(What’s Left of) Our Economy: The Laughable EU-Japan Trade Deal

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agriculture, automotive, driverless cars, EU, European Union, fake news, Financial Times, free trade agreements, G20, globalization, Japan, Mainstream Media, Trade, Trump, Wolfgang Munchau, {What's Left of) Our Economy

It seems like the economic policy world is all abuzz about the news that the European Union (EU) and Japan have agreed to the broad outlines of a trade agreement. That’s odd, to put it mildly, since reviewing what’s known about the deal for about five minutes is enough to debunk the notion that it’s a global economic game-changer – and the related claims that it will represents a stinging rebuke to President Trump’s moves toward a more results-oriented U.S. trade policy.

It’s true that the EU and Japan are enormous economic entities. They’re also high-income entities. But they haven’t been very dynamic economic entities. From 2005 to 2016, the former increased its output by just under 28 percent (in euro terms) before factoring in inflation. The latter has grown by less than 2.50 percent in yen terms. By contrast, the United States (which hasn’t been killing it, either) has boosted its current dollar gross domestic product by 41.82 percent during this period in U.S. dollars. 

They’re also regions that tend to run trade surpluses – although massive energy imports following the Fukushima nuclear plant disaster have generally tipped Japan’s total trade into deficit. So from a macro-economic standpoint there’s a major question regarding how willing they are to open their markets significantly on a net basis – especially given how slow their overall growth has been. Maybe that’s why one joint European-Japanese effort to estimate their welfare effects came out with results that barely move the needle. And interestingly, this study projects that the United States will be a net winner.

But the strangest aspect of the prospective deal, especially from the EU perspective, concerns the specific trade flows that are apparently targeted. For Brussels is aiming mainly to boost its exports of food products like meat, wine, and dairy, and in return has been willing to lower its automotive tariffs. The agreement has even been nicknamed the “cars for cheese” deal.

In other words, the Europeans supposedly believe they’ll prosper – and show the Trump administration a thing or two – by giving pride of place to industries that, however politically powerful, have relatively little ability to generate big positive spillovers to the rest of the economy, and welcoming more predatory competition to an industry with phenomenal potential to foster future innovation and productivity growth. (Think “driverless cars.”) In fact, this quid pro quo is so bad for Europe that it casts considerable doubt as to whether its terms will be honored.

Also interesting – for all the European ire about the steel tariffs being mulled by the United States (which runs a big trade deficit in this sector), Brussels has said little about the industry during its trade talks with Japan (which runs a big surplus).

Financial Times columnist Wolfgang Munchau has admirably dissented from the Mainstream Media groupthink and dismissed the EU-Japan deal as “a shameful attempt at manipulation” of the narrative surrounding the recent G20 summit that was hyped by journalists exhibiting “confirmation bias” of their pro-internationalist, anti-Trump views. On this side of the pond, we’ve come up with a simpler description: fake news.

(What’s Left of) Our Economy: Trump Steel Trade Critics Offer Recipes for (Continued) Failure

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Barack Obama, China, European Union, globalization, Japan, national security, Russia, steel, tariffs, The Washington Post, Trade, trade law, Trump, World Steel Organization, World Trade Organization, {What's Left of) Our Economy

The case for bold new Trump administration steps to ensure the U.S. steel industry’s continued viability is so clear that even opponents can’t help but (unwittingly) make it.

Thus this morning, The Washington Post editorial board praised – or at least seems to have praised – the Obama administration’s imposition of the tariffs on imports of Chinese steel because the world’s overwhelming source of overcapacity is China. The Post also urged the White House to remember that in order to avoid “international destabilization,” it’s critical to keep relying on “global institutions such as the World Trade Organization.”

Yet as the paper implicitly recognizes, none of these approaches has succeeded. What else can reasonably be concluded from its acknowledgment that the although the world’s “major governments, including President Barack Obama’s administration, have long recognized” the problem of Chinese fueled steel overcapacity,” the glut continues to create “unsustainable downward pressure on producers’ prices….” That’s “unsustainable” as in “can’t be sustained.” As in “if the downward pressure isn’t stopped, steel producers will start going under.”

The Post, however, has left out some crucial information. Specifically, the pressure on global steel producers has been far from uniformly felt. According to the latest (2015) figures from the World Steel Organization, which represents most of the global industry, the United States runs the world’s largest steel trade deficit by far measured in volume (which leaves out the distortions created by falling prices). At 26.5 million tons, it was nearly 80 percent greater than that of the world’s next biggest net steel importer (Vietnam, at 14.9 million tons), and nearly seven times greater than that of the European Union (3.9 million tons).

China, Japan, Russia, South Korea, and others are running surpluses, with China lapping the pack at 98.4 million tons and Japan, universally described as a staunch U.S. ally, coming in second at still-impressive 34.9 million tons.

These skewed trade patterns, moreover, are unmistakably affecting national steel output. For example, according to the World Steel Organization, in 2010, as the world’s recovery from the Great Recession was becoming established, the United States accounted for 7.46 percent of global steel output by volume. In 2016, its share had shrunk to 4.95 percent.

China clearly has been the big winner, with its share of world steel production rising from 42.62 percent to 50.16 percent during this period. Japan has boosted market share as well – albeit only from 6.49 percent to 6.60 percent. The European Union and Russia have lost ground – but the losses have been minimal. The former’s global market share has dipped from 11.54 percent to 10.43 percent. The latter’s is down from 4.48 percent to 4.45 percent.

Even weirder: America’s economic growth during this period has outstripped the recoveries of all these countries except China, and its manufacturing sector has recovered (though not completely) thanks largely to a rebound in the steel-intensive automotive industry.

In other words, according to the Post editorial board, due to global overcapacity, the U.S. steel industry is facing unsustainable (and largely artificial) pricing pressure, the worldwide statistics make clear that this pressure is in a class by itself…and the Trump administration is being advised to stick with responses that have been manifestly incapable of preventing this dangerous situation.

It’s perfectly respectable to oppose as a solution the kind of national security-focused tariffs that the Trump administration is considering – even though the advantages they offer (they need no Congressional approval and they can be implemented relatively quickly as well as flexibly) are substantial. But if critics – domestic and foreign – are genuinely interested in solving the longstanding world steel problem in a timely manner, they’ll start proposing alternatives that haven’t already failed.

Our So-Called Foreign Policy: At the WTO, Europe Claims a Right to Free Ride

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Airbus, alliances, Boeing, Charles Dickens, Defense Department, EU, European Union, foreign policy establishment, free-riding, NATO, North Atlantic treaty Organization, Our So-Called Foreign Policy, subsidies, Trade, trade law, Trump, World Trade Organization, WTO

Charles Dickens famously observed that the law can be an idiot. Last week’s World Trade Organization (WTO) ruling on U.S. and European Union (EU) aerospace subsidies reminds that American alliance policy can be idiotic – and in a key respect has been for decades. The fault here lies not with the WTO – which is hardly beyond criticism. Instead, the problem entails an American approach to international security relationships that continues a decades-long record of enabling brazen free-riding even under the current U.S. administration – which so far has decried this practice only rhetorically.

Interestingly, the WTO decision last Friday looks like a big win for American aerospace giant Boeing and a big loss for its EU rival Airbus. The trade body ruled as still illegal only one of the original 28 subsidies provided Boeing by Washington state and the federal government that were challenged by Airbus. According to Airbus, the WTO agreed with its allegation that some of the other 27 means of Boeing support were subsidies, but Boeing says that since the ruling determined that these payments had not harmed Airbus, they can remain in place. Airbus disagrees, so expect more litigation.

But here’s what’s completely outrageous. Some of the subsidies Airbus successfully challenged – at least on paper so far – were U.S. Defense Department subsidies. It’s jaw-dropping enough to recognize that Airbus gets military support, too. What’s worse is that so much of the Pentagon money handed over to Boeing (and other defense contractors) has been spent on weapons and other military systems that the United States would not need at all or in such quantity either if Washington hadn’t taken on any role in protecting Europe for decades, or if the Europeans bore anything like an appropriate burden for the own defense.

And don’t forget: For decades, even most U.S. Presidents and other foreign policy establishmentarians who have assign supreme value to continuing current transatlantic security arrangements agree that too many European members of the North Atlantic Treaty Organization (NATO) have been shirking. Talk about biting the hand that shields you.

It’s important, however, to keep in mind who’s mainly to blame. It’s clear that the Europeans deserve no high marks for either gratitude or loyalty. But it’s also clear that their actions can be reasonably portrayed as legitimate efforts to maximize their own self interests – reflecting the equally reasonable judgment that these gambits long have been good bets to succeed.

What the American public needs to ask is (a) why their leaders have handled alliance relationships so ineptly as to have created expectations of free-riding that the WTO case shows are now seen as nothing less than a right to free-ride; and (b) whether the avowedly transactional Trump administration will view the EU defense subsidy charges as a long overdue opportunity to say enough’s enough.

(What’s Left of) Our Economy: Slight March Trade Deficit Dip Conceals Numerous Milestones, Major Asia Deterioration

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Asia, Canada, Census Bureau, China, European Union, exports, free trade agreements, high tech goods, imports, Japan, KORUS, manufacturing, Mexico, NAFTA, North American Free Trade Agreement, Pacific Rim, recovery, services, South Korea, Trade, trade deficit, {What's Left of) Our Economy

Note:  So many new records and multi-year highs were revealed by the March trade figures released this morning by the Census Bureau that I’m posting this abbreviated, just calculated, write-up — containing all the main highlights — rather than the usual lengthier, more comprehensive version.

America’s goods and services trade deficit slipped by 0.12 percent on month in March, to $43.71 billion, but the decline was more than offset by a noteworthy 0.47 percent upward revision to the originally reported February figure – to $43.76 billion. This modest movement, moreover, masked major deterioration in America’s trade balances with Pacific Rim countries, many of whose surpluses with the United States had been depressed by winter or spring holidays. 

Whereas in February, the American goods deficit with that region plunged sequentially by 30.76 percent, it rebounded in March by 25.39 percent, to $33.55 billion – the biggest such jump since last March 2015’s 52.63 percent. The greatest (15.53 percent) monthly merchandise import increase since then was largely responsible. Although the China goods deficit remained high – mainly because U.S. merchandise exports in March fell for the fifth straight month – the biggest trade swings were recorded with Japan and South Korea. Significantly, March marked the fifth anniversary of the implementation of the bilateral U.S.-Korea free trade agreement (KORUS) 

The March merchandise deficit with Japan soared by nearly 55 percent, to its highest level ($7.42 billion) since April, 2008 ($7.61 billion). And American goods imports from Japan rose by 32.12 percent to $13.04 billion – their highest total since March, 2007 ($13.47 billion). 

U.S. merchandise exports to South Korea hit a new monthly all-time high in March ($4.36 billion), imports rose to their second highest level ever ($6.61 billion), and the large sequential gains left the goods deficit at $2.25 billion. That was 73.50 percent higher than a February figure that itself had fallen by nearly 50 percent.  

Since KORUS’ implementation, in March, 2012, the U.S. merchandise deficit with South Korea has more than quadrupled (from $561.4 million) on a monthly basis.  By that same measure, U.S. goods exports to South Korea are up by 3.99 percent, and goods imports are 38.08 percent higher. 

The huge and chronic U.S. goods deficit with China rose by 7.03 percent sequentially in March, to $24.58 billion, but remained well below record levels. Nonetheless, American merchandise exports to China’s still strongly growing economy fell for the fifth straight month, to $9.63 billion. That was their lowest level since last September ($9.56 billion). 

Asia events also clearly influenced the big on month rebounds in the March trade deficits for manufacturing (up 15.23 percent, to $69.76 billion, after dropping by 19.88 percent) and high tech goods (up 33.87 percent, to $6.07 billion, after plummeting by 46.39 percent).

New records and multi-year highs were set in U.S. trade on other fronts, too. American goods exports to the European Union hit $25.69 billion – a new all-time best. Goods imports from NAFTA partner, Mexico, however, hit a new record as well ($21.02 billion), and helped boost the bilateral merchandise to its highest level ($7.03 billion) since November, 2007 ($7.23 billion) – just before the Great Recession officially began. The United States fared better with its other NAFTA partner, Canada. Its merchandise deficit sank by 35.49 percent, to $1.37 billion, as exports of $24.92 billion represented the best such total since March, 2015 ($25.50 billion), and imports of $26.29 billion represented their highest level since June, 2015 ($27.34 billion).

U.S. global services exports rose in March to a new record high as well ($64.70 billion), and helped push the surplus to its best level ($21.80 billion) since June, 2015 ($22.41 billion). As for overall goods and services exports and imports, they both fell sequentially in March (by 1.02 percent and 0.73 percent, respectively). 

The trade drag on the historically feeble American economic recovery declined as well, from 17.55 percent in the fourth quarter of last year to 17.44 percent of during the first quarter of this year, but still slowed the economy’s cumulative expansion by a staggering $433.76 billion after inflation.

Making News: Back on with Thom Hartmann Tonight – Talking Brexit!

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Brexit, European Union, Making News, Populism, RT America, The Big Picture with Thom Hartmann, Thom Hartmann, United Kingdom

I’m pleased to announce that I’m slated to appear tonight on RT America’s “The Big Picture with Thom Hartmann” tonight. The segment, which is scheduled to begin at 7 PM EST, will deal with Brexit – the United Kingdom’s fateful decision to leave the European Union – and what it might mean for politics and populism in the United States and around the world.

Watch on your home cable or satellite system, or live on-line at this link. For those who can’t tune in, I’ll be posting a link to the streaming video as soon as one’s available.

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

(What’s Left of) Our Economy: Where America Has Literally Been Asleep at the Switch on Trade

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Buy American, Canada, Commerce Department, European Union, free trade agreements, FTAs, government procurement, Government Procurement Agreement, GPA, Japan, Jeff Merkley, NAFTA, North American Free Trade Agreement, Norway, Politico, South Korea, Tammy Baldwin, Trade, Trump, Wilbur Ross, World Trade Organization, WTO, {What's Left of) Our Economy

Here’s a big, sincere shout-out to U.S. Senators Jeff Merkley (Oregon) and Tammy Baldwin (Illinois). Thanks to their insightful curiosity, Americans have just gotten evidence that their country’s trade policy is indeed as much of a disaster area as claimed by President Trump and other critics.

Their accomplishment? The two Democrats asked the Government Accountability Office (GAO) to look into how well Washington has been implementing a more than two-decade-old global trade agreement aimed at opening government procurement markets around the world. Also examined: the trade liberalization record of government procurement provisions of bilateral and regional trade agreements signed by the United States (like the North American Free Trade Agreement, or NAFTA).

The findings were released last month (and alertly reported by Politico‘s trade correspondents), and make clear that the United States has been getting royally shafted. Moreover, these results have been inevitable both because the global deal was so poorly conceived from an American standpoint, and because literally no one in the U.S. trade policy-making apparatus has been tracking the results of either the global agreement or the relevant sections of the narrower trade deals agreement affecting literally trillions of dollars worth of actual and potential sales.

Even worse, the blithe assumption that other signatory countries has been scrupulously abiding by all of these procurement agreements has sharply limited America’s willingness to expand and tighten the Buy American rules that cover its own official purchases – in the process, passing up major opportunities for growth and job creation at a time of economic weakness. And P.S. This includes President Trump.

The GPA is a “plurilateral” agreement negotiated under the auspices of the World Trade Organization. In other words, accession by WTO members is voluntary. Still, the deal, which went into effect in 1996, currently encompasses 47 countries that are now committed to placing foreign enterprises and their own domestic entities on an equal footing when they compete for government contracts. Nine other WTO members are in the process of signing on. Most of America’s bilateral and regional trade agreements also prohibit discrimination in awarding these opportunities for supplying governments with goods and services. Consequently, 19 other countries have promised the United States to open their official procurement markets to the United States in return for America opening its own to them. (All of these governments have carved out various agreed on exemptions. And sub-national governments are covered by these deals as well.)

With stakes this high, you’d think that at some point the U.S. government would display reasonably consistent interest during the multi-decade lives of these trade agreements in whether they’ve been paying off. But according to the GAO researchers, you’d be wrong.

Even though the GPA requires detailed, annual reporting of procurement statistics by signatory governments, the GAO’s

“review of data that the United States and next five largest GPA parties [the European Union, Japan, Canada, South Korea, and Norway] submitted to the WTO for 2008 through 2013 found that a number of parties did not submit the reports annually, the submitted reports did not include all required data, and each party’s reports included inconsistencies that limit the data’s comparability. Further, a lack of common understanding on definitions of key terms has led to inconsistent reporting practices among the GPA parties, and a GPA statistical working group has made little progress in addressing such challenges.”

Some specific failings:

>”although Canada submitted annual notifications with central government procurement data for 2008 through 2013, the notifications did not include data on procurement by subcentral governments or by other government entities”;

>”Japan’s annual notifications have not included procurement by entities such as utilities and state-owned enterprises that are covered by the GPA”:

>”South Korea has not submitted notifications for any year except 2010, and Japan has not submitted a notification for 2012 although it did so for other years through 2013.”

>”Of the U.S. FTAs [free trade agreements] we reviewed, only NAFTA requires its parties to report annual statistics on government procurement; however, the last data exchange between the three NAFTA parties took place in 2005. As a result, information about the extent to which U.S. FTA partner governments open procurement to U.S. suppliers is not available.” [Emphasis added.]

The United States has been far from a whiz in reporting, either. But its failings have been much less excusable given all the evidence provided by the GAO showing that it’s opened its procurement markets much wider than any other GPA or FTA signatory. Despite the above data limitations, the GAO nonetheless felt confident in concluding that for 2010, “[T]he United States reported more than twice as much GPA-covered government procurement as the next five largest GPA parties combined, although total U.S. government procurement is less than the combined total for the other five parties.”

In money terms, the value of contracts opened to non-discriminatory bidding by the United States at all levels of government was $837 billion. The value of contracts opened by those five non-U.S. GPA parties that promised to liberalize the most in absolute terms was some $381 billion. Yet total government procurement in the United States that year was some $1.7 trillion, the GAO estimates. For the other five GPA signatories, it was much larger – $4.4 trillion.

Moreover, because of the aforementioned reporting failures, it’s not possible at all for the U.S. government, or the American people, to gauge procurement liberalization under free trade agreements – with the exception of Canada. But when their procurement budgets are added in, and duplication eliminated (e.g., for Canada), the total market that should be available to American business and workers at least in principle is $4.4 trillion. 

The GAO doesn’t conclude that U.S. trade partners are simply capitalizing on Washington’s indifference to flout their treat obligations. In fact, in one instance, it even tries to get them partly off the hook: “Many EU member states, as well as Japan and South Korea, have actual government expenditures smaller than the United States’ and are therefore likely to have more smaller-value individual procurement contracts that fall below the GPA threshold levels.” (Decisions on the smallest government contracts typically are one of the main GPA and FTA procurement carve-outs.)

But if so many foreign government contracts are too small to be opened for non-discriminatory bidding, then obviously these trade deals are too poorly structured to give American producers anything remotely like reciprocity. And more important, Washington so far has had no way of knowing judging by any measures whether non-discrimination in principle is being translated into non-discrimination in fact .

As Mr. Trump’s Commerce Secretary, Wilbur Ross, recently noted, “There’s not a lot of point making trade deals if you don’t enforce them.” He could have added that such enforcement is impossible without seeking and obtaining reliable data on results. Donald Trump’s predecessors have flunked these two crucial tests of American trade policy-making. Until he gets strong evidence to the contrary, it’s time for the president to take the logical next step, assume that the GPA and the FTA government procurement measures have been serious mistakes, and ignore them as thoroughly as America’s competitors evidently have.

Following Up: Brexit and American Politics

Tags

2016 election, Bernie Sanders, Brexit, chattering class, Donald Trump, European Union, Following Up, globalization, Hillary Clinton, Immigration, Populism, United Kingdom

Maybe since I never thought it would happen, I never followed Brexit closely and never expected to write much about it. So much for those plans! Therefore, some of those great items I thought I’d be posting this weekend and early next week will head for the shelf. Here, instead, are some musings, focusing on the political effects in the United States – and that follow on from yesterday’s post.

>Although I remain confident that the United Kingdom vote to leave the European Union will have scant impact on American politics this election year, some effects may rise above the trivial level. One has to do with an opportunity lost – by opponents of presumptive Republican presidential candidate Donald Trump.

Had Britain opted for “Remain,” it’s certain that Trump critics throughout the political establishment would have rushed to proclaim that his brand of economic and political nationalism was dead politically as well as disastrous policy-wise. And it’s possible that these innumerable published and broadcast victory laps could have discouraged some Trump backers and reduced their turnout in November (all else equal). The torrent of scorn also could have convinced some independents and leaners to opt for a status quo champion like his presumptive November Democratic rival, Hillary Clinton. Converse effects, moreover, might have rippled through the Clinton and Clinton leaners camps. So in that sense, Brexit could represent a major dodged bullet for Trump-ism.

>Nonetheless, I remain just as strongly convinced that the Brexit victory won’t create any noteworthy positive momentum for Trump. Think of it this way: Can you imagine any Hillary Clinton (or Bernie Sanders) supporters concluding anything on the order of “The British decided to leave the European Union. They were motivated largely by security-related immigration concerns, resentment to economic globalization, and a desire to preserve and reclaim their political sovereignty. Therefore, I should vote for Trump because his positions are similar”?

How about this version? “The British decided to leave the European Union…CONTINUE AS ABOVE through “political sovereignty,” and then conclude, “Therefore, I should vote for Trump because those similar positions of his are actually right.” Equally preposterous.

Or this version, “The British….political sovereignty” and then conclude, “Therefore, I should vote for Trump because I don’t want to be out of step with what might be a global wave.” Come on.

One slightly more plausible possibility: “The British…political sovereignty” and then conclude, “Therefore, I should vote for Trump because it would be best if the United States and the U.K. had leaders on the same wavelength.” Slightly – but not much more – conceivable.

Clearly visible here in all the commentary hailing or fearing a domino effect is the tendency – especially on the part of shortsighted, superficial pundits and politicians – to substitute catchy metaphors and facile talking points for thought. Sure, it sounds at first hearing plausible that elections overseas – especially in a country with close cultural and historical ties and resemblances to America – would produce “momentum” that influences U.S. voters for any of the reasons implied above. But when has that actually ever happened?

Just as important: Why in concrete, substantive terms would it? Here it’s especially important to remember both the economic and geopolitical gulf dividing the United States and the U.K. that I explained in my first Brexit post. Precisely because – despite all the tripe manufactured by the chattering classes about an interdependent world – the United States is so amply insulated against so many international developments, American voters, as I noted, generally aren’t even paying attention to the British decision, and rightly so.

Yes, the stock market turmoil, which could linger briefly, is focusing Americans’ attention. But for anyone who professes to be genuinely optimistic about America’s future economic prospects, there’s no reason to believe that Brexit per se will produce a lengthy stock slump. The most credible argument in this vein – and for Brexit shaping American election results – entails the British vote meaningfully reducing economic confidence around the world and increasing uncertainty, producing a big drop-off in business investment and therefore even slower growth. And Trump would figure to be the prime beneficiary of a U.S. economy that gets even worse.

But here we run into a real irony: Who can doubt that, rightly or wrongly, one of the biggest threats to (already weak) business confidence and investment these days is the prospect of a Trump victory? Trying to net out all the effects here – whether political or economic – has my head spinning. That’s always a good sign that it’s time to stop speculating.

Another decisive reality the refutes both the momentum hopes and fears: However many sovereignty-related concerns are justified by U.S. membership in international organizations (especially like the World Trade Organization, which is legally authorized to nullify American law), significant actual threats to the nation’s independence simply have not emerged. As a result, sovereignty-grounded political appeals can’t reasonably be expected to resonate very widely or deeply in the U.S. electorate.

By contrast, the European Union’s decisions had already been realities that the British have to live with every day. So it was always likely that the Brexit campaign would at least attract large-scale support.

>Finally, the American media and political classes do have one Brexit-related point right. It’s centered on policy, but could also affect the election. Although some pundits and politicians are attributing the “Leave” vote mainly to various combinations of nativism, xenophobia, racism, and the like, more appear to understand that the EU and its backers have made serious policy mistakes that, if not enough to justify the Union’s breakup, do require major reforms.

Throughout the current presidential campaign, Clinton has clearly voiced similar thoughts about Vermont Senator Bernie Sanders’ unexpectedly strong Democratic primary challenge, and has already pushed moved Left-ward on issues such as trade and Wall Street regulation, at least rhetorically. Clinton’s early responses to Brexit as such have been pretty muted. But it’s entirely possible that even if I’m right about Brexit’s impact on the domestic political fundamentals, Clinton might interpret the referendum and its implications as another sign that populism is the wave of the future in America, and that she has no choice but to ride it. Even in this astonishing political year, success along these lines would rank high on its list of political shocks.

Our So-Called Foreign Policy: First Thoughts on the Post-Brexit World

Tags

2016 election, Brexit, Catalonia, David Cameron, Donald Trump, EU, European Union, Eurozone, Federal Reserve, France, globalization, Greece, Hillary Clinton, Im-Politic, Immigration, interest rates, Janet Yellen, NATO, North Atlantic treaty Organization, Obama, Scotland, Spain, terrorism, The Netherlands, TPP, Trade, Trans-Atlantic Trade and Investment Partnership, Trans-Pacific Partnership, TTIP, United Kingdom

I sure as heck was surprised by the United Kingdom’s decision yesterday to leave the European Union (EU). Were you? And now that “Brexit” will indeed take place, what’s in store for America and the world? My crystal ball has never worked perfectly, and much of Brexit’s ultimate impact will depend on how London executes the move, and how the EU and financial markets respond. America’s reactions of course will matter as well. Here are some initial reactions. 

>The unexpected Brexit verdict significantly changes the narratives about the global economy’s evolution, about the future of international trade and related economic policies, and about the fate of international political integration.

As recently as 48 hours ago, the safest bet was that British voters would behave similarly to voters elsewhere in Europe who have had the chance to change fundamental political arrangements. In September, 2014, the Scots voted to remain a part of the United Kingdom. Although Greek anti-EU sentiment runs high for reasons that are easily understandable given that country’s prolonged economic crisis, a much-feared (by those who were not hoping for it) “Grexit” vote never took place. Catalonia is still part of Spain, despite a strong separatist movement in the region – and a terrible Spanish economy. And in 2005, the French and Dutch electorates voted down a proposed new EU constitution that would have accelerated political and economic integration – chiefly by streamlining decision-making via greater powers for pan-European institutions. But the issue of departing the Union has not yet come up.

As with Scottish devolution in particular, I thought that instincts for caution would steadily overcome nationalist or ethnic (take your pick) feelings as election day approached, and that the British would ultimately reject a leap in the dark. And of course, my confidence was reinforced by my view that the UK is hardly an economic superpower, and that its prospects outside the EU objectively are iffy.

The British public’s refusal to back down – despite an unmistakable fear-mongering campaign by (now caretaker Prime Minister) David Cameron’s government and even the country’s central bank – signals that Europeans at least may be willing to shift integration into reverse, not simply keep it in place

>In that vein, one of the biggest worries of Brexit opponents entailed the possibilities of contagion – a “Leave” verdict encouraging similar EU opponents throughout the Union. And copycat Brexit votes are clearly back on the table, given widely acknowledged structural defects in the eurozone (a common currency area that includes 19 of the 28 – counting the UK – EU members, and that Britain never joined), Europe’s especially weak recent economic performance, and controversial EU decisions to admit large numbers of Middle East refugees.

Their success would be a genuinely historic, and indeed seismic, development, as Europeans themselves since the end of World War II have generally acknowledged that closer, more regularized economic ties were essential for breaking their centuries-old cycle of major conflict. It’s possible concerns about keeping Europe peaceful are overblown. For all the importance of economic integration, the main pacifier of the continent has been the American commitment to European defense embodied in the North Atlantic Treaty Organization (NATO). Brexit per se does nothing to change the UK’s role in the alliance.

Nevertheless, economic and security issues are never, or even often, completely separate. Therefore, particularly over the longer term, Brexit and other withdrawals from the EU could well turn Europe into a much less stable place than it’s been for the last 70 years. More uncertainty could be added to the European security scene if presumptive Republican presidential nominee Donald Trump, an outspoken critic of America’s NATO policy, won the presidency.

I’ve strongly critical of continued U.S. NATO membership, too – especially of what looks to me like a possibly suicidal nuclear security guarantee. Indeed, the risks created for America by its continued NATO role convinces me that fundamental changes in the alliance’s structure are inevitable anyway, since the U.S. promise to risk its existence on Europe’s behalf has become ever less credible. If Brexit brings the EU’s dissolution, or significant weakening, closer, then Washington will face fateful NATO choices it has long tried to avoid sooner rather than later. And the foreign policy establishment’s demonization of all proposals for proactively dealing with these dilemmas has left the nation completely unprepared for their growth to critical mass.

>Economically, Brexit carries disruptive potential, too. Just look at the financial and currency markets today. But epochal political events inevitably create short-term costs; any other expectations are completely unrealistic. Especially inane have been claims on social media (e.g., by The New Yorker‘s Philip Gourevitch) over the last twelve hours that the initial turbulence touched off by Brexit proves it a failure.

Sure to be complicated greatly, however, are efforts to conclude a major trade agreement between the United States and the EU. This Trans-Atlantic Trade and Investment Partnership (TTIP) has been a long slog anyway. But since such negotiations always entail achieving a delicate balance of interests, and since the UK is a significant part of the overall EU economy, any important compromises that have been struck in the talks would seem to be threatened.  

President Obama has already concluded with eleven other countries a Pacific rim-centered trade agreement called the Trans-Pacific Partnership (TPP), but it’s doubtful that Brexit will do much to dispel Congressional skepticism that has prevented Mr. Obama from formally submitting it for approval.

Keep in mind, though, that trade – including with Europe – is still a pretty minor part of the U.S. economy. The channel through which the biggest Brexit impact is likeliest to be transmitted to America is monetary policy – the province of the Federal Reserve. At the Fed’s June 15 meeting, Chair Janet Yellen made clear that the possibility of Brexit, and especially its impact on financial markets, was one factor behind the central bank’s decision to keep interest rates on hold. Until business-as-usual in the world economy resumes, don’t expect any rate hikes – good news if you believe that the U.S. desperately needs super-easy credit to sustain its current feeble recovery, and bad if you believe that prolonged near-zero rates have prevented the post-financial crisis adjustments needed to restore real health to the economy.

>In fact, such existing skepticism around these trade issues, as well as around immigration policy, makes me doubt that Brexit will have a notable effect on American politics and policy. Sure, the same kinds of economic anxieties that have fueled Trump’s campaign helped lead to victory for “Leave.” But his followers won’t be able to cast more votes for him as a result of the British decision.

Supporters of his presumptive rival, Democrat Hillary Clinton, are surely horrified by the resistance to unlimited immigration and massive refugee admissions signaled by Brexit, so they wouldn’t seem headed for the Trump camp. And it’s difficult to imagine many independent voters marking their ballots in November based on the British vote. Indeed, this poll tells us that Brexit isn’t even on the screens of most U.S. voters. Rightly or wrongly, that choice will be overwhelmingly Made in America.

One possible exception – but one that’s largely independent of Brexit: A wave of overseas terror attacks could easily heighten American anxieties about their own security, whether an Orlando or San Bernardino repeat occurs or not. Ditto for some major military success by ISIS or a similar group abroad, or an unrelated international crisis. More terrorism-related developments could favor Trump. Something like a showdown with Russia over Eastern Europe or China over the South or East China Seas could break in Clinton’s direction (due to judgment and experience considerations). In the process, these contingencies could also remind us how quickly Americans might forget all about Brexit.

Our So-Called Foreign Policy: What You Really Need to Know About Brexit

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Brexit, Donald Trump, EU, European Union, geopolitics, globalization, Immigration, internationalism, Obama, regulation, self-sufficiency, sovereignty, Trade, United Kingdom, Walter Lippmann, {What's Left of) Our Economy

“Brexit” – the possibility that Thursday, the United Kingdom (UK) will vote to leave the European Union (EU) – deserves every bit of the exhaustive media coverage and commentary its received. Although there’s major (and understandable) disagreement over the economic and geopolitical impact of a “Leave” victory, there’s no doubt that the effects could be seismic on both fronts. Especially momentous would be a post-Brexit decision by other members of the floundering EU to follow suit, producing the breakup not only of the world’s biggest integrated market, but of a genuinely historic experiment in political integration and transnational governance.

I have no particular dog in this hunt – but strongly believe that the British have every right to decide whether to continue its EU membership, and that foreigners, and particularly foreign leaders, should tread carefully in offering their opinions. I’m also agnostic on the reverberations for Britain– in part because I haven’t studied the UK economy very closely.

Something I am sure of, however, is that contrary to much of the flood of Brexit-bred pontificating (notably from President Obama), Britain’s decision won’t hold important lessons for the United States either way. The reason: The UK’s economic and geopolitical situation is nothing like America’s.

This observation may sound obvious, but as I’ve written, since U.S. foreign policy’s (current) internationalist era began at the outset of World War II, American leaders and strategists practically across the board have justified non-stop, all-but-limitless global engagement by pointing to the nation’s acute exposure to all manner of threats and opportunities generated abroad. Their reasoning – which was articulated best by pundit, philosopher, and adviser to presidents Walter Lippmann – sprung from the belief that the United States was best seen as a big version of Britain.

That is, geographically it’s an island that floats in “an immense oceanic lake of which the other great powers control the shores” and therefore (my phrasing) enjoy “an unbeatable combination of geographic advantage, boast combined military potential far greater than America’s, and in an age of long-range air power, are located much closer [to the United States]” than Lippmann’s historically complacent countrymen realized.

I explained that Lippmann, and other internationalists, couldn’t be more off-base, because the United States and Britain couldn’t have less in common economically and geopolitically. Especially relevant to the Brexit debate and its implications for the United States, America boasts all the major resources and other assets needed for all the economic independence it genuinely needs – including a domestic market more than large enough to support production of the full range of goods and services at scales large enough to be profitable.

Conversely, Britain overwhelmingly lacks these advantages. This hardly means that leaving the EU is sure to be an economically foolhardy choice for the UK. In principle, the benefits of Brexit could exceed the costs of EU membership (like excessive pan-European regulations and Open Borders immigration policies). Britain could also boost its long-term productivity – and chances for greater prosperity – with a “Leave”-inspired burst of reform. But there can’t be any legitimate doubt that the UK is in a much weaker position than the United States to pursue such a go-it-alone strategy.

It’s also important to note that the British people could decide – as is their sovereign right – that restoring what they see as their pre-EU degree of political independence matters more than any conceivable economic risks they might run.

But the vote and whatever consequences it produces for Britain is not, as widely portrayed, a universal test of the pluses and minuses of free trade and the current version of globalization. As such, it should have no bearing on U.S. decisions on integrating more extensively with the global economy (as President Obama and the rest of the political and economic establishment seek), or starting to back away (as presumptive Republican presidential nominee Donald Trump seems to favor).

Clearly, the United States has longstanding historic and cultural ties with the UK, along with close economic and security relations. But the superior economic choices it faces are in a class by themselves – and they’ll remain so as long as Americans remember that their country isn’t Britain.

(What’s Left of) Our Economy: July Trade Gap Falls but U.S. Deficits in Manufacturing & with EU Set New Monthly Records

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China, European Union, exports, free trade agreements, high tech goods, imports, Korea, KORUS, manufacturing, non-oil goods deficit, Obama, oil, TPP, Trade, trade deficit, Trans-Pacific Partnership, {What's Left of) Our Economy

The U.S. goods and services trade deficit narrowed on month in July in part because June’s total was revised sharply upward. America’s trade deficits in manufacturing and with the European Union both set their second straight monthly records, with the former headed for its third consecutive yearly all-time high. China’s mounting economic ills, meanwhile, are not preventing the PRC from staying on track to rack up yet another annual goods trade surplus of its own with the United States.

Here are selected highlights of the latest monthly (July) trade figures released this morning by the Census Bureau:

>The total U.S. trade deficit for July fell to its lowest monthly level in five months, though the improvement was partly offset by a unusually large upward revision in the June figure, and new monthly record deficits were set in the manufacturing sector and in goods with the European Union (EU).

>The July combined goods and services deficit of $41.86 billion was the nation’s lowest since February’s $38.54 billion, and came in 7.39 percent below June’s $45.21 billion. But the June reading was revised up an unusually large 3.12 percent, from the initially reported $43.84 billion. June exports were lower than first estimated, and June imports higher.

>The U.S. deficit in manufactures trade set its second straight monthly record in July, with the $73.58 billion shortfall exceeding the old June mark of $72.71 billion by 1.20 percent.

>U.S. manufacturing exports dropped 5.29 percent in July, from $97.52 billion to $92.36 billion. Manufactures imports fell by only 2.52 percent, from $170.23 billion to $165.94 billion.

>As a result, on a year-to-date basis, American manufacturing stayed on target for its third straight record annual trade deficit. Between last January and July, the manufacturing trade deficit totalled  $406.57 billion. This year’s comparable total of $466.62 billion is 14.66% greater  .

>Year to date manufacturing exports are down 4.93 percent, from $690.36 billion to $656.33 billion. Manufacturing imports are up 2.37 percent, from $1.09693 trillion to $1.12294 trillion.

>The July U.S. goods trade shortfall with the European Union rose to $15.18 billion in July – a mark that topped June’s previous record $14.45 billion by 5.03 percent. U.S. merchandise exports to this economically troubled group of countries sank by 5.33 percent, from $22.91 billion to $21.69 billion, while American merchandise imports dipped by 1.32 percent, from $37.36 billion to $36.87 billion.

>On a year-to-date basis, the goods trade gap with the EU has risen by 7.21 percent so far this year, from $80.95 billion to $86.79 billion.

>The July figures showed that total U.S. exports reversed two straight months of decreases, and advanced by 0.43 percent on month, from a downwardly revised $187.69 billion to $188.50 billion. U.S. imports declined by 1.09 percent from an upwardly revised $232.90 billion to $230.36 billion, their lowest level since February.

>Through the first seven months of this year, the combined U.S. trade deficit is running 3.59 percent ahead of last year’s January-July total.

>The U.S. oil trade deficit jumped for the second straight month in July, by 11.10 percent to $8.11 billion – the second highest figure for this year. But this shortfall is still less than half as large as last year’s on a year-to-date basis.

>The non-oil goods deficit dropped by 7.08 percent, to $51.13 billion, but is still running 21.81 percent ahead of 2014’s January-July figure.

>The U.S.-China merchandise trade deficit reached $31.58 billion in July – just 0.38 percent higher than the June figure but its highest total of this year, and the biggest since last October.

>American goods exports to China decreased by 1.93 percent on month, from $9.69 billion to $9.50 billion. U.S. merchandise imports from the PRC were off only fractionally, to $41.08 billion.

>On a year-to-date basis, the U.S. merchandise trade deficit with China is currently 8.55 percent higher than last year’s record level. U.S. goods exports to the slowing PRC economy are down 3.57 percent during this period, but U.S. goods imports are 5.32 percent greater.

>The U.S. goods trade gap with Korea – whose bilateral KORUS agreement with the United States is a model for President Obama’s prospective Trans-Pacific Partnership trade deal – rose by another 6.35 percent on month in July. U.S. exports were down and imports were up compared with June’s figures.

>Since the trade deal went into effect in March, 2012, the American merchandise trade deficit with Korea has surged by nearly 375 percent on a monthly basis.

>One bright spot in the July trade report came in high tech goods trade. The U.S. deficit fell on month by 15.93 percent, from $8.80 billion to $7.40 billion. Both exports and imports declined.

>On a year-to-date basis, however, the high tech goods deficit is running 5.68 percent ahead of last year’s pace.