Making News: Talking China Trade Deal with Jersey Joe, John Batchelor…& More!

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AlphaWeek.com, America First, Breitbart News Tonight, Breitbart.com, China, economic nationalism, energy, enforcement, Gordon G. Chang, IndustryToday.com, Jersey Joe, Joe Piscopo, John Carney, Making News, Middle East, Phase One, Populism, RealVision.com, tariffs, The Epoch Times, The Joe Piscopo Show, The John Batchelor Show, trade deal, trade deficit, Trump

I’m pleased to announce that I was interviewed this morning on the new U.S.-China trade deal on “The Joe Piscopo Show” on New York City’s AM 970 The Answer radio station.  Sorry that I could only give limited advance notice, but the podcast is on-line already!  Special bonus:  Jersey Joe and I also dealt with the Major League Baseball cheating scandal, too!

In addition last night, I was back on John Batchelor’s nationally syndicated radio program to discuss the so-called Phase One agreement with John and co-host Gordon G. Chang.  You can listen to the podcast here.

Tuesday night, I was interviewed on a wide range of foreign and domestic issues on “Breitbart News Tonight.”  Click on this link and scroll down till you see my January 14 segment.

The Breitbart.com folks were also kind enough to write up some portions of this segment in website items here and here.

On Tuesday, meanwhile, Breitbart‘s excellent economics and finance editor John Carney quoted me in his detailed analysis of the latest U.S. government report on consumer prices – which reveals whether the Trump trade wars have sparked any meaningful inflation.  You can read it at this link.  (Spoiler alert for everyone who hasn’t been paying attention to RealityChek‘s own coverage of this issue:  They haven’t.)

Meanwhile, The Epoch Times has quoted my views recently on energy security and what it means for America’s policy in the hopelessly dysfunctional Middle East, and on the progress made in reducing the U.S. the trade deficit.

On January 6, IndustryToday.com re-published – at this link – my recent blog post on the latest data undermining the claim that President Trump has betrayed his working class and middle class voters.  (Another spoiler alert:  These data indicate that he hasn’t.)

Finally, on January 2, the popular finance website AlphaWeek.com posted the video of my December RealVision.com interview on the virtues of an America First approach to U.S. foreign and trade policy – and whether Mr. Trump’s measures fit the bill.  Catch it here.

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

 

 

 

(What’s Left of) Our Economy: The Case that Phase One Passes the Enforceability Test

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China, enforcement, Phase One, tariffs, Trade, trade deal, trade talks, Trump, unilateralism, {What's Left of) Our Economy

Not only has the “Phase One” trade deal now been signed by the United States and China, but official texts have now been released. And my initial read indicates that the Trump administration just might have come up with an effective enforcement regime – though success here will depend on U.S. governments (including this one) displaying nerves of steel.

At the same time, the enforcement terms raise the question of why the President felt the need to reach this point via a treaty, rather than simply punish China unilaterally for economic transgressions – as his tariffs on hundreds of billions of dollars worth of imports from the People’s Republic (most of which remain firmly in place) already accomplish.

By way of background, from the beginning, I’ve doubted that any such agreement could be adequately verified from the U.S. standpoint. The main reasons: The bureaucracies China uses to implement the various features of its trade and broader commercial predation are too big and secretive for any outsider to monitor in any meaningful sense. (Further complicating matters – many of the worst culprits are provincial and city governments.) Therefore, documenting abuses in any kind of detail – or verifying any Chinese promises of structural change – has looked like an insurmountable obstacle to standard, legalistic dispute-resolution systems that could actually work satisfactorily for American plaintiffs.

As a result, I’ve argued that the best way to handle these transgressions is for the U.S. government to impose sweeping tariffs on China (because its predation is a systemic plan, not the product of individual entities’ decisions), and to deal with additional, individual complaints by acting as judge, jury, and court of appeals. And because of my conviction that the United States holds the clear upper hand in its relations with China, I saw no need to permit any Chinese involvement in these processes.

The Phase One deal certainly can’t be relied on to eliminate or even reduce Chinese opacity. But the way the treaty reads, it doesn’t need to. The key appear to be these passages (on page 7-3), which set out the procedures to be followed if the United States and China can’t, after a series of meetings and “consultations” agree on resolving a complaint. Here’s the first:

“…the Complaining Party may resort to taking action based on facts provided during the consultations, including by suspending an obligation under this Agreement or by adopting a remedial measure in a proportionate way that it considers appropriate with the purpose of preventing the escalation of the situation and maintaining the normal bilateral trade relationship.”

“Remedial measures” clearly means punitive tariffs, and just as clearly, they can unilaterally applied.

It’s true, as some trade policy critics have fretted, that the agreement gives the Chinese the same rights – as well as the option of retaliating if Beijing believes the United States has been acting in “bad faith.”

But here’s where the nerves of steel come in. The retaliation that’s permitted isn’t tit-for-tat – as in the case of World Trade Organization (WTO) rules. Indeed, even challenging such retaliation isn’t allowed – a right that can always frustrate justice by delaying it. Instead, the retaliation required is no less than exiting from the entire deal. The system can work in America’s favor if U.S. leaders either display confidence that China won’t take such a dramatic step (because the export-heavy Chinese economy still needs the American market much more than vice versa), or if they resolve to tariff China heavily if this U.S. bluff is called.

Incidentally, the language also makes clear that, in order to go ahead with tariffs, Washington won’t need much evidence any kind of Chinese failure to respond adequately to complaints. In fact, no meaningful evidentiary standards are specified at all. In other words, it’s entirely up to the United States to decide on the threshold for action.

Can China take advantage of the same provisions? In theory, yes. But nothing in the deal would prevent the United States from treating as treaty violations any Chinese complaints it regards as unmerited – and credibly threatening to retaliate by withdrawing unless Beijing backs down.

The deal also could well prevent a big potential problem from emerging – fear of Chinese retaliation (which itself might be tough even to identify because of Chinese bureaucratic secrecy) by U.S. victims of Chinese predation (and especially by victims that are operating in China). Such fears have prevented many of these victims from complaining publicly about Chinese abuses in the first place.

But the text on pages 7-2 and 7-3 appear to permit Washington to keep the name of the plaintiff’s business confidential. So, at least in theory, problem preempted.

As suggested above, however, the deal looks so promising, and permits so much implicit U.S. unilateralism, that it’s difficult to understand why President Trump decided to proceed bilaterally t begin with. Was he worried about being criticized for being reckless and not going the extra mile to deal with the Chinese respectfully and accommodate their legitimate concerns? Perhaps. But I strongly suspect that, at least if the agreement works out as I expect, he’ll face such accusations anyway. And by negotiating, he’s lost precious time to provide tariff relief for U.S.-based producers who need it, and to permit other companies to adjust their supply chains to a new tariff-heavier era sooner rather than later (and to make adequate progress well before November, 2020).

Clearly, however, the negotiating train has left the station. And between this effective enforcement system, Chinese promises of big import increases from the United States, and steep tariffs remaining on most imports from China (which cope with the systemic issue), it looks like a major and important economic and political win for a self-proclaimed master negotiator, and the entire domestic economy – if he makes full use of it.

(What’s Left of) Our Economy: The Latest Details Still Don’t Justify Trump’s China Trade Deal

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agriculture, China, Clyde V. Prestowitz, dispute resolution, enforcement, managed trade, manufacturing, Phase One, trade deal, trade war, Trump, U.S. Trade Representative, USTR Rpbert :Lighthizer, World Trade Organization, WTO, {What's Left of) Our Economy

Because the Trump administration has for some reason been putting out the specifics on its new “Phase One” trade deal with China in dribs and drabs, information has come out since Friday’s post panning the agreement suggesting that it might be better than first impressions indicated. At the same time, the case for continued skepticism still looks considerably stronger.

Grounds for optimism can be seen in the Fact Sheet on the deal put out late Friday afternoon by the office of the U.S. Trade Representative (USTR). Most promising: This administration indicates that the President has finally adopted a strategy urged by me last month, originally articulated by former U.S. trade negotiator Clyde V. Prestowitz, Jr. back in the 1980s, and oddly endorsed by a former senior Chinese official recently – in an interview he would never have given had he not been certain that Beijing would at least receptive.

The strategy has been denigrated by critics as “managed trade” – a supposedly foolhardy departure from the standard free trade approach followed by pre-Trump Presidents. Rather than trying to persuade foreign governments to open their markets to American exports and put in effect other free market practices, managed trade seeks to persuade foreign governments to reduce their surpluses with the United States by boosting their purchases by designated amounts. The big advantage: Managed trade efforts permit negotiators to avoid getting bogged down in philosophical debates about the virtues of economic liberalism, or in mudslinging matches over which economies are “fair” and “unfair.” Instead, they focus on unemotional bargaining over numbers. In addition, as Prestowitz has noted (and the senior Chinese official recently confirmed), Asian governments in particular are much more comfortable haggling over “how much” than preaching ethics and other intangibles.

The President’s interest in managed trade has been evident since he began pushing the Chinese to resume by certain amounts blocked purchases of soybeans and other agricultural commodities. But according to the Fact Sheet, China has not only consented to hit specific targets in its imports of farm products and energy goods like natural gas. (USTR Robert Lighthizer on Friday told reporters that Chinese farm products imports would rise over the next two years by a total of some $16 billion a year over the 2017 figure of $24 billion.) Beijing has also committed to “import various U.S. goods and services [including the agricultural buys] over the next two years in a total amount that exceeds China’s annual level of imports for those goods and services in 2017 by no less than $200 billion.” Even better, these purchases will include manufactures.

If these promises are kept, the massive U.S. merchandise trade deficit with China will shrink considerably, and American output and employment will grow. And the greater the share of manufactured products in this total, the higher quality the growth and the better the jobs.

But what will the manufacturing numbers be? Lighthizer has said that broad target figures will be released. But if it can already quantify China’s pledges to boost agriculture imports, why not for industry? Is it because Chinese promises in these areas haven’t been nailed down? And what’s the deal with the reference to targets? Does it mean that China is free to fall short for certain reasons? For any reasons?

Lighthizer explained the failure to divulge more detailed, product-by-product numbers even for agriculture by pointing to the need to “avoid distorting markets.” On the one hand, this worry isn’t unreasonable. On the other, the secrecy won’t make it any easier for any Americans without a vested political stake in claiming victory or success to assess progress with any precision.

More ominously, Lighthizer said that China would be free to buy things when “it’s the perfect time in the market to buy things.” That sounds suspiciously like the objection China originally raised when pressed to buy more farm products as part of the Phase One deal – i.e., purchases that ignored levels of Chinese domestic demand would make no economic sense, “might be hard for the domestic market to digest,” and would sharply depress local prices.

Of course, the response to these points needs to be that China has never let free market forces interfere with its mercantile trade policy goals before. Therefore, this is no time to start swallowing this kind of excuse. Indeed, if Beijing is so worried about supporting the prices received by local producers for any good, it can keep them off the market by stuffing the excess imports into warehouses. That’s not America’s problem.

Unfortunately, the Lighthizer statement indicates that the Trump administration has decided to accept this bogus Chinese rationale – which threatens to permit China to insist indefinitely that the time just isn’t ripe to buy all those extra American products called for in the deal. And with China’s growth likely to slow further for the foreseeable future, expect this claim to be trotted out frequently.

Also suspicious: If the United States has secured Chinese agreement to ramp up agriculture imports greatly, why did the agreement need to address “a multitude of [Chinese] non-tariff barriers to U.S. agriculture and seafood products…including for meat, poultry, seafood, rice, dairy, infant formula, horticultural products, animal feed and feed additives, pet food, and products of agriculture biotechnology.”

After all, as long as the promised results keep coming in for American agricultural producers, who cares what Chinese trade barriers remain officially in place? And if the U.S. team did bother to negotiate these provisions to ensure adequate market access for U.S.-based producers once the two years apparently covered by the agreement run out, then this is more a temporary fix than a big win for the American sectors affected.

What about the other structural issues – the intellectual property theft, the technology extortion, and other predatory Chinese practices that threaten both American national security as well as prosperity? The Fact Sheet remains distressingly vague.

For the former, we’re told only that the agreement “addresses numerous longstanding concerns.”

For the latter, the administration claims the establishment of “binding and enforceable obligations to address several of the unfair technology transfer practices of China that were identified” by its prior investigation of Chinese economic predation.” These entail Chinese agreement to end demanding cutting edge knowhow in return for access to the Chinese market and other benefits, and a Chinese commitment “to provide transparency, fairness, and due process in administrative proceedings and to have technology transfer and licensing take place on market terms.”

But how will these Chinese promises be monitored and enforced? How will “transparency, fairness, and due process” be defined?

And speaking of enforcement, it’s encouraging that the agreement “establishes strong procedures for addressing disputes related to the agreement” and in particular “allows each party to take proportionate responsive actions that it deems appropriate.”

Yet how long will it take for the procedures to reach the point at which Washington gains the right to punish Chinese violations with tariffs? One major criticism of the World Trade Organization (WTO) has been that many years often have passed between the initial filing of complaints till judgments were handed down determining that transgressions had indeed taken place, and authorizing tariffs unless the offending actions were halted. Although the Face Sheet promises resolving disputes “expeditiously,” it’s far from clear yet that the Phase One arrangements will be able to achieve this goal.

In addition, will Beijing enjoy similar authority to determine American violations of Phase One, and to levy punitive tariffs if it’s “deemed appropriate” by China? Moreover, whenever either side concludes that a violation has taken place, what in the agreement, if anything, will prevent the other side from retaliating.

And if the answer is “nothing,” then how would post-Phase One U.S.-China economic relations differ from those relations today – since each country would appear to be as free legally speaking as it is now practically speaking to deal with problems it blames on the other however it wishes, and to respond to any resulting tariffs with whatever countermeasures it chooses? 

The Phase One deal is no cave-in to China, as many have claimed. The high tariffs remaining on most products imported from China belie that description. Nor does it matter whether China’s dictators believe they’ve outwitted or intimidated Mr. Trump, and therefore that they can keep resisting his demands for improved behavior – since the towering obstacles will prevent adequately verifying even the most forthcoming Chinese promises of reform. 

Instead, the deal is mainly a lost opportunity; indeed a big one. Moreover, it raises the crucial question of when the President will finally start downplaying – at least – the consequently futile efforts to negotiate a better trade and broader economic relationship between the United States and China, and start emphasizing the need to keep moving down the road toward what should be the overriding goal of decoupling.      

(What’s Left of) Our Economy: You Call This a China Trade Deal?

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agriculture, China, dispute resolution, enforcement, NAFTA, offshoring lobby, Phase One, tariffs, Trade, trade deal, Trump, U.S. Trade Representative, USMCA, USTR, WTO, {What's Left of) Our Economy

OK, let’s assume that something deserving the name “U.S.-China trade deal” has been reached – even one dubbed “Phase One” or “preliminary.” Deep doubts would remain justified about whether it can possibly serve American interests.

For example, where’s even an English-language version? There’s nothing new about such agreements coming out in both English and Chinese, raising thorny questions about ensuring that key terms in both languages are commonly understood – on top of all the towering issues raised by China’s long record of flouting official commitments it’s made. But if something worth announcing officially on both sides has actually been produced, why is the most detailed description so far this statement from the U.S. Trade Representative’s (USTR) office?

Why does this statement contain plenty of specifics about U.S. tariff reductions (except for the actual dates by which American levies on imports from China will be cut) but no specifics about China’s own pledges? In that vein, no useful accounts have been released of what China will actually buy from the United States (though it’s interesting that President Trump has included manufactures on the list – not simply agricultural products and other commodities), and by when the Chinese will buy these goods. Special bonus – shortly after noon, the President said he “thinks” China will hit $50 billion in U.S. agriculture imports. Over what time period? Heaven only knows.

Don’t forget – such import increases will be the most easily described and verifiable aspects of any agreement. So maybe since these terms are still being left so vague, it shouldn’t be surprising that there’s absolutely nothing from the administration so far about “structural reforms and other changes to China’s economic and trade regime in the areas of intellectual property, technology transfer, agriculture, financial services, and currency and foreign exchange.”

Even the Trump administration has viewed these issues – which lie at the heart of the intertwined U.S.-China technology and national security rivalries, as well as of the purely economic rivalry – as so challenging to address diplomatically that rapid progress can’t be made. Why else would Mr. Trump have settled for now for seeking a shorter term, interim agreement?

If genuine breakthroughs have been made that will strengthen and safeguard and enrich Americans, terrific. But if so, what’s the point of couching them in generalities? And if not, what’s the point in claiming major progress?

Also completely, and crucially, omitted are any indications of what’s actually meant by “a strong dispute resolution system that ensures prompt implementation and enforcement.” In particular, if the United States doesn’t insist on the last word in judging Chinese compliance and meting out punishment when agreement terms are broken, then this deal will work no better on behalf of U.S.-based producers (employers and employees alike) than previous arrangements under the World Trade Organization (WTO) and the old North American Free Trade Agreement (NAFTA) that pleased only the corporate Offshoring Lobby, its hired guns in Washington, D.C., and the Mainstream Media journalists who have long parroted its talking points.

So if the United States is not recognized as sole judge, jury, and court of appeals when dealing with Chinese compliance, history teaches that will be the case that the agreement literally will be worthless.

The politics of this U.S. announcement are puzzling in the extreme as well. China’s economy obviously has taken a much greater trade war hit than America’s – of course mainly because it’s so much more trade-dependent. Beijing’s dictators are struggling to contain unrest in Hong Kong. The new U.S.-Mexico-Canada Agreement (USMCA), which will replace NAFTA, will offset some of the China-related losses suffered by the agriculture-heavy states so critical to Mr. Trump’s reelection hopes. The polls show unmistakably that the President is winning the impeachment battle in the court of public opinion. And even before the Congressional Democrats’ efforts to remove him from office began bogging down, their party’s slate of presidential candidates had started looking so weak to so many in Democratic ranks that a gaggle of newcomers jumped into the primary campaign on stunningly short notice. 

In short, this is no time for Mr. Trump to reach any deal with China – whatever Phase it’s called. In fact, it’s the time for the President to keep the pressure on (because whatever weakens the Chinese economy ipso facto benefits the United States these days). And since a deal that promotes real U.S. interests remains impossible to reach because of verification obstacles, it’s also time for Mr. Trump to start signaling to American business that major tariffs on China are here to stay for the time being, and may even increase down the road. That’s one way to eliminate any uncertainty employers are feeling about doing business with China that will increase the odds of building a new, improved bilateral relationship – not restore its epically failed predecessor.

The only reasons for optimism on the U.S.-China trade front right now? Just two that I can identify, but they’re hardly trivial. First, for all the reasons cited above, the supposed Phase One deal is clearly still so tentative and, frankly, so flimsy, that it’s likely to fall apart sooner rather than later. Second, U.S.-China decoupling will continue – precisely because the closely related technology and national security gulf dividing the two countries can’t be bridged diplomatically, and because even previously gullible U.S.-owned companies in numerous industries will now be thinking twice about exposing themselves, or exposing themselves further, to the whims of China’s utterly lawless and unreliable government. 

(What’s Left of) Our Economy: Why a China Trade Deal Still Looks Unenforceable

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China, enforcement, Liu He, Robert Lighthizer, Trade, trade talks, Trump, {What's Left of) Our Economy

Yesterday’s Financial Times contained the latest in a long string of press reports – often coming after similar administration pronouncements – that the United States and China are close to concluding a deal that will resolve much and even most of their current trade conflict.

Even with Chinese Vice Premier Liu He currently in Washington, D.C. for the second round of high level talks within a week, heaven only knows if it’s true, given President Trump’s unpredictability; given the repeated (but again, only reported) postponements of a summit between Mr. Trump and his Chinese counterpart, Xi Jinping; and given how fundamental disagreements about enforcement seem to be among the final remaining obstacles.

Nonetheless, this most recent news provides as convenient an opportunity as any to review why enforcement will be not only difficult, but so difficult that it’s tough to see how a system satisfactory form the U.S. standpoint can be created.

In the first place, problems I’ve identified from the start (see, e.g., most recently, this op-ed) remain firmly in place. Chiefly, the Chinese regime has always prioritized keeping its own people in the dark about its policies and practices. That’s why it not only has never created any means of providing transparency and accountability to the Chinese public. Because they understand that knowledge is power, and because maintaining power is its paramount goal, Chinese leaders emphatically reject such principles. And if Beijing is so determined to keep secrets from its own compatriots, why would it share such knowledge with foreigners?

China’s secretiveness and equally strong rejection of Western-style rule of law also mean that the regime’s most important decisions aren’t written down even for most Chinese to see, much less foreigners. And what is written down is typically too vague to be informative. So good luck trying to document Chinese violations of any agreement.

To its credit, the Trump administration appears aware of these difficulties – which is why what it’s divulged about its enforcement proposals depart from the standard American approach of relying on the World Trade Organization (WTO) to resolve disputes and, more important, insist on some degree of American unilateral authority to punish transgressions with tariffs (rather than giving China any authority to block such moves).

Unfortunately, the Trump enforcement approach still looks incapable of promoting and defending American interests adequately. Take the new wrinkle mentioned in the Financial Times piece: “One possible [enforcement] compromise could involve a gradual lifting of US tariffs [imposed in recent months by President Trump] based on specific triggers and implementation dates….” China’s aforementioned secrecy raises major questions concerning how those triggers (presumably Chinese steps to come into compliance) would be identified. And it’s clear that, so far, Beijing isn’t on board even with this questionable idea.

Congressional testimony by the chief U.S. trade negotiator, Robert Lighthizer, revealed similarly flawed American ideas. According to this summary, Lighthizer told the House Ways and Means Committee in late February that “The US and China have agreed to an enforcement mechanism” that “would consist of monthly meetings at the office director level, quarterly meetings at the vice-ministerial level and semi-annual gatherings at the ministerial level, with these last meetings convened by Lighthizer and…Liu He, the top US trade negotiator testified….

“Lighthizer said the deal-enforcement meetings would allow government representatives from both sides to raise concerns and get them addressed. The meetings would be a chance for Washington to air complaints about any systemic problems, and to pass on any specific grievances issued to the US administration from American companies, he said….If the problems ended up at the ministerial level and could not be resolved there, then the US ‘would expect to act unilaterally’, he said. ‘Proportionally, but unilaterally.’”

But the very complexity of this structure indicates that China is going to enjoy substantial opportunities to haggle for months over any accusations – and possibly long enough for circumstances to change enough to render eventual American tariffs moot.

Ironically, moreover, the Chinese are also likely to take advantage of an American attempt to overcome one of the longest standing hurdles to enforcing deals with Beijing effectively: U.S. companies’ well-founded fear of facing Chinese retaliation if they accuse China of predatory practices publicly. On the one hand, the Trump administration’s stated willingness to bring anonymous corporate complaints would appear to solve the problem by shielding these firms. On the other, what could be easier than for Beijing to respond that it can’t fix a specific problem that an accuser’s anonymity prevents it from identifying precisely?

Finally, Lighthizer’s emphasis on proportional responses both makes any punishments eminently bearable by the Chinese economy, and belies his (accurate) description of many predatory Chinese practices as “systemic.” After all, precisely because they’re systemic, by definition they’re both widespread and approved by the Chinese government. Responding in a limited, indeed tit-for-tat, manner will almost certainly be seen by Beijing as a green light to continue violations of the agreement provisions in question everywhere else possible.

As a result, nothing known about the Trump administration’s enforcement strategy should give anyone confidence that satisfactory enforcement is possible. Which should be no surprise to anyone who’s been monitoring U.S.-China trade and commerce in general dispassionately. Decades of experience should by now have clearly taught the lesson that, at least under the present Chinese regime, mutually beneficial economic ties were never possible. It makes just as little sense to suppose that Beijing will agree to a mutually beneficial enforcement system, either.

Making News: Podcast of Last Night’s National Radio Interview on China Trade Deal Enforcement

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Breitbart News Tonight, China, enforcement, Making News, Trade, trade talks

I’m pleased to present the podcast of a new national radio interview I did last night updating the U.S.-China trade conflict.  The segment, which aired on Breitbart News Tonight, focused on an issue likely to make or break prospects for a trade deal acceptable to Americans — monitoring and enforcing Chinese compliance with the terms of whatever agreement is reached.

To access it, click on this link and scroll down until you see the March 1 segment with my name on it.

And keep checking in with RealityChek for news of upcoming media appearances (when I get enough notice!) and other developments.

(What’s Left of) Our Economy: Why Trump’s Budget Proposal is a Win for Trade Policy Realism

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border adjustment, budget, Commerce Department, enforcement, exports, imports, Robert Lighthizer, tax reform, Trade, trade law, Trump, U.S. Trade Representative, Wilbur Ross, {What's Left of) Our Economy

Certainly since Donald Trump has been elected president, there’s been a tension even among his most supposedly hawkish trade policy advisers over basic objectives: Should the United States seek to solve its major trade-related problems mainly by promoting exports, or mainly by curbing imports? Of course, the two goals aren’t mutually exclusive. But the first suggests that the nation’s approach to trade will essentially be more of the same (albeit executed more competently), while the latter suggests a significant shift and is vigorously put into effect.

That’s one trade-related reason why Mr. Trump’s new budget proposal is so interesting and potentially important. If you believe that “money talks,” or “deeds count more than words” or any homilies to that effect, then it looks like that the tension has been resolved in favor of import limits – which would be good news indeed if it remains intact.

The reasons, as I’ve long written, are pretty simple, and should be much more obvious than they’ve been. First, for all its problems, the U.S. economy has been growing faster recently than most major world economies. And unlike the faster growers (mainly in the developing world), America’s growth isn’t export-led or -heavy. For that reason alone, its domestic market continues to be the world’s paramount emerging market.

Second, that relatively fast growth, combined with the ongoing export-heavy nature of most foreign economies means, and the huge and chronic American trade deficit, means that the size of the U.S. domestic market into which domestic producers can sell is enormous in absolute terms and indeed much bigger relative to foreign markets than widely realized. After all, this American market includes not only whatever growth the United States can generate going forward, but the large chunks of its market currently controlled by foreign competition.

Third, however much leverage the United States enjoys in global trade, and over foreign countries, its influence over its own market will always be much greater. And that goes double for countries with long records of sweeping protectionism.

Fourth, the domestic market is the market that domestic American producers should know best. Therefore, despite its undeniably impressive dynamism, these domestic producers have less to learn about customer preferences than is the case with foreign market.

For examples of the administration’s apparent ambivalence, simply check out statements made in the confirmation hearings of Commerce Secretary Wilbur Ross and U.S. Trade Representative-designate Robert Lighthizer. Indeed, it’s easy to conclude that their stated bottom line endorses the export-focused approach.

But the new Trump budget document is sending the opposite message – and its declared spending priorities arguably matter more than even sworn testimony. Specifically, according to the Commerce Department section, the final budget

“Strengthens the International Trade Administration’s trade enforcement and compliance functions, including the anti-dumping and countervailing duty investigations, while rescaling the agency’s export promotion and trade analysis activities.”

Not that this text is the end of the story, or even close. As widely recognized, the new budget statement is the first step in a lengthy process in which Congress will be heavily involved. Moreover, because so much of it is so controversial, and because the nation is so far from a consensus on official spending priorities, it’s entirely likely that the current budget priorities will simply wind up being carried over for the time being.

And as for trade policy specifically, Commerce Department funding will be far from the only determinant as to where the administration will put most of its energies. Just one example: the structure of whatever new or revised trade agreements it seeks will matter greatly as well. So will the fate of the border adjustability feature of the House Republican leadership’s tax reform proposals – which would both in effect penalize imports and subsidize exports. Moreover, because the U.S. trade law system is so (inevitably) slow-moving, episodic and reactive, relying exclusively or even mainly on this traditional trade enforcement tool will become a recipe for trade policy failure.    

But the Commerce budget priorities appear to be a straw in the wind that’s unmistakable – and because realistic, unmistakably welcome.

Making News: New Op-Ed Says U.S. Trade Strategy Flawed from the Get-Go

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enforcement, environmental standards, free trade deals, labor standards, Lifezette.com, Making News, non-tariff barriers, tariffs, TPP, Trade, Trans-Pacific Partnership, unilateralism

I’m pleased to report that my latest op-ed article has just been posted this morning on Lifezette.com – which analyzes a new U.S. government report on the likely economic impact of President Obama’s Pacific Rim trade deal. The piece explains that this study makes clear not only the dangers posed by this Trans-Pacific Partnership (TPP) to America’s growth and employment performance, but why the nation’s standard goal of negotiating terms of trade with more protectionist economic powers is completely misguided.

I hope that this piece spurs major debate both on the TPP and on the potential – and indeed the superiority – of unilateralism as a new basis for America’s global trade strategy. What do you folks think?

(What’s Left of) Our Economy: The Text Showcases TPP’s Real Flaws

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China, currency manipulation, dispute resolution, enforcement, environmental standards, exports, imports, labor standards, Obama, protectionism, rules of origin, state-owned enterprises, TPP, Trade, Trade Deficits, trade surpluses, Trans-Pacific Partnership, Treasury Department, World Trade Organization, WTO, {What's Left of) Our Economy

The release this morning of the Trans-Pacific Partnership trade deal (TPP) text means that the Obama administration has kept at least one of its promises in connection with the Pacific Rim agreement: The public has gained the ability to review every single provision in detail within a month of the deal’s signing in Atlanta, Georgia.

Nonetheless, when it comes to evaluating the TPP, the devil is not in the details, and never has been – for all the sweat expended by government officials and industry lobbyists from the 12 signatory countries on even the most arcane aspects of rules of origin, tariff rates and elimination schedules, copyright protections, labor and environmental standards, and the like. All the while, there have been only been two remotely possible exceptions – the agreement’s provisions for dispute resolution, and for determining which goods will actually be eligible for the agreement’s trade breaks.

Re dispute resolution, which is obviously crucial to any agreement’s effectiveness but which has been generally ignored in the TPP debate, the text’s release simply confirms what has always been utterly predictable: This system mirrors the kangaroo court arrangements of the World Trade Organization (WTO) – whose creation has done virtually nothing to prevent the U.S. economy’s victimization from predatory foreign trade practices. As a result, the claim of President Obama and other supporters that the agreement will create a huge, increasingly integrated market governed by U.S.-friendly, free-market-oriented rules should be recognized as the most naive imaginable fantasy.

Re rules of origin, the text confirms numerous press reports that the TPP’s benefits will extend to many products whose content comes from outside the new trade zone – which makes a mockery of the notions that currently excluded countries like China need to join in order to enjoy TPP’s benefits, and that the agreement’s conclusion therefore creates powerful incentives for such non-signatories to adopt the TPP’s high standards,

The TPP dispute-resolution process unveiled in the text demonstrates that the vast majority of member states, whose prosperity depends heavily on maximizing net exports and thus racking up trade surpluses, will gain major new guarantees of unfettered access to America’s much more open market. As with the WTO, a crucial effect of the TPP – and raison d’etre – is to narrow greatly the United States’ internationally accepted legal authority to respond unilaterally to the types of mercantilism in which most TPP countries, notably gigantic Japan, specialize.

Moreover, as with the WTO, despite the paramount importance of the U.S. market, the TPP’s dispute-resolution and rule-making systems grant no special role for America. Even though its economy represents nearly two-thirds of the new total TPP market, its influence under the agreement is simply equal to that of much smaller, and indeed tiny, economies.

Worse, just as with the WTO, the TPP’s one-country/one-vote arrangement will enable the majority of the signatories to game the system and work cooperatively to further their joint goal of ensuring that the U.S. market remains much wider open to their goods and services than the reverse. In other words, like the WTO, and all other international organizations, the TPP will be fundamentally a political organization, not a legal-juridical arrangement, and America’s negotiating strategy has in effect defined its inevitable politics out of existence.

Consequently, whatever market-opening and playing-field language the TPP text contains, turning these words into significantly new, more equitable trade realities is a chimera. For the vast majority of TPP members will be determined – and empowered through their ability to interpret rules and influence verdicts – to ensure the opposite. These countries will be working overtime, and successfully, to prevent TPP dispute-resolution panels from handing down decisions against one that could serve as precedents against all of the others, and the larger organization from writing rules, that could be used to undermine their mercantile national economic structures and strategies.

Understanding the TPP’s protectionist-friendly structure in particular debunks U.S. claims that it will foster meaningful progress toward ending or even disciplining currency manipulation. According to the U.S. Treasury Department, an agreement on this practice among the twelve signatories – which, revealingly, isn’t even in the actual TPP text – “sets a new high standard on exchange rate policies and unfair currency practices for trade agreements.”

But believing this proposition amounts to believing that countries with long protectionist histories, like Japan and Malaysia, are OK with launching efforts that eventually will forever prevent them from using a device for creating decisive price advantages for all the goods they trade in markets around the world. What is it that is known about such economies that convinces anyone that such changes of heart have taken place?

In addition, the rules of origin laid out in the final text make clear that nothing could be easier for non-signatories, like China, to enjoy many crucial advantages of TPP membership. After all, thousands of manufactured goods will be eligible for duty-free or duty-lighter treatment in TPP markets even if most of their content comes from non-TPP members. Given the pervasive global reality of industrial supply chains passing through many countries both in the TPP and outside, this is a Pacific-sized loophole.

The text’s release also should remind Congress, the public, and the media that even if the TPP’s deck wasn’t organizationally stacked against the United States, its measures to prevent abuses of workers and the environment, and the operations of state-owned enterprises, from being used for competitive advantage, are utterly unenforceable from a simple logistical and administrative standpoint.

As I have repeatedly pointed out, the factory complexes of even relatively small TPP economies dwarf the capacity of the U.S. government to monitor their labor and environmental practices systematically. And in many TPP economies, the lines between public and private sector are blurry enough, and bureaucracies opaque and skilled enough at concealing information, to render wishful thinking any confidence that these systems can be transformed.

It’s equally fanciful to suppose that even the TPP’s minimalist origin rules can be effectively enforced, either. How many million American bureaucrats would be required to open how many containers of goods coming into U.S. ports to ensure compliance? And how many more would be needed to find out whether boxes of Chinese-produced goods marked “Made in Malaysia” or “Made in Japan” really are?

All along, the effort to negotiate the TPP, and the debate generated by the deal, have reflected the American delusion that signatures on a piece of paper prove that economies that have been largely closed and centrally commanded for decades have genuinely decided to mend their ways. It’s been a delusion shared by both agreement supporters (who contend that they’ve accomplished this aim) and opponents (who insist that this goal can be achieved with better language).

As a result, even the TPP’s defeat in Congress may not guarantee that American trade policy will get off its failed, export- and negotiations-obsessed track, and focus on what the United States has much more control over – access to its own one-of-a-kind market and the leverage it creates to establish more equitable and sustainable terms of trade unilaterally. But the right kind of TPP debate could still provide an invaluable learning opportunity – and start the process of turning America’s approach to trade into an engine of domestic growth and job creation, rather than of offshoring, higher trade deficits, and (even) slower recovery.      

(What’s Left of) Our Economy: TPP Debate is Perpetuating Longstanding Trade Delusions on Both Sides

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currency manipulation, David Autor, enforcement, labor standards, Lawrence Summers, level playing field, non-tariff barriers, offshoring, Paul Krugman, Sander Levin, Simon Johnson, tariffs, TPP, Trade, Trans-Pacific Partnership, {What's Left of) Our Economy

Some of the biggest names in the economics world have weighed in recently on President Obama’s proposed Pacific Rim trade deal and the negotiating authority that would help secure its approval by Congress, and their analyses once again underscore how thoroughly misunderstood American trade diplomacy, its impact, and its possibilities remain. Their main points – that agreements like the Trans-Pacific Partnership (TPP) have little economic impact, and that carefully crafted provisions can produce equitable terms of competition for America – could not be more at odds with the record, and with simple common sense.

The main rationales for slighting the economic effects of the TPP – and indeed trade agreements in general – have been made by New York Times columnist and Nobel economics winner Paul Krugman, and former Treasury Secretary and top economic adviser to President Obama Lawrence Summers. The former emphasizes that “once trade is already fairly open, the gains from opening it further are small.” The latter writes that “increases in the extent of U.S. trade are driven largely by technology and by the increased sophistication of developing economies, not by trade agreements.” (Krugman also expresses agreement with this point.)

But although trade liberalization unquestionably has made major strides in the post-World War II period, the barriers that remain shouldn’t be underestimated. For the vast bulk of the obstacles to trade that have been dismantled have been visible barriers like tariffs and quotas. By contrast, non-tariff barriers (NTBs) like subsidies – which are often excruciatingly difficult even to identify, much less document and combat through trade law actions – have become especially important to America’s trading fortunes for two main reasons.

First, most of them are found overseas, which means that their persistence and growth damages U.S. producers who face foreign competition disproportionately. Second, they are particularly popular among the developing countries whose massive surge into the global trading system starting roughly when the Cold War ended has transformed international commerce. Because trade with countries like China increasingly dominates America’s trade flows, their pervasive use of NTBs – greatly aided by the secrecy with which their governments tend to operate – imposes outsized costs on their U.S. rivals, too.

What Summers overlooks is just as important. The main reason that these developing countries’ sophistication has fueled so much trade growth is that trade agreements have enabled capital from the United States and other high income countries to access not only their markets but their productive capacities and potential. In fact, by providing important guarantees to prospective investors about their treatment in host countries, these trade agreements have boosted and indeed created most of that developing country sophistication to begin with – through the transfer of management and technological knowhow that these economies never would have developed so quickly on their own.

Ironically, Summers concedes the point when he writes that trade agreements “reduce pressure for outsourcing because when barriers fall the incentive to invest abroad in order to avoid paying tariffs is attenuated.” Unfortunately, he misses the continuing importance of NTBs in sending American production and jobs to trade deal partners, especially requirements that foreign investors transfer technology, and produce and source locally.

Krugman and Summers also ignore the crucial role played by recent U.S. trade agreements, and the global imbalances they inevitably generated, in triggering the last financial crisis and ensuing Great Recession. Chiefly, the third world focus of America’s trade diplomacy starting with NAFTA intensified U.S. economic ties with countries whose willingness and potential to produce vastly exceeded their willingness and potential to consume. So not only did soaring U.S. trade deficits become inevitable. So did a deterioration of income-earning opportunities in the United States that Washington decided to offset with recklessly easy money policies. These in were turn enabled largely by the trade profits of its partners that were recycled back into the U.S. economy to create oceans of cheap credit. If you don’t believe this, your quarrel isn’t only with me. It’s with guys named Obstfeld and Rogoff, among others.

Completely unjustified faith in the ability of trade agreements to deal effectively with trade barriers – especially NTBs – is the second fundamental misunderstanding surrounding U.S. trade policies. It’s expressed prominently on both sides of the TPP debate both by Members of Congress and leading scholars, notably Summers as well as David Autor, David Dorn, and Gordon H. Hanson in the Washington Post; and Simon Johnson (along with Rep. Sander Levin, Democrat from Michigan) in Politico.

TPP supporters (based on what is known of the agreement) claim that the deal will significantly strengthen the American economy and even improve the lot of hard-pressed U.S. workers facing foreign competition by creating significant protections for intellectual property; and by protecting “U.S. firms against predatory regulatory interventions by member governments” (as Autor, Dorn, and Hanson insist). Critics, like Johnson, Levin, and Summers believe that the deal could be made acceptable to the United States if it banned currency manipulation and included strong safeguards for the environment and worker rights.

Based on America’s experience, though, confidence in trade rule-writing is a total mystery. One big and in practical terms insuperable problem is enforcement. As I’ve noted, many of the countries currently negotiating the TPP have enormous manufacturing complexes (even relatively small economies like Vietnam). As Johnson and Levin recognize, the labor provisions of NAFTA have been a major flop in Mexico. But even if a much stronger regime had been in place, how many American officials would have been needed to be constantly inspecting how many Mexican factories to ensure consistent, widespread compliance? And now they propose to add Vietnam to Washington’s enforcement burden? And, down the road, possibly China?

The second equally big and insuperable problem stems from the structure of the dispute-resolution systems in U.S. trade agreements. Typically, they give each signatory country an equal say, even though the American economy is invariably the biggest by far in the group – and therefore the greatest prize. As a result, even if so-called strong and enforceable disciplines on currency manipulation, for example, were included in the core texts of TPP and other trade deals, what reason is there to suppose that the majority of partner countries would ever see eye-to-eye with Washington on actually using any existing standard to punish the practice?

After all, Japan has already been accused by the U.S. Treasury Department of devaluing the yen for trade advantage. Why would Tokyo agree to deprive itself of the option in the future? The same goes for follow-on countries like Korea and China. In fact, since all of current and likely TPP members have a strong interest in growing by amassing trade surpluses with the United States, why would any of them ever agree to remove this weapon from their policy arsenals in any and all future circumstances?

The real lesson taught by America’s experience with trade deals is that it’s not remotely possible to level the proverbial global playing field with provisions proscribing or limiting various ostensibly objectionable foreign practices and policies. Washington’s enforcement capacity is sorely inadequate to the task, and the necessary consensus among our trade partners on acceptable and unacceptable behavior simply doesn’t exist, and shows no likelihood of emerging no matter how many pieces of paper these countries sign and how many rules they endorse.

The United States can, however, reasonably hope to secure equitable terms of trade for its domestic producers by relying on what it can hope to control – access to its own supremely important market. In other words, to serve the interests of the U.S. domestic economy, America’s trade agreements must stipulate that other countries will receive the privilege and immense advantages of doing business in the United States only on terms acceptable to the U.S. government and subject to the Congress’ unfettered ability to amend any deal it considers. Moreover, Washington will unilaterally administer all agreements and serve as judge, jury, and court of appeals for all disputes.

Even better, since the U.S. economy remains the world economy’s biggest golden goose, such tough trade policy love will bring major worldwide benefits as well – by preventing the reemergence of unsustainable international economic imbalances and the destructive financial instability and global crises to which they can lead.