(What’s Left of) Our Economy: Encouraging Brexit Lessons for the United States

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Brexit, China, decoupling, European Union, Eurozone, Financial Times, France, Germany, IMF, International Monetary Fund, United Kingdom, {What's Left of) Our Economy

Some awfully interesting evidence supporting my view (see, e.g., here) that the United States is uniquely positioned in the world to prosper quite nicely from seeking to maximize its already high degree of economic self-sufficiency has just emerged — and from some awfully unlikely sources.

It’s indirect evidence, to be sure, and concerns the United Kingdom’s (UK) economic perfomance since the Brexit referendum of 2016 that mandated its pull-out from the European Union. But it’s relevant to the United States’ situation because the U.S. economy is far more actually and potentially self-sufficient.

The evidence – from the ardently globalist International Monetary Fund (IMF) and from the just-as-ardently anti-Brexit Financial Times – makes clear that since the UK finally left the EU at the end of January, 2020, it’s gross domestic product (GDP – the standard measure of a national economy’s size), has not only risen about as fast as those of the major members of the EU, but that it’s closed the gap that existed pre-withdrawal. And all the while, the UK has reaped a crucial benefit – much more control over its future.

The IMF evidence came in today’s release of its World Economic Outlook – a twice yearly Fund publication that surveys the state of the globe and includes growth forecasts for major countries, geographic regions, and formal groupings of countries like the eurozone (which overlaps pretty thoroughly with the EU).

According to the Fund, last year, the UK economy expanded by 7.4 percent in inflation-adjusted terms (the most closely monitored gauge of growth). The figure for the countries using the euro as their currency? A mere 5.4 percent. And it’s not like the lagging eurozone performance was dragged down by its long-time economic laggards. Germany’s real 2021 growth was a measly 2.8 percent, and France’s much better seven percent still trailed the UK’s.

In other words, a single country that’s cut itself off from all the alleged benefits of economic integration with a much larger market had out-grown the collective members of that market that presumably were enjoying all the economic advantages of such integration.

Moreover, the IMF’s latest projection for this year crowns the UK as a growth winner, too. Its 2022 price-adjusted GDP is forecast to improve by 3.7 percent, versus 2.8 percent for the euro area. The French after-inflation growth rate is expected to top the UK’s slightly (2.9 percent), but Germany’s will be stuck at a lowly 2.1 percent.

The only solace Brexit-haters can take from the IMF analysis is that the UK supposedly will fall way behind growth-wise next year. Its real GDP performance is pegged at a mere 1.2 percent – slower than that of the euro area (2.3 percent), France (a not-so-impressive 1.4 percent), and Germany (a respectable 2.7 percent, but a performance coming off an unusually low baseline). Yet needless to say, it’s much more reasonable to put more stock in near-term predictions and longer-term predictions.

In addition, even with this possible slowdown, the Financial Times graph below (taken from this article) shows that, despite its glass-half-empty title, if the IMF is right about 2022, the UK will have turned itself from a growth laggard in 2019 compared with France and Germany to a growth equal. And although the 2023 projections are tough to see in this graphic, they show near parity among the three.

Two qualifications to these findings need to be made. First, as I’ve repeatedly noted, all economic data for the last few years has been dramatically affected and surely distorted by the CCP Virus pandemic. Second, although the UK left the EU, it still does business with the bloc and its economic ties with the rest of the world stayed the same organizationally.

At the same time, for years after the referendum vote, businesses in the UK had been dealing with major uncertainties and the inevitable short-term costs of the negotiations over Brexit’s precise withdrawal procedures and terms. And the growth figures make obvious that, on the whole, they and the entire economy have managed to navigate them successfully.

And if the UK has so far emerged successfully from its Brexit-style decoupling from the EU, it’s hard to imagine that the much more economically diverse United States can’t emerge from a much more determined decoupling from China – which will promote vital and intertwined economic and national security interests – at least as well.

(What’s Left of) Our Economy: Can Negotiations Really Solve America’s Main Europe Trade Problems?

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automotive, EU, European Union, Eurozone, Jean-Claude Juncker, non-tariff barriers, tariffs, Trade, Trump, value-added tax, VAT, {What's Left of) Our Economy

Whenever an agreement raises many more, and bigger, questions than it answers, it’s legit to ask whether it’s much of an agreement. And the questions raised by yesterday’s U.S.-European Union (EU) announcement on trade relations are numerous and immense.

For example, the statement, released following talks between President Trump and European Commission President Jean-Claude Juncker, said nothing directly about the U.S. auto trade tariff threat that raised transatlantic trade tensions to a whole new level. To be sure, the two leaders did agree that, while a joint “Executive Working Group” would begin work on implementing a new trade agenda between the two economic giants, neither “will not go against the spirit of this agreement, unless either party terminates the negotiations” – which sounds like a deal to forego any new trade restrictions. Moreover, Juncker reportedly has stated that this agreement specifically rules out the automotive levies.

Nonetheless, there’s been no announcement yet that the United States will terminate the study it launched in May to determine whether or not new tariffs are needed to bolster the American automotive sector for national security reasons. And regarding the U.S. levies still in place on certain metals products from Europe, the statement simply declared an intention “to resolve the steel and aluminum tariff issues and retaliatory tariffs” issue.

But there are far bigger questions about the agreement, its execution, and the implications for U.S. trade flows and industries that haven’t been answered — or even asked. Of special importance: First, will Washington and Brussels agree to tackle – and eliminate — all the barriers impeding and distorting transatlantic trade? Second, will any such agreement be genuinely enforceable. Major doubts are justified on both counts.

Regarding the barriers to be addressed, it’s encouraging that the statement targeted the complete elimination of not only tariffs, but non-tariff barriers and subsidies on “non-auto industrial goods.” But why was the automotive sector omitted? And why, when it comes to “trade in services, chemicals, pharmaceuticals, medical products, as well as soybeans,” is the aim simply to “reduce barriers.”

Even more important, what about the towering value-added taxes (VATs) imposed by European Union members? Not only do they typically add between 20 and 25 percent to the cost of imports. They subsidize exports to the same degree. Unless they’re on the agenda, the proverbial playing field will remain badly tilted. Yet the joint statement made no mention of them.

Monitoring and enforcement is a major concern, too. As indicated above, it’s heartening that the Trump administration recognize the importance of non-tariff trade barriers and subsidies. But recognizing their importance is a far cry from devising a strategy to eliminate or even reduce them verifiably.

Principally, although the European Union’s bureaucracy is less opaque than similar complexes in East Asia, for example, it still suffers major transparency problems – as even its officials admit. So even identifying many non-tariff barriers and subsidies – much less eliminating them – will be exceedingly difficult at very best. America’s governing processes, by contrast, are highly transparent. All rules and regulations and budgetary expenditures are published regularly, frequently, and in full.

Relatively secretive bureaucracies such as Europe’s enjoy another important trade-related advantage over the American system. Subsidies and non-tariff trade barriers have proved to be eminently fungible. In other words, they are easily reshuffled and renamed. But when such shell games are played by systems such as the EU’s, they’re typically played behind closed doors. Such American gambits, however, are pursued and agreed on in the open.

Finally, the joint statement made no mention of currency manipulation. Admittedly, there’s precious little consensus even within the United States as to defining this protectionist practice. Yet there’s a serious case to be made that it’s been engaged in by the eurozone, which includes many EU members, by virtue of the European Central Bank’s ultra-easy monetary policies.

Not that the America’s central bank, the Federal Reserve, hasn’t kept interest rates very low for long periods of time, and pursued similar forms of stimulus, such as Quantitative Easing. But given the consumption-oriented structure of the U.S. economy and the gigantic trade and current account deficits it chronically runs, it’s hard to make the currency manipulation charge stick. Given the major international surpluses racked up by the eurozone and EU, and how net exports have led their growth, they’re much more plausible culprits.

Interestingly, for all these differences, Europe’s economic and political systems are surely closer to and more compatible with America’s than those of nearly all other major economies. If Washington can’t overcome the above obstacles and negotiate a truly win-win deal with Brussels, how promising can trade talks with other countries and regions be?

(What’s Left of) Our Economy: Why ‘Less Can be More’ in Trade with Germany – & Others

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Angela Merkel, currency manipulation, euro, Eurozone, Germany, mercantilism, non-tariff barriers, public investment, Trade, trade barriers, Trump, wages, {What's Left of) Our Economy

This week’s first meeting – in Washington, D.C. – between German Chancellor Angela Merkel and President Trump is being billed as a confrontation between polar opposites due to apparently clashing positions on immigration, trade, alliances and international organizations, and contrasting personalities. Actually, notwithstanding the penchant of the mainstream media and bipartisan policy establishment for Trump hysteria-mongering, one of the divides between Mr. Trump and Ms. Merkel may actually be more fundamental than recognized. Growing trade tensions might be signaling that the two economies simply aren’t structured to trade with each other in mutually beneficial ways – at least not at current levels.

So far, the mounting trade row – which could already be the most serious since American ire at an allegedly undervalued deutschemark during the Nixon era – has produced a now-predictable policy debate. The Trump administration is accusing Germany’s powerful economy of unfairly benefiting from a euro that’s kept weak because of the economic problems of its partners in the eurozone. As a result, goes the American complaint, its goods enjoy major price advantages over their U.S. competition all over the world for reasons that have little to do with market forces.

Germany and its sympathizers counter that the country simply makes terrific products, especially advanced manufactures, and that its trade barriers are actually on the low side. Another argument raised in Germany’s defense – in part because of a strong inflation-phobia created by the disastrous experience of the 1920s and by the population’s natural frugality, Germans tend to be low spenders and high savers.

All of the pro-German positions have merit. And the Trump administration case is further complicated by Germany’s consistent calls for eurozone economic policies that would tend to strengthen the common currency.

Yet Germany’s free trade record is at the least open to dispute. Although its tariff levels are generally low, like most other U.S. trade partners, it uses a value-added tax that effectively raises the prices of foreign goods headed for its market and reduces the prices of its exports via the rebates they receive. Moreover, even before President Trump took office, the U.S. government repeatedly reported that non-tariff barriers maintained by Berlin “can be a difficult hurdle for companies wishing to enter the market and require close attention by U.S. exporters.” The country’s government procurement market appears to pose special problems. According to the American Commerce Department under former President Obama:

“Selling to German government entities is not an easy process. German government procurement is formally non-discriminatory and compliant with the GATT Agreement on Government Procurement and the European Community’s procurement directives. That said, it is a major challenge to compete head-to-head with major German or other EU suppliers who have established long-term ties with purchasing entities.”

Nonetheless, the more closely the German economy is examined, the less amenable to standard trade policy remedies it looks. For Germany has long decided to create a national economic and business model that seeks both to maximize net exports and depress consumption at home. Two examples should suffice to make the case.

First, although Germany’s is, as frequently noted, a high-cost, high-regulation country, upon adopting the euro, its government put into effect a series of policies that put its labor costs on a much slower growth path than those of the rest of the eurozone and the high income world as a whole (including the United States). As many critics of Germany have charged, the resulting wage repression has overpowered the euro-dollar exchange rate and in fact amounted to an “internal devaluation” that produced the same effects as currency manipulation.

Second, Germany has also limited its consumption levels in part through very low expenses on infrastructure and other public investments. Moreover, according to one former European Central Bank official, the country’s external orientation has been so pronounced that “private investment in Germany’s aging capital stock has been weakened by many German companies’ desire to invest abroad.”

Revealingly, some of the harshest attacks on these and similar German policies have come from the eurozone itself. In particular, members like Greece and other southerly countries have accused Berlin of conducting a mercantilist campaign to grow at their expense by flooding them with exports and denying them comparable opportunities to supply the German market.

Without taking sides in this dispute, it’s clear that because the eurozone is a currency union, its success arguably depends on members conducting both their domestic and foreign economic policies in mutually compatible ways. So in principle, Germany’s eurozone fellows have grounds for complaining about the totality of the German national model. (The reverse holds as well in principle.)

The United States also should be perfectly free to ask Germany to change its priorities. Unlike eurozone members, however, it has no legitimate claims to influence over this vital aspect of German sovereignty. Germans apparently have decided that their choices work for them, and are absolutely correct to insist that aside from the rules of the World Trade Organization or other international legal arrangements, they have no obligations to accede to foreign demands for reform. Berlin, moreover, has a point when it notes that the United States should look to domestic practices of its own that might be hampering its global competitiveness, rather than placing the burden of change on others.

This German argument, however, is not dispositive. After all, if America’s national business and economic model emphasizes consumption and domestic-led growth rather than promoting net exports, that’s a choice that its own political system has been entitled to make. Moreover, it’s a choice that makes considerable sense for a big, continent-sized economy with great potential for more national self-sufficiency in a wide variety of goods and services. Germany has no more right to dictate U.S. preferences than vice versa.

The decisive difference between the two countries is that Germany has been happy with the pre-Trump status quo, and the United States has not. Washington of course has the right to press complaints about possible German violations of world trade law and other trade agreements. But it also needs to recognize that such conventional approaches are dwarfed by the breadth and depth of Germany’s approach to economics. Promoting German reform isn’t likely to work, either – given the above sovereignty concerns, and given the sheer difficulty facing even so powerful a country as the United States in urging domestic reform on another powerful country – especially one that views itself as a success.

So what to do?

First, in general terms, understand that, however legitimate Germany’s sovereign decisions, they create problems to which the United States is equally entitled to respond

Second, without continuing to hector or nag Germany, figure out the most effective response and act accordingly.

Third, depending on Germany’s counter-moves, decide what combination of unilateral carrots, sticks, and negotiations, might achieve progress (including some acceptable compromise), while preserving approximately current levels of trade.

But fourth, recognize along the way that Germany’s legitimate sovereign economic decisions simply may not permit bilateral trade to continue at those levels with acceptable results for the United States. If need be, then, revert to whatever unilateral strategy can preserve or enhance interests America has identified as its own priorities.

The new status quo would put the ball in Germany’s court, and grant it full scope to accommodate the United States if it’s dissatisfied, or make whatever other changes are needed to achieve whatever new objectives it chooses.

In other words, Washington should deal with Germany through an ongoing process of give and take, employing a variety of tactics and tools in flexible, agile ways. The aim would be to capitalize on its considerable leverage but also understand where it can and can’t hope to succeed at acceptable cost and risk. This approach clearly has a less impressive upside than efforts to produce grand bargains, or than more extensive international economic integration schemes — both of which can in theory maximize bilateral commerce. But its very modesty means that it’s less likely to risk angry misunderstandings and consequent major blow-ups, and more likely to result in trade and investment that’s sustainable not only economically, but politically, socially, and culturally.

President Trump can think of this new policy framework as the Less is More Strategy. And he should realize that its usefulness extends far beyond Germany.

(What’s Left of) Our Economy: Record Gaps in Manufacturing, Hi-Tech Goods Help Drive November Trade Deficit Bounce

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(What's Left of) Our Economy. trade, Eurozone, exports, high tech goods, imports, Made in Washington trade deficit, manufacturing, non-oil goods trade deficit, oil, recovery, South Korea, trade deficit

America’s goods and services trade deficit grew sequentially for the third straight month in November. The 6.80 percent monthly rise pushed the shortfall to $45.24 billion – its highest total since February’s $45.26 billion. Leading the increase were record monthly deficits in manufacturing ($80.75 billion), high tech goods ($13.53 billion), plus the great shortfall in oil in current dollars ($6.02 billion) since August, 2015 ($7.07 billion). Largely as a result, the merchandise deficit of $66.63 billion was the largest since March, 2015 ($70.40 billion). More encouragingly, the services trade surplus ($21.39 billion) was its largest since December ($21.57 billion).

Overall goods and services exports fell sequentially (by 0.24 percent) while their imports rose (by 1.06 percent) and hit another post-August, 205 high. Big monthly merchandise deficit increases were registered with the Eurozone (up 18.56 percent), and Korea (88.22 percent). And the November increase in the real non-oil goods (Made in Washington) portion of the trade deficit to a five-month high of $59.30 billion indicates that the trade drag on feeble recovery-era growth is set to increase.

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

>The U.S. goods and services trade deficit rose in November by 6.80 percent, from a downwardly adjusted $42.36 billion to $45.24 billion – the highest such total since February ($45.26 billion).

>The increase was spearheaded by new record deficits in manufacturing ($80.75 billion) and high tech goods ($13.53 billion), and the biggest oil trade gap in current dollars ($6.02 billion) since August, 2015 ($7.07 billion).

>In addition, the overall merchandise deficit of $66.63 billion was the greatest such total since March, 2015 ($70.40 billion).

>Also contributing to the overall rise in the November trade deficit – an 18.56 percent sequential move up in the merchandise trade gap with the Eurozone (to $12.64 billion), fueled no doubt by a weakening currency; and a stunning 88.22 percent jump in the goods deficit with South Korea (to $2.40 billion).

>The November manufacturing trade deficit was 4.90 percent higher than October’s $76.98 billion level, and slightly higher than the previous all-time high of $80.43 billion set in August.

>November manufacturing exports dropped by 5.41 percent sequentially, from $90.91 billion to $85.99 billion, but imports dipped by only 0.68 percent, from $167.89 billion to $166.74 billion.

>On a year-to-date basis, the manufacturing trade deficit stands at $792.30 billion, and is running 3.51 percent ahead of last year’s record pace.

>January-November manufacturing exports are down 6.31 percent year-on-year, while imports are off only 2.01 percent.

> The record high tech goods trade deficit of $13.53 billion hit in November obliterated the old record of $11.72 billion, set in November, 2012, by 15.44 percent.

>High tech goods exports sank by 8.93 percent on month, to $27.79 billion, while imports rose by 5.37 percent. Their $41.32 billion level was the highest since October, 2015 ($41.38 billion).

>Year-to-date, however, the high tech goods deficit is still down 5.80 percent from last year’s levels.

>November’s $6.02 billion current-dollar oil trade deficit was the highest such total since August, 2015’s $7.07 billion total. This figure was also 5.60 percent higher than the October level.

>Yet the oil trade deficit year-to-date ($50.45 billion) is still fully 36.06 percent lower than last year’s January-November figure.

>The higher November merchandise deficit with the Eurozone stemmed from a 10.39 percent in U.S. goods exports to the troubled region, whose currency keeps weakening versus the U.S. dollar, and a 0.72 percent bump up in American goods imports.

>Year-to-date, the Eurozone deficit is still down 3.47 percent from last year’s levels.

>The near-doubling of the U.S. goods deficit with South Korea, a free trade agreement partner of merica’s since 2012, reflected a 10.93 percent decrease in U.S. merchandise exports and a 13.80 percent increase in American imports.

>Year-to-date, the merchandise deficit with South Korea is running 0.56 percent higher than last year’s total.

>One of the few bright November-specific bright spots in the trade report was came in services. Its long-running surplus increased 2.54 percent on month, from $20.86 billion to $21.39 billion. That total was the sector’s best since last December ($21.57 billion).

>Yet a cause for concern is the year-to-date services surplus. At $226.58 billion, it’s currently 5.84 percent lower than last year’s January-November figure ($240.63 billion).

>The combined U.S. goods and services trade deficit for 2016 stood at $453.99 billion – 1.06 percent lower than at this point last year.

>Overall U.S. exports fell 0.24 percent sequentially in November from a downwardly revised $186.28 billion to $185.83 billion. Overall imports increased nearly five times faster – from a downwardly revised $228.64 billion to $231.07 billion. That level was their highest since August, 2015 ($231.26 billion).

>Year-to-date, overall exports are off 2.72 percent while imports are down by 2.42 percent.

>A 5.69 percent monthly rise in the November real non-oil goods trade deficit indicates that these trade flows remain a major drag on the current, historically feeble American economic recovery.

>This Made in Washington deficit – which is heavily influenced by U.S. trade agreements and related policy decisions – had been narrowing lately, with its growth-subtracting on the recovery down to 16.05 percent of the cumulative improvement in real gross domestic product as of the third quarter.

>But in November, it hit its highest level ($59.30 billion) since June ($60.76 billion).

>The publication of next month’s first full-year 2016 trade data will permit a preliminary fourth quarter calculation to be made.

>The American merchandise trade deficit with China declined in November by 1.96 percent, from $31.11 billion to $30.50 billion.

>U.S. goods exports to China’s still healthily growing economy fell by 4.56 percent on month in November, while goods imports were down 2.71 percent.

>Year-to-date, this China shortfall is running 5.90 percent behind last year’s record pace.

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

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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.

(What’s Left of) Our Economy: U.S. Growth Slowing but Trade Deficit Keeps Rising

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Canada, China, Eurozone, exports, high tech goods, imports, Japan, Korea, manufacturing, Mexico, oil, recovery, services trade, TPP, Trade, trade deficit, Trans-Pacific Partnership, {What's Left of) Our Economy

The U.S. total trade deficit rose to a six-month high of $47.06 billion despite mounting signs of an American economic slowdown and many of the best oil-related trade numbers in more than a decade. Combined goods and services exports and imports both improved, but their January levels were multi-year lows. February services imports of $41.80 billion hit a new monthly record.

The chronic bilateral goods deficit with China narrowed but the longstanding manufacturing shortfall widened and both are running well ahead of 2015’s record levels. Meanwhile, the case for President Obama’s Pacific Rim trade deal was weakened again by a high goods deficit with Korea – whose bilateral trade deal with the United States is the TPP’s model.

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

>Despite signs of a slowing U.S. economy and an historically low oil products trade deficit figure, the nation’s goods and services trade deficit hit a six-month high in February, rising 2.57 percent over January’s upwardly revised $45.88 billion to $47.06 billion.

>America’s oil trade shortfall sank 23.15 percent in February to $3.55 billion – its lowest level before adjusting for deflation since March, 1999. Current dollar oil-related imports dropped by 11.77 percent on month to $9.85 billion – their lowest level since September, 2002.

>Current dollar oil-related exports slipped as well – by 3.74 percent, from $6.55 billion to $6.30 billion. That total is the lowest since September, 2010.

>In another milestone, U.S. services imports in February rose by 0.63 percent from upwardly revised January levels to $41.80 billion – an all-time high.

>Overall U.S. exports inched up by 1.01 percent in February, from a downwardly adjusted $176.29 billion to $178.07 billion. The January export total was the smallest since June, 2011.

>Combined goods and services imports were up 1.33 percent on month, from an upwardly revise $222. 17 billion to $225. 13 billion. The former had been the lowest figure since April, 2011.

>The February numbers brought 2016’s goods and services trade shortfall to $92.94 billion – up 13.14 percent from 2015 levels.

>Overall 2016 exports are now down by 5.47 percent on an annual basis, but combined imports are off only 2.13 percent.

>The longstanding U.S. merchandise trade deficit with China dipped by 2.84 percent on month in February, from $28.93 billion to $28.12 billion. This shortfall has now decreased for five of the last six months, but remains by far America’s largest trade gap with an individual competitor or regional grouping.

>February’s results bring the 2016 merchandise trade deficit with China to $57.05 billion – up 11.53 percent from the comparable 2015 totals.

>America’s chronic manufacturing trade deficit ticked up by 0.70 percent in Feb – from January’s $65.44 billion to $65.89 billion.

>Manufacturing exports rose sequentially by 4.16 percent in February, but the much larger amount of manufacturing imports increased by 2.59 percent.

>Year on year, the manufacturing trade deficit is now running 14.08 percent ahead of 2015’s record levels.

>America’s trade deficit in high tech goods rose in February as well – by 3.21 percent over January levels, to $5.14 billion. U.S. high tech exports advanced by 0.40 percent on month in February, while imports increased by 0.86 percent.

>The high tech deficit is now running 24.91 percent ahead of 2015 levels.

>In developments with other important competitors, the U.S. goods deficit with South Korea – whose recent trade deal with the United States is the model for President Obama’s proposed Trans-Pacific Partnership (TPP) agreement – fell sequentially in February by 9.95 percent, to $2.45 billion.

>This monthly total, however, is more than four times the level of March, 2012, when the bilateral agreement went into effect.

>U.S. goods exports to Korea were down on month by 3.18 percent to $3.09 billion – their smallest monthly total since September, 2013.

>U.S. goods imports from Korea declined by 6.30 percent sequentially, to $5.54 billion.

>The oil-heavy U.S. goods deficit with Canada plunged by nearly 60 percent on month, to $1.02 billion, led by the lowest import total ($21.82 billion) since February, 2010.

>Yet the U.S. merchandise shortfall with its other partner in the North American Free Trade Agreement (NAFTA), Mexico, increased by 14.55 percent in February. The goods trade gaps with the Eurozone and Japan rose by 8.97 percent and 9.42 percent, respectively, on month.

(What’s Left of) Our Economy: Obama Couldn’t be Seeking New Trade Deals at a Worse Time

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China, currency, currency manipulation, euro, European Union, Eurozone, exchange rates, Federal Reserve, Japan, Obama, TPP, Trade, Trans-Pacific Partnership, yen, {What's Left of) Our Economy

You know that expression, “Timing is everything”? If so, you’re a big step ahead of President Obama, his trade negotiators, and most of Congress. Because it’s becoming ever more screamingly obvious (except to them) that this is a terrible time to be seeking new foreign trade agreements, and that the timing won’t be anywhere near right for the foreseeable future.

As I’ve documented, the United States has been outperforming most of the rest of the world economy since it’s recovery began in mid-2009. All else equal, when fast-growing countries increase trade with slower growers, their imports from the laggards tend to rise faster than their exports to the these countries. As a result, the trade balances of the faster growers typically worsen, turning trade into a drag on their economies.

This reality alone would seem enough to kill the case for President Obama seeking new trade deals with a group of 11 other Pacific Rim countries (the Trans-Pacific Partnership, or TPP) and with the European Union (EU). Even worse, the economies in these groups that are outgrowing America mostly have done so by racking up trade surpluses. So it’s unlikely that their own export-led economies will become growth engines for the United States.

If you look at exchange rates – the value of the dollar versus that of other foreign currencies – pursuing trade expansion, especially a la Obama and Congressional majorities, seems still more counterproductive. All else equal (I know that phrase could be getting tiresome, but it really is needed to underscore how single variables never explain economic trends entirely) once initial effects fade, a weak currency will improve a country’s trade balance (and growth) by lowering the prices of its goods and services versus those of competitors. A strong currency usually has the opposite effect. And nothing could be clearer from the data that the strong dollar points to a trade-inflicted hammering of America’s recovery if the president’s plans bear fruit.

Conveniently, the Federal Reserve tracks exchange rates for a group of countries with “major currencies” – which “circulate widely” outside their home countries. Even more conveniently, these include the yen (since Japan’s is by far the largest non-U.S. economy in the TPP), and the euro (since the eurozone includes the main countries negotiating the US-EU trade deal). What these Fed data show is that the dollar is just shy of near-12-year highs versus this basket of currencies whether you adjust for inflation or not.

Could the dollar weaken much against these currencies going forward? Sure – if you think that Japan and the EU will become world growth leaders in the foreseeable future. Given that both the Japanese and European counterparts of the Fed have been trying to juice those economies with Fed-type bond-buying programs, and given that the results have been even less impressive, that looks like a big stretch. And don’t forget – the eurozone will be strapped with major Greece-like debt problems for many years.  

Another major obstacle to sustained dollar weakening will undoubtedly be foreign currency manipulation.  Countries like TPP member Japan and China (will looks sure to join before too long) have long histories of artificially weakening their currencies to gain trade advantages when market forces aren’t getting that job done.  The president could have favored including in TPP an enforceable ban on this unusually effective form of protectionism, but he opposed such proposals.  As a result, both the TPP countries and members of the EU will be completely free to devalue their currencies at America’s expense whenever their growth rates need boosting.

Strangely – or not? – one of the main domestic beneficiaries of trade deal-related timing looks to be President Obama. When the U.S. economy starts suffering the consequences of these misguided agreements, his time in the White House will have come and gone.

(What’s Left of) Our Economy: New Evidence that Greece’s Former Prosperity Really was Built on Sand

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bubbles, consumption, Europe, Eurozone, France, Greece, incomes, Ireland, Italy, Spain, {What's Left of) Our Economy

A new Pew Research Center report is a gold mine of information that I’ll be returning to in the next few days and weeks. But given the intensification of the Greece crisis this weekend, it seems especially important to note briefly what it shows about that country’s experience in the Eurozone. It’s especially revealing on how the easy access to credit made possible by Greece’s membership created one of history’s most stunning examples of false prosperity.

Among other statistics, Pew’s study of global incomes over the last decade presents figures on the shares of many national populations that could be classified as “high income” in 2001 and 2011. And the Greece numbers are mind-blowing. In 2001, 10.8 percent of Greeks belonged in the category with family per person income (or consumption) of $50 or more per day. (These figures are expressed in 2011 dollars adjusted for differences in price levels across countries.) By 2011, this share had more than doubled – to 23.8 percent. Moreover, the share of “upper middle income” ($30-$50 per capita per day) Greeks by this measure increased from 49.8 percent to 54.2 percent.

Even given the relatively low base from which Greek incomes began, it has to be significant that the only other countries in Western Europe that saw anything close to this progress were the continent’s other problem debtors. In Italy, for example, the high income share of the population just about doubled, from 17.1 percent to 34.8 percent. Spain saw 18.4 percent to 27.3 percent growth in this category, and the numbers were 21.2 percent to 36.2 percent in Ireland. (Pew did not present any figures for Portugal.)

Among economically and financially healthier Western European countries, oil rich Norway’s high income residents rose from 56.3 percent of the population to 77.2 percent, while the comparable numbers for France were 27.3 percent and 37.9 percent.

Moreover, Greece was a major out-performer in the Upper Middle class as well. In Italy, Spain, and Ireland, this group fell as a share of the population from 2001 to 2011. Ditto for France.

In case you’re wondering, the United States is one of the few wealthy countries studied that saw a decline in its share of the population living on more than $50 per day between 2001 and 2011 – from 58.2 percent to 55.7 percent. The Upper Middle class increased only from 31.4 percent of the American people to 31.9 percent. And therein hangs many a tale, as I’ll be reporting.

(What’s Left of) Our Economy: Even a Great Energy Performance Can’t Keep Trade from Killing U.S. Growth

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Canada, China, energy, Eurozone, growth, Japan, Korea, KORUS, manufacturing, Mexico, NAFTA, non-oil goods deficit, North American Free Trade Agreement, Obama, TPP, Trade, Trade Deficits, Trans-Pacific Partnership, {What's Left of) Our Economy

The monthly May trade figures show that even as the energy revolution keeps improving America’s overall performance, trade flows strongly influenced by trade deals and related policies keep producing historically high deficits and therefore remain drags on growth. Moreover, the still-worsening Korea goods deficit indicates that President Obama’s proposed Pacific Rim trade deal will bring more of the same, since it is modeled on the 2012 Korea agreement (KORUS).

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

>Despite the lowest monthly U.S. oil deficit since December, 2001, the combined goods and services trade deficit rose in May rose by 2.88 percent on month, from a downwardly revised $40.70 billion to $41.87 billion. These figures kept the shortfall running slightly (0.51 percent) ahead of last year’s pace on a January-May basis.

>The May oil trade gap, in current dollars, shrank by 15.27 percent on month, to $5.78 billion, just slightly higher than December, 2001’s $5.50 billion.

>Thanks to the interacting effects of lower global energy prices, a sluggish world economy, and America’s energy production revolution, for the first five months of the year, the U.S. oil trade deficit of $38.44 billion is only 43 percent as big as 2014’s comparable figure.

>America’s dramatically reduced oil trade performance helped produce an historic development in May – the first monthly merchandise trade surplus with Canada, its largest two-way trade partner, since monthly data have been published (1985). The $644.1 million goods figure contrasts with the $169.3 million deficit for April. The next best U.S. monthly goods trade figure with Canada was the $95.8 million deficit run in April, 1990.

>By contrast, the U.S. non-oil goods deficit rose month-to-month in May by 3.90 percent, from $52.60 billion to $54.65 billion – the second highest level ever for this portion of American trade flows, which unlike oil trade is heavily influenced by trade agreements and related policies. (March’s $61.76 billion is the all-time high monthly non-oil goods total.)

>May overall worldwide U.S. exports fell by 0.77 percent, to $188.60 billion, from their upwardly revised April level of $190.07 billion. The much larger amount of May combined imports ($230.47 billion) was only 0.13 percent lower than the downwardly revised $230.77 billion April figure.

>Year-to-date so far, overall exports have decreased by 2.73 percent, versus a 2.15 percent decline for the greater influx of combined imports.

>The U.S. China merchandise trade deficit rebounded strongly in May as well – by 15.01 percent, from $26.48 billion in April to $30.45 billion. The increase was led by a 5.99 percent monthly drop in U.S. Goods exports to China – from $9.32 billion to $8.76 billion.

>Year-to-date, U.S. goods exports to China are down 6.07 percent – more than the 5.12 percent fall-off in overall U.S. goods exports. Moreover, whereas U.S. global goods imports are down 3.50 percent on year, they’re up by 6.25 percent from China.

>Although the manufacturing-heavy U.S. China trade deficit worsened, the overall American manufacturing trade deficit actually improved slightly in May – from $66.70 billion to $66.55 billion. Manufactures exports dipped by 0.61 percent on month while the much greater amount of imports was lower by 0.45 percent.

>At the same time, at $320.33 billion, the manufacturing trade deficit this year is running 15.23 percent ahead of last year’s record pace. January-May American manufactures exports have sunk by 4.25 percent, while imports have increased by 2.51 percent.

>The U.S. goods trade deficit also worsened with new free trade partner Korea, whose 2012 deal with Washington is described by the Obama administration as the model for its proposed Trans-Pacific Partnership trade agreement.

>At $2.75 billion, the merchandise deficit with Korea was 9.76 percent higher than the April figure, and more than five times its level on a monthly basis than when the bilateral deal went into effect in March, 2012.

>Especially troubling – U.S. goods exports to Korea are down 12.51 percent since then on a monthly basis. Since March, 2012, U.S. global goods exports are only down by 3.12 percent according to the same measure.

> U.S. trade in high tech goods deteriorated in May as well. The longstanding deficit rose by 13.55 percent on month to its highest level of the year – $7.23 billion. Both U.S. high tech exports and imports fell.

>Year-to-date, this high tech deficit is 2.32 percent greater than the January-May, 2014 figure, but fully 9.41 percent below 2013’s comparable number.

>Although Canada’s monthly merchandise trade with the United States turned into an historic U.S. surplus, the nation’s other NAFTA partner, Mexico, saw its own goods surplus with America resume rising – by 3.64 percent on month, to $4.56 billion.

>The merchandise deficit with the struggling Eurozone rose slightly in May, but the goods trade shortfall with Japan plummeted by more than 23 percent, to $5.32 billion, mainly because U.S. goods imports dropped by 15.48 percent.

Following Up: For Greece and Creditors, Minimalism = Realism

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Angela Merkel, austerity, bailouts, debt, EU Stability and Growth Pact, euro, European Central Bank, European Union, Eurozone, Following Up, France, Francois Hollande, Germany, Greece, International Monetary Fund, Russia, Syriza

Every new fact emerging from Greece and its plight seems weirder and weirder. Today, the day of the country’s referendum on its creditors’ proposals to handle its financial crisis, the Greek government started issuing “official projections” of the final results. Not that Greece covers multiple time-zones like the United States, but I’m sure glad Washington isn’t in that possibly elections-altering business.

As of this writing, the only (apparent) certainty about the Greece mess is that its population has rejected the latest bailout-for-austerity deal offered by the European Union, the European Central Bank, and the International Monetary Fund. Even Europe’s most important national leader, Germany’s Angela Merkel, doesn’t seem to know what comes next; before the polls closed, she announced that she’ll meet tomorrow with French President Francois Hollande for a “joint assessment of the situation.”

Europe’s immediate challenge is deciding what a “No” vote by Greece means for the future of the European Union and of the eurozone – since Greece appears to have decided to break the rules of these rules-based institutions. (Here it’s important to note that Greece has by no means been the first rule-breaker, and that two of the biggest outlaws – when it comes to the EU’s Stability and Growth Pact – have been Germany and France.) How the continent handles the Greek challenge will surely influence how other economically hurting, debt-strapped – and larger – members of its defining organizations will react.  Specifically, will Portugal and Spain and ultimately even Italy more actively wonder whether they are better off remaining within such arrangements or leaving?

In turn, these decisions have huge national security and geopolitical implications. However flawed they have or haven’t been, pan-European institutions have been major pillars of the free world’s strategy for turning the continent into a zone of peace following centuries of calamitous wars.  In a nuclear age, for the entire world’s sake, these conflicts simply could not be allowed to continue. It’s eminently arguable that these institutions were insufficiently democratic or badly structured from an economic standpoint, or simply that they sought too much too soon (or too little too late, depending on your viewpoint). But if they fall apart, recreating them will be excruciatingly difficult, and Europe will surely become a more, not less, combustible place.

Worse, this new instability would emerge just at a time of rising tensions between America and its European allies on the one hand, and Vladimir Putin’s Russia on the other. Indeed, it’s entirely possible that Greece’s Syriza party leaders are betting on precisely these dangers to produce greater flexibility by their creditors.

But as important as these threats are, it’s tough to imagine any of them being solved or even headed off for very long if Greece’s fundamental economic problems aren’t solved, and what’s painfully clear to me is that no one in charge anywhere has a realistic plan.

As I suggested last week, Greece lacks a viable national economy. And no bail-out programs or austerity policies, much less further can-kicking, do anything to change its fundamental predicament. It doesn’t produce enough goods and services at affordable prices to meet its own current (first world-level) desires. It doesn’t produce enough of anything that the rest of the world is willing to purchase from it that’s needed to fill the gap. And I haven’t seen any evidence that any Greek leaders or European leaders are even thinking in detail about these issues – which matter crucially these days because the world economy is growing so sluggishly.

The closest I’ve seen to any micro-economic and structural thinking about Greece’s future is the idea that the country could ride a tourism boom back to respectable growth if either (a) the Germans and other wealthier Europeans would simply spend more of their incomes on Greek vacations; or (b) a currency devaluation following an exit from the euro made Greek vacations an irresistible bargain for the entire world.

Leaving aside the lunacy of believing that tourism and the overwhelmingly lousy jobs it creates can sustain Europe-style living standards, how many Europeans and others are likely to flock to Greece for the foreseeable future? By all accounts, many of its neighbors’ populations are thoroughly fed up with Greece’s perceived insolence, and its likely near-term future of economic turbulence doesn’t look like a formula for filling hotel rooms.

So I see no reason to change my view that most of Greece is headed for at least years of third world living standards no matter how the next few weeks and months turn out. It’s true that no one “owes Greece a living,” especially given the spendthrift choices made by its leaders and accepted with varying degrees of enthusiasm by so many of its people. Similarly, it’s true that no one forced the Greeks to borrow all the money that private sector European lenders foolishly provided. But it’s also true that both European financiers and the pensioners and other clients whose funds they invested in Greece, have gotten off pretty easy for their reckless choices, with the continent’s taxpayers and the governments they underwrite absorbing many of these losses.

As a result, maybe at least some of the intertwined political and emotional obstacles to genuinely constructive Greece policies could be cleared away with two measures. First, European authorities in particular should offer Greece some honesty. Second, that country’s financial enablers should be required to help fund purely humanitarian programs aimed at helping those Greeks who are suffering through no fault of their own.