standpoint, the third quarter result are disappointing.

They look even more disappointing when compared with the results from the first two years of the Trump administration. In 2017, manufacturing production also grew somewhat faster (3.99 percent) than the increase in manufacturing’s trade gap (3.16 percent), and in 2018, output grew much faster (6.23 percent to 3.96 percent).

These Trump presidency figures, in turn, have been much better than those reported for President Obama’s administration. Once the current economic recovery entered a normal phase (2011), the manufacturing trade deficit grew much faster than output ever year except for 2013.

So what’s the case for the latest third quarter 2018-third quarter 2019 figures representing continued progress? And why should anyone be happy with 1.21 percent annual manufacturing output growth no matter what’s happening on the trade deficit side?

Two answers suggest themselves. First, since the President began imposing tariffs in earnest (essentially, in April, 2018), importers have been “front-running” their purchases from abroad.  Their efforts to secure these deals before various sets of tariffs kicked in has produced several short-term distortions in the trade deficit in particular. Second, since the spring, Boeing’s safety woes have exerted a major drag both on domestic manufacturing output and on industry’s trade performance – since the aircraft giant has long been America’s leading exporting company.

Just one example of the difference Boeing has made: Between the third quarters of 2018 and 2019, the U.S. civilian aircraft trade surplus dropped from just under $10 billion to just under $6.5 billion. Civilian aircraft is of course the product category containing Boeing’s troubled 737 Max jet, and the plane was grounded worldwide, or banned from many national airspaces, starting in March.

The relationship between trade balances and production is never one-to-one, especially over relatively short time frames. And the matter becomes more complicated in sectors like aircraft, with its long lead times and generally large backlogs. But it’s difficult to believe that the 737 Max crisis and the narrowing of the aircraft trade surplus hasn’t impacted American civilian aircraft production and exports at all. (In fact, between those two quarters civilian aircraft exports, which are strongly related to output levels, sank by $2.75 billion, or nearly 22 percent.)

Moreover, for the purposes of comparing manufacturing output growth and the manufacturing’s trade deficit growth, the aircraft troubles are significant. Had the category’s trade performance simply remained the same between the third quarters of 2018 and 2019, the trade shortfall would have increased not by 2.55 percent, but 1.25 percent – less than half the rate. As result, during that period, manufacturing’s output (1.21 percent) and trade deficit would have grown at very nearly the same pace.

What does the future hold for this key ratio? On the one hand, civilian aircraft production is bound to decrease for the foreseeable future due to the 737 Max production halt announced by Boeing in mid-December. On the other, numerous signs indicate that industry overall has come out of the recession that dogged it for much of the last year and a half (and that by some output measures, never happened at all). Moreover, the Phase One trade deal signed by the United States and China last week could well reduce at least some of the tariff-related uncertainty that’s clearly slowed manufacturing-heavy capital spending decisions by American business in general, and certainly in manufacturing itself.

That looks like a modest case for domestic manufacturing continuing its longer term trend of becoming more self-sufficient while growing adequately – a development that makes major sense in a world that’s far more uncertain.

Making News: Podcast Now On-Line of a Trade Policy Debate with Obama’s Former Top Economic Advisor

Tags

Barack Obama, China, decoupling, Jason Furman, Jobs, Making News, manufacturing, metals tariffs, Munk Debates, tariffs, Trade, Trade Deficits, trade war, Trump, wages

I’m pleased to start off the New Year by announcing that a podcast is now on-line of a major debate over trade and globalization in which I participated in late this fall.  It was sponsored by Munk Debates – a series of policy exchanges that since 2008 have featured some of the world’s leading thinkers and policymakers in head-to-head events dealing with issues like the future of capitalism, the China threat, the rise of populism, and the emergence of political correctness.

I wasn’t crazy about the clickbait-y title (“Be it resolved, tariffs are terrific.”).  But I say “major” because my interlocutor was no less than Jason Furman, whose previous positions include chief economic advisor to former President Barack Obama. In addition to clashing over various individual on Trump tariffs (e.g., on metals), we also crossed verbal swords over the possibility and desirability of decoupling America’s economy from Chiina.

You can listen to the debate at this link, and given the importance of the subject and the prominence of my opponent, I’d be especially interested in your own reactions.

As usual, moreover, keep checking in with RealityChek for news of upcoming media appearances and other developments.

(What’s Left of) Our Economy: New Data Show Continued U.S.-China Decoupling & Broad Trade Performance Improvement

Tags

aircraft, Boeing, China, decoupling, exports, goods trade, imports, Made in Washington trade deficit, manufacturing, merchandise trade, tariffs, Trade, trade war, Trump, {What's Left of) Our Economy

With all the China trade war headlines in the news lately, the release this morning of the latest (for October) monthly U.S. trade data couldn’t be timelier. Indeed, one of the biggest takeaways from the results is that, as has been the case since the conflict began, the decoupling of the American and Chinese economies continues apace.

A second big takeaway: Boeing aircraft’s safety woes remain a major drag on domestic U.S. manufacturing’s trade performance and hence overall production (currently in mild recession) – and one having nothing to do with President Trump’s tariffs or foreign retaliation. 

And a third important conclusion:  Aside from the China trade account, the new report shows considerable improvement in some of the most important trade deficits run by the economy for decades.

One measure if decoupling is the humongous merchandise trade deficit the United States has run with China for so long. As of October, it’s down 14.60 percent year-to-date – even though the U.S. economy keeps growing. And in that vein, America’s overall non-oil goods trade deficit (the best global proxy for U.S.-China trade) rose by 4.04 percent during the same period.

The same trends are visible on the individual export and import sides, too. From January through October of this year, U.S. goods exports to China accounted for 7.13 percent of America’s worldwide total. For the comparable period last year, that figure was 8.22 percent. The analogous merchandise import figures were 19.78 percent and 23.28 percent.

Other highlights of the new monthly trade report:

>The combined goods and services trade deficit fell 7.63 percent sequentially in October, from a downwardly adjusted $51.10 billion to $47.20 billion. The October total is the lowest since May, 2018’s $44.35 billion. And the monthly drop was the biggest since January’s 12.61 percent.

>The downgrade of the September overall trade deficit was an unusually large 2.57 percent.

>The combined goods and services trade deficit is now running just 1.35 percent ahead of last year’s level. That’s a much slower rate of increase than the 13.89 percent rise between the two previous January-through-October periods.

>The overall trade deficit’s slower year-to-date increase was mainly the result of a dramatic decrease in the U.S. petroleum trade deficit – from $46.97 billion in the first ten months of 2018 to $13.93 billion between January and October of this year. That 70.34 percent nosedive contrasts with the aforementioned 4.04 percent increase in America’s non-oil goods trade deficit.

>At the same time, this “Made in Washington trade deficit” (so called because oil and services trade have little to do with the terms of U.S. trade agreements and other trade policy decisions) has been rising at a considerably slower pace this year (the aforementioned 4.04 percent rate) compared with last – when the January-through-October increase was 12.74 percent.

>Total U.S. exports dipped by 0.21 percent in October, from $207.55 billion to 207.12 billion – their lowest level since April’s $206.87 billion.

>Total U.S. exports are down 0.04 percent year-to-date – compared with a 7.45 percent rise between the preceding January-through-October period.

>”Made in Washington” exports are down 1.35 percent year-to-date, with October’s monthly $119.96 billion total the lowest since October, 2017’s $118.19 billion. Between the first ten months of 2017 and the first ten months of 2018, they grew by 5.98 percent.

>”Made in Washington” imports are up 0.55 percent year-to-date, with October’s monthly $187.54 billion total the lowest since November, 2017’s $186.99 billion. Between the first ten months of 2017 and the first ten months of 2018, they climbed by a much faster 8.26 percent.

>The also chronic and huge U.S. manufacturing trade deficit rose by 5.45 percent between September and October – from $87.91 billion to $92.70 billion. The increase followed two straight sequential declines.

>Manufactures exports in October improved by 5.03 percent, from $91.84 billion to $96.45 billion. But the much larger amount of manufactures imports increased by a faster 5.23 percent, from $179.75 billion to $189.15 billion.

>Year-to-date, the manufacturing trade deficit is up 2.76 percent, from $847.21 billion to $870.62 billion. That’s a much slower rate of increase than the 11.26 percent rise between January-through-October, 2017 and the same 2018 period.

>Interestingly, the safety woes of longtime manufacturing export superstar didn’t weigh heavily on the industry’s latest trade figures. Exports of civilian aircraft actually edged up sequentially in October – from $3.29 billion to $3.33 billion. Imports rose more, from $1.35 to $1.60 billion, but the result contributed only $210 million to the $4.79 billion monthly rise in the total manufacturing trade deficit.

>Longer term, though, it’s a much different story. For the first ten months of this year, civilian aircraft exports have decreased from $46.03 billion to $37.21 billion. Import, however, are up from $10.06 billion to 12.16 billion.

>As a result, the civilian aircraft trade surplus is down on a year-to-date basis from $35.97 billion to $27.15 billion. And this $8.82 billion drop-off represents 37.68 percent of the $23.41 billion worsening of the overall manufacturing trade balance so far from 2018 to 2019. Moreover, it’s a far cry from the days when the civilian aircraft sector was strengthening the U.S. manufacturing trade balance.

It’s true that when examining the improvement of trade performance on an absolute or relative basis, the economy’s growth rate has to be taken into account. In this vein, though, the rates of improvement are all significantly faster than the slowdown being experienced by the wider economy. That development doesn’t lend itself to pithy headlines (or catchy campaign slogans). But by any reasonable standard, it’s solid progress.

Those Stubborn Facts: Trade Deal or Not, U.S.-China Decoupling Continues

Tags

CFIUS, China, Committee on Foreign Investment in the United States, decoupling, FDI, foreign direct investment, national security, technology, Those Stubborn Facts

“The data [do] not identify the origin of the buyers who abandoned their investments. But attorneys who handle CFIUS [the U.S. inter-agency Committee on Foreign Investment in the United States] cases said many are probably Chinese companies caught in a Trump administration campaign to stymie their efforts to acquire sensitive U.S. technology.”

Share of proposed foreign buys of U.S. assets abandoned due to U.S. government “national security concerns,” recent years:

2014-16: 4-5 percent annually

2017: 14 percent

2018: 11 percent

(Source: “More foreign firms halted U.S. deals amid Trump administration scrutiny: report,” by Alexandra Alper, Reuters, November 22, 2019, https://www.reuters.com/article/us-usa-investment-trump/more-foreign-firms-halted-u-s-deals-amid-trump-administration-scrutiny-report-idUSKBN1XW1VJ)

(What’s Left of) Our Economy: (Inadequate) Establishment Progress on China Trade

Tags

China, decoupling, dual-use technologies, national security, reciprocity, Trade, Trade Deficits, trade war, Trump, World Trade Organization, WTO, {What's Left of) Our Economy

Normally, it’s bad news for anyone seeking a realistic, sustainable U.S.-China trade policy when a group like private “The U.S.-China Trade Policy Working Group” issues a statement outlining “a new framework for trade negotiations” out of concern that bilateral economic relations “have taken a very concerning turn.”

Such phrases usually signal that the group of supposed experts in question is going to “Blame America First” for the current trade war (albeit with token acknowledgments of problematic Chinese policies) and urge a return to a cosmetically altered pre-Trump status quo. A quintessential example is this July letter to the President and Members of Congress from “members of the scholarly, foreign policy, military and business communities, overwhelmingly from the United States, including many who have focused on Asia throughout our professional careers.” Pessimism seemed especially appropriate given that this latest Working Group is comprised of “economists and legal scholars from China and the United States,” since members from the PRC can be accurately seen only as mouthpieces for the dictators in Beijing.

So I’m as pleased as I am surprised to report that the Group’s October 18 statement reinforces the case for a Trump-ian turn in China policies in two important ways. First, it made clear that, contrary to the economic conventional wisdom, lopsided U.S.-China trade flows (i.e., U.S. trade deficits) are an important, legitimate concern for Americans and their leaders. Second, it echoed increasingly common criticisms that the World Trade Organization (WTO) is a sorely inadequate forum for dealing adequately with these as well as the grave threats to U.S. security created by China’s rapid progress toward superpower status.

Not that the Working Group’s endorsement of a concentration on economic imbalances was emphatic, or even explicit. In fact, it was disappointingly implicit, and justified partly for political, not economic reasons. But nonetheless, endorsement it was, and it came twice, in the following passages:

>”In today’s interdependent global economy, a broad assortment of divergent domestic policies (including policies that have not historically been regulated through WTO rules) can trigger calls to ‘rebalance’ the structure of cross-border market access and trade barriers between countries.”

>”One advantage of [the Group’s proposed new framework for world trade] is that it offers a structure whereby the US and China can, together, make choices about how to rebalance their trading relationship in the future.”

At the same time, some individual Group members have accorded considerably more importance to the bilateral imbalances, both in economic and political terms. For example, University of Cambridge (United Kingdom) economist Meredith A. Crowley wrote in a concurring statement:

“Economic research has documented that the US’s trade policy commitments at the WTO have resulted in a higher level of penetration of the US market by producers based in China than China’s trade policy commitments have generated for producers based in the US. This asymmetry in border policy commitments, in conjunction with changes in technology, domestic and regulatory policies, and the wider economy have resulted in an asymmetry in the real and perceived benefits of the US-China economic relationship between these countries and across groups within the United States.”

And according to Dartmouth College economist Robert W. Staiger:

“US expectations of reciprocal market access expansion into the Chinese market arising from China’s 2001 entry into the WTO have not been met. This requires a rebalancing of the existing WTO market access commitments between the US and China to achieve the degree of reciprocity in these commitments that was intended to arise from their 2001 negotiations.”

Indeed, Staiger both went on to note that the same criticism could be made of the 1994 Uruguay Round global trade agreement that produced some trade barrier cuts along with creating the WTO:

“US expectations of the balance between the internal benefits and costs of its own tariff commitments agreed to at the…Uruguay Round have not materialized. This may require a rethinking and possible renegotiation of some of the Uruguay Round tariff commitments made by the US, subject to the preservation of reciprocity (once achieved) with China and with other US trading partners who would be impacted by this renegotiation.”

His mention of reciprocity as a trade diplomacy goal is noteworthy as well, for although this objective has been sought by the Trump administration and long supported by trade policy critics, it was never a goal enshrined by the WTO (or its predecessor, the General Agreement on Tariffs and Trade) and is roundly rejected by most economists.  (See, e.g., here.)

As for the WTO itself, the Group as a whole made two key observations:

“It has been almost 18 years since China joined the WTO, the system of trade rules and dispute resolution mechanisms that, at that time, defined the state of the art. During the intervening years, the global economy and the technologies that sustain it have changed dramatically, in ways that very few people anticipated at the time”; and

“[T]hese changes have had significant impacts on the international trade ecosystem, and the political leaders of many WTO members have voiced concerns that globalization pursuant to the WTO system is no longer attuned to their countries’ needs.”

As a result, the Group declared its intent to offer an “intellectual framework” that would represent an “alternative” to that which “undergirded the global economy at the time of China’s 2001 Protocol of Accession to the WTO.” (In fairness, the Group has also described its recommendations as an alternative to more recent ideas, emphasizing geopolitical competition, that underlie more recent calls for U.S.-China economic decoupling.)

Most strikingly of all, although Group members clearly would like to preserve as much of the WTO’s multilateral dispute-resolution system as possible (in order to preserve to the great possible extent what they remain confident are the mutual gains resulting from maximum free trade), all are now on record as backing both the United States and China dealing with certain high priority issues “bilaterally outside the WTO framework initially, with subsequent WTO-compliance then achieved through the application of various WTO ‘flexibilities,’ or, in the case of new areas such as digital trade, through the development of new WTO norms.”

And despite the above qualifications to outside-the-WTO bilateralism, the references to “WTO ‘flexibilities’” and to “developing new WTO norms,” can only shrink the trade body’s role and legally accepted authority over the trade policies of both countries.

Unfortunately, the new Working Group report isn’t entirely a good news story for critics of pre-Trump China trade policies – mainly because it says so little about operational details, and what little is said is so unconvincing. For example, it uses a “buckets of policies” methodology to identify practices that the two countries (and the world trade system as a whole) should agree to prohibit or forswear, and practices that all parties concerned should be permitted in the name of sovereignty in general and economic development objectives more specifically.

But even keeping in mind the Group’s recognition that it work is only a start down this road, the suggested standards they propose for classifying practices as permissable and not seem hopelessly subjective. Even regarding rules they consider relatively uncontroversial, what will be the real world difference between “policies [that] cause harm to [another] country…without necessarily taking on a beggar-thy-neighbor character or entailing global economic losses” on the one hand, and on the other, policies that cause harm to another country that do take on a beggar-thy-neighbor character?

Similarly, in terms of the more controversial situations they explore, what’s the real world difference between “cases where Country A’s policies have adverse implications for Country B, but the harm is the incidental consequence of, and not the primary motivation for, those policies” and cases where the harm isn’t incidental and/or the primary motive?

And within these areas, huge definitional questions loom just as large. Like what kinds of compensation for various trade-related offenses will be deemed “adequate” and what kinds of responses considered “well-calibrated”?

The calibration point also brings up another problem never squarely faced by the Group to begin with: What’s the verification mechanism? That’s an especially important omission given China’s long record of violating official commitments. To date, if anyone’s thought of an answer that can adequately safeguard legitimate American interests other than reserving that authority unilaterally to Washington, they’ve very effectively kept it secret.

Moreover, the Group’s approach can be faulted for failing to recognize the systemic nature of China’s assault both on even minimally free market-oriented norms. “Well-calibrated domestic policy adjustments” and “proportionate and well-targeted” remedies sound great until the ease with which China’s vast and secretive bureaucracy can reorganize and rename offending entities is considered.

In fact, the Group seems to try to define the systemic nature of the China threat out of existence, touting the “advantage” created by its framework of “encouraging each country to refrain from aggregating the other’s extraterritorially injurious policies into a single grievance and to refrain from amalgamating extraterritorially injurious policies with other, non-economic concerns.”

Such aggregation is precisely what’s needed to deal with the China challenge satisfactorily from a U.S. standpoint, and avoid being drawn into the mug’s game of responding to offending Chinese behavior episodically.

Moreover, for all the potential benefits of delinking lower from higher hanging fruit, delinking economic concerns and strategic concerns created by Chinese transgressions clashes with the Group’s own recognition of the emergence and multiplication of “dual use” technologies with civilian and crucial military applications.

This U.S.-China Trade Policy Working Group deserves credit for breaking out of some dangerously outdated academic and policy molds. But compared with the growth of the Chinese threat, and the extent to which the economic decoupling it seeks in part to avoid is already proceeding, its work is way behind the times.

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

Tags

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.        

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

Tags

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.