(What’s Left of) Our Economy: Why Trump was Still Right to Nix Obama’s TPP Trade Deal

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Asia, Barack Obama, bilateral trade agreements, China, export-led growth, mercantilism, multilateral trade agreements, non-tariff barriers, rules of origin, subsidies, tariffs, tech transfer, TPP, trade surpluses, Trans-Pacific Partnership, Trump, {What's Left of) Our Economy

At first I was irritated with President Trump for his expressions of interest this year in reviving U.S. efforts to join the Trans-Pacific Partnership (TPP) – the Pacific Rim-wide trade agreement that former President Barack Obama couldn’t persuade Congress to ratify, and that Mr. Trump removed from America’s policy agenda during his first week in office.

I still wish the President had kept the TPP consigned to the proverbial ash heap of history. But I do see one silver lining in his apparent about-face: the new opportunity it creates to remind how awful the Obama TPP was, and in particular how cynical the case that it represented a masterful ploy to contain the rise of Chinese power regionally and globally, and even shape it to serve America’s goals of sustaining an open world trading system.

In fact, it’s entirely possible that Mr. Trump’s apparent new openness to TPP results at least partly from widespread claims from mainstream politicians and analysts that its multilateral nature endowed the deal with much more potential to curb China’s trade predation than the unilateral tariffs he’s announced.

Yet this contention is the one that’s most easily refuted. First, the version of the treaty signed by Obama contained a wide open back door for many Chinese exports by allowing goods that contained high levels of content produced outside the TPP zone to be traded freely within the zone. Given how central China is to Asia-wide production chains, these loose rules of origin were bound to enable China to enjoy crucial benefits created by the TPP without incurring any of the obligations.

Second, until the eve of its departure from office, neither the Obama administration nor any TPP supporters in Congress or the mainstream media or the think tank world lifted anything more than the occasional pinky even to protest perhaps the principal source of China’s rising economic and military power – the massive transfer of cutting edge knowhow, along with capital, from U.S. tech companies to Chinese business partners or other institutions, either voluntarily (including through shortsighted training programs and investments in Chinese entities) or involuntarily (due to Beijing’s widespread practice of linking access to the China market to the handover of critical technology).

The sudden transformation of these corporate panda-huggers and their hired American guns into China skeptics and even hawks has demonstrated nothing more than that national security is the last refuge of a trade policy scoundrel – especially since by all accounts, U.S. technology and investment continue pouring into China – including defense-related tech. (See here and here for some evidence.)

Third, there’s no reason to believe that most of the other key TPP members have any interest in turning China into a free-trading economy. Quite the contrary. Whether it’s Japan or Singapore or Vietnam or Malaysia, most of the treaty’s most important countries have followed China-style economic development models (except when they’ve borrowed from Japan’s somewhat different but of course much earlier blueprint). And economic openness emphatically isn’t in the recipe. What’s central to these strategies is amassing trade surpluses with the United States and the rest of the world to help generate adequate levels of growth and employment.

The bottom line: Most TPP countries knew that effective disciplines on the trade predation largely responsible for China’s surpluses could be used against their own subsidies and non-tariff barriers. Conversely, it’s surely the reason that these economies accepted the paper curbs on mercantilism that are mandated by TPP. They’re rightly confident that thanks to the secretive bureaucracies that keep their economies effectively closed – and their barriers difficult for outsiders even to identify, much less litigate – none of these curbs is remotely enforceable.

Even better for TPP’s mercantile majority, the treaty’s dispute-resolution system ensured that the United States would be repeatedly outvoted when it sought to advance or defend its interests.

That’s why the TPP was so likely to supercharge America’s already enormous and economically damaging trade deficits. The TPP mercantilists’ liberalization promises would do nothing substantial to open their markets and increase U.S. export opportunities. But America’s TPP commitments, carried out by a government characterized by transparency, would be very effective guarantees that the American market would remain wide open to the TPP majority’s products.

President Trump has demonstrated that he recognizes many of these fatal flaws in the Obama TPP. His stated preference for bilateral over multilateral trade deals suggests an understanding that the former give the United States much more legal authority in dispute resolution. Moreover, he has explicitly tweeted that he’d only back rejoining the TPP if major fixes were made.

Precisely because he’s the only American President in recent memory to show any interest in changing the nation’s ill-considered trade status quo, and any awareness that the United States retains ample leverage to achieve its trade objectives unilaterally, I can’t rule out the possibility that Mr. Trump might turn TPP into a winner for the U.S. domestic economy (as opposed to the importing and offshoring lobbies).

But the main lesson that should be taken from decades of American trade diplomacy with Asia is that economies structured to promote exports and limit imports are going to stay substantially closed no matter what promises they make. Therefore the best course for the United States to make is to expend its energy and resources on reducing its economic engagement with Asia, rather than trying to remake the region in anything like its own image.

(What’s Left of) Our Economy: TPP Defenses are Turning Downright Farcical

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Asia, China, export-led growth, Harvard Business Review, Pankaj Ghemawat, TPP, Trade, trade surpluses, Trans-Pacific Partnership, Trump, {What's Left of) Our Economy

It’s always embarrassing when your brain stops working. (And we’ve all had those moments.) It’s especially embarrassing when it happens in public, and it’s downright humiliating when you make your living with that brain – and you have a title like “ Global Professor of Management and Strategy and Director of the Center for the Globalization of Education and Management at the New York University Stern School of Business.” Not to mention “Anselmo Rubiralta Professor of Global Strategy at IESE Business School in Spain.”

So if I was Pankaj Ghemawat, I’d be furious that the Harvard Business Review has just shared on Twitter an absolutely jaw-dropping example of brain freeze – his December article titled, “If Trump Abandons the TPP, China Will Be the Biggest Winner.”

Like way too many other backers of the Trans-Pacific Partnership that’s been just killed off by President Trump, Ghemawat seems completely unaware of some basic facts about TPP’s relationship with China. Like the fact that, even though the deal was widely touted as a means of containing the PRC’s rising economic, political, and military power, the negotiators gave Beijing a wide open back door into the new free trade zone. How? By permitting large numbers of manufactured products to be sold in TPP countries duty-free even if they contained high levels of Chinese content.

As a result, China would not only enjoy many of the benefits of TPP membership without incurring any of the obligations. Worse, it would reap these economic rewards without arousing the attention of economic interests struggling against often predatory Chinese competition.

But unlike most TPP supporters who have focused on the supposed China angle, Ghemawat has introduced an argument that is not simply lame, but transparently so.

It has to do with with this map he included in his piece.

 

Its purpose is illustrating Ghemawat’s claim that Mr. Trump’s decision to pull the TPP plug is a big win for China by showing which countries trade most with the United States, and which countries trade most with China. According to the author, the map shows that “The U.S. leads in a few places, particularly in the more proximate parts of the Americas, but China leads more broadly.” Even more worrisome (allegedly), “Extrapolations indicate that by 2025, the Chinese sphere of trade leadership will extend even farther, with the U.S. forecast to lead only in the part of the Americas that is north of the equator.”

But if Ghemawat’s brain really was working when making these claims, it seemed to have convinced him that the countries taking up the most land area are the most important economically and strategically. To which the most respectful reply is, “You can’t be serious!”

After all, think just for a minute about all those geographically enormous regions where trade with China is dominant, or where the Chinese lead. Much of it is sub-Saharan Africa, which is economically inert. Much of the rest is Russia and Eastern Europe – no great prizes economically. The same goes, in spades, for South America.  

Three major economies are indeed on this list: Australia, Brazil, and Japan. But the first two are mainly raw materials suppliers to Chinese manufacturing. They also compete with American farmers and ranchers for global markets, but the last thing they want to do is to start buying lots in the way of U.S. agricultural products.

As for Japan, it’s obviously extremely wealthy. Indeed, it’s the world’s third largest single national economy (behind the United States and China). But it’s been growing very slowly, at best, for many years, and its markets are hermetically sealed both in agriculture and industry. And much of its trade with China consists of sending the PRC parts and components of advanced manufactures that the Chinese assemble into final products and then export – often to the United States.

Further, the same goes for most of the other important Asian countries where China holds the trade lead that so impresses Ghemawat. Sorely inadequate American trade data makes presenting precise numbers impossible, but how else can it be explained that nearly every economy in the region runs hefty trade surpluses with the United States?

Finally, it’s vitally important to remember this export orientation when thinking about the one country on earth where China trade dominates, according to the author’s map: China itself. Exports – and more specifically, amassing trade surpluses – have long been and remain crucial to China’s growth, and in turn to its political stability. And the United States is a big part of this picture. Even China’s own (often dubious) economic data reveal that nearly half of its annual trade surplus is run with America.

China is an important market for U.S. exports as well. But as with its Asian neighbors, it’s a much smaller final consumption market because so many U.S. sales to the PRC also are parts of components of finished goods that then get sent abroad – frequently right back to the United States. And even the deeply misleading aggregate trade data make clear that in absolute terms, the Chinese market is incidental to the American economy, and even more so to its growth.

Karl Marx, who was wrong on a great deal, once famously wrote that, “History repeats itself, first as tragedy, second as farce.” Ghemawat’s article is strong evidence that TPP defenses (and lamentations) are well into the second stage.

(What’s Left of) Our Economy: Lopsided Trade is Making Financial Crisis 2.0 Likelier

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Bloomberg, dispute resolution, export-led growth, free trade agreements, Global Imbalances, HSBC, IMF, International Monetary Fund, Janet Henry, Korea, Larry Summers, manufacturing, Obama, offshoring, secular stagnation, TPP, Trade, Trade Deficits, Trans-Pacific Partnership, {What's Left of) Our Economy

As RealityChek regulars know, my biggest fear about the U.S. and global economies concerns the likelihood that rebounding, trade-centered current account imbalances around the world will lead to an international financial and economic crisis just as they did in the previous decade. The big difference next time, of course, would be that major central banks would not have already poured trillions of dollars and yen and euros worth into major economies in a vain attempt to promote historically adequate growth.

So it’s great to see these concerns coming from a new source. As reported by Bloomberg last week, on top of the International Monetary Fund, the U.S. Treasury, and, as I’ve reported, leading academic economists) a leading analyst from the HSBC bank is expressing comparable worries.

To review quickly, the idea is that the record trade and broader payments shortfalls run by the United States in the “aughts” sent so much foreign capital flooding into the country that most incentives to use these funds prudently vanished. And with years of deregulation and lax regulation freeing American finance companies to concoct ever more reckless schemes to deliver acceptable returns in the face of this yield-depressing glut, much of the economy turned into a gigantic, housing- and consumption-fueled Ponzi Scheme.

I’d add three extra points. First, the offshored U.S. manufacturing production behind so much of the nation’s trade deficits greatly reduced the number of genuinely productive investments that the American financial sector could contemplate. Meanwhile, the burgeoning narrative that manufacturing was increasingly passe for an advanced economy like the United States kneecapped any expectations that adequate productive investment opportunities would return any time soon.

Second, the neglect of productive domestic sectors like manufacturing played a major role in plunging the United States into the secular stagnation trap so cogently described by former Treasury Secretary and Harvard economist Larry Summers. For an economy lacking adequate productive ways to foster growth – and especially a democracy – will be continually and sorely tempted to spur short-term growth by inflating dangerous credit bubbles.

Third, America’s proposed new trade deals, especially the Trans-Pacific Partnership (TPP) are likeliest to boost U.S. trade deficits further. Their most economically dynamic signatories depend heavily on net exporting for growth. Their foreign market-opening measures are either inherently difficult to enforce or subject to dispute-resolution processes stacked in favor of export-dependent defendants. And America’s remaining trade barriers are easy to identify and will be much easier for the other signatories to eviscerate. Indeed, TPP is modeled on the bilateral U.S. trade agreement with Korea, under which the American merchandise deficit has skyrocketed.

The analysis by HSBC’s Janet Henry doesn’t apparently go into this degree of trade policy detail. But it makes two especially disturbing points of its own. First, as made clear by this chart, the global imbalances in toto are back to their bubble-decade levels – and then some.

True, the American shortfall is down since peak bubble bloat. But it’s up since the current economic recovery began. Moreover, the historic sluggishness of the current expansion is undoubtedly keeping the current account and trade gaps down.

Second, the chart shows that the biggest source of resurgent current account surpluses is “Other Asia” – which of course includes Japan and other important TPP members. China’s chronic surplus hasn’t recovered quite as fast, but TPP could change that as well, since its inadequate rules of origin give outside countries a wide open backdoor into the new trade zone.

As strongly suggested by his renewed TPP push, President Obama either doesn’t know about these developments and relationships, or doesn’t care. If he succeeds in a lame duck session of Congress, or if his successor fails to heed the glaringly obvious trade policy lessons, Americans may look back on their current secular stagnation as an economic golden age.

(What’s Left of) Our Economy: Obama’s TPP Case is Staler than Ever

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ADB, AIIB, APEC, Asia Pacific Economic Cooperation, Asian Development Bank, Asian Infrastructure Investment Bank, China, environmental standards, export-led growth, exports, Free Trade Area of the Asia Pacific, FTAAP, Japan, labor standards, NAFTA, North American Free Trade Agreement, Obama, RCEP, Regional Comprehensive Economic Partnership, SOEs, state-owned enterprises, TPP, Trade, Trans-Pacific Parternship, World Bank, {What's Left of) Our Economy

Maybe President Obama believes that repeating even the most laughably off-base contentions endlessly will make them true? Or convincing? It’s hard to look at his new Washington Post op-ed urging passage of his Pacific Rim trade deal and conclude anything else. The article makes clearer than ever that the Trans-Pacific Partnership (TPP) makes sense for the United States only if Americans ignore everything known about the agreement itself, about U.S. trade with the eleven other signatories, and about the region’s economics and commerce.

The President’s fraudulent case for TPP starts with his first claim – that “some of our greatest economic opportunities abroad are in the Asia-Pacific region.” Trouble is, as I’ve noted, the only truly fast growers on the list of TPP countries are economies like Vietnam and Malaysia, whose growth depends on not only exporting, but on amassing large trade surpluses. They lack both the capabilities and the intention of becoming significant net buyers of U.S.-origin goods and services. Compared with the United States, most of the other TPP countries are growth laggards.

Similarly, Mr. Obama’s description of the proposed TPP zone as representing a whopping 40 percent of the global economy ignores how the American economy represents more than 60 percent of total TPP area output. Moreover, the United States already has negotiated trade deals with many of the largest signatories, notably Australia, Canada, and Mexico. So Americans have long reaped nearly all of whatever benefits the President argues will result from this exercise in trade expansion.

No more credible is Mr. Obama’s insistence that the TPP will benefit America by enabling the United States to influence writing the rules that govern regional commerce rather than permitting Chinese-led arrangements shape this environment.

After all, as critics like Republican presidential front-runner Donald Trump has pointed out, China already stands to gain from the TPP, thanks to loose origin requirements that permit free or freer trade of goods with high levels of content from non-TPP countries. And since China for decades has been a key node in the multinational production chains that bind together so many Asian economies, much of this non-TPP content will obviously be Chinese.

Further, nothing could be clearer than the determination of the TPP countries to avoid making either-or choices when it comes to rule-writing exercises for East Asian commerce. No less than six TPP signatories – including Australia and New Zealand – have signed up to participate in the Asian Infrastructure Investment Bank (AIIB) that China set up recently in part as a TPP counterweight. And although the largest by far non-U.S. TPP signatory, Japan, has so far declined to bandwagon, the Asian Development Bank (ADB) that it has traditionally co-dominated has started working actively with the AIIB. So has the World Bank.

These last two developments, by the way, mean that the United States has also decided to work with the Chinese initiative rather than continuing to oppose it, since Washington plays a major role in both institutions.

And what about the Chinese-initiated regional trade agreements about which Mr. Obama expressed so much alarm? The Regional Comprehensive Economic Partnership singled out by the president has already attracted seven TPP signatories – including Japan, along with Australia and New Zealand.

Interestingly, Mr. Obama didn’t mention a second Chinese regional trade scheme – a Free Trade Area of the Asia Pacific (FTAAP). Maybe that’s because he’s decided to cooperate with Beijing on this front, too, at least to the extent that he approved a study of the proposal under the auspices of the Asia Pacific Economic Cooperation (APEC) process in which Washington participates.

Finally, the president’s belief that the TPP will greatly boost U.S. exports through enforceable new rules remains a monument to delusion. As I’ve explained, enforcing labor and environmental standards would require an army of American officials to inspect hundreds of thousands of facilities in low-income countries like Vietnam and Malaysia. Who’s going to pay for these personnel? And that’s not even including the vast manufacturing complex that’s been created in Mexico since it joined a North American Free Trade Agreement (NAFTA) more than twenty years ago, and in which evidence abounds such provisions remain overwhelmingly ineffective.  (Hence, largely, the president’s insistence that “this time, it will be different” in TPP.)  

As for the state-owned enterprises (SOEs) whose trade-distorting activities TPP will supposedly curb, how will U.S. officials gain access to these notoriously secretive constructs and their financial records? Moreover, since low (at best) labor and environmental standards along with opaque SOEs are keys to competitiveness throughout Asia, why would the region’s TPP signatories give Washington the power to weaken these arrangements through dispute-resolution hearings?

President Obama writes that the alternative to Congress passing the TPP is “building walls to isolate ourselves from the global economy.” That’s the most pernicious trade policy and TPP myth of all. The real alternative is developing trade policies based on global economic realities, not his own fantasies about the power of mere pen strokes.

(What’s Left of) Our Economy: China’s Still Taking the Easy — Export-Led — Way to Growth

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China, export-led growth, exports, Financial Crisis, G20, Global Imbalances, mercantilism, protectionism, rebalancing, recession, recovery, Trade, UN Conference on Trade and Development, {What's Left of) Our Economy

Ever since the financial crisis of 2007-08 and the ensuing recession shifted global growth into a much slower gear, the world’s business and economic policy establishment has identified at least one likely silver lining: Sluggish demand in its major foreign markets would force China to speed up its transition from an export-led to a domestic demand-led economy. In the process, the massive, U.S.-China-centered worldwide trade and investment imbalances that resulted in unsustainable international growth patterns and set the stage for the crisis would start to moderate, and the foundation for healthier global growth would be laid.

This scenario was especially appealing to the economic and business powers-that-be because it held that changes in global trade and investment flows would take place without governments resorting to tariffs and other interventions that history supposedly taught would set all countries back further.

Today, however, Reuters reported on data showing that these claims have indeed been too good to be true. As I have predicted, for the closely related reasons that its consumers as a whole remain far too poor to generate satisfactory Chinese growth on their own, and that an import- and offshoring-friendly U.S. government would preserve the export-led approach as Beijing’s easy way out, China has confounded the rosy post-crisis scenario. According to the UN Conference on Trade and Development (UNCTAD), although the world economy and trade flows remain weak, China has coped by boosting its market share.

In fact, UNCTAD contends, not only did China’s share of world exports rise from 12.3 to 13.8 percent between 2014 and 2015 alone. That 13.8 percent represents the highest global export share any country has enjoyed since the United States in 1968. Revealingly, at that time, the world economy was much more vigorous (even though major inflationary and related pressures on the gold standard were mounting), and America’s predominance was still near its zenith.

Moreover, China’s global trade surplus hit a new record last year, too: $595.4 billion. So could we also drop the widely expressed idea that the PRC is an important engine of global growth on net – or is generating any global growth on net? To the contrary: Countries with surging worldwide trade surpluses mathematically must be subtracting from global growth, and in a slow-recovery world, they are nothing less than parasitic.

Discouragingly, however, the official global rhetorical consensus – as expressed in the communique issued by the Group of 20 finance ministers and central bank governors last week – remains focused on using “all policy tools – monetary, fiscal and structural” to foster growth, and resisting “all forms of protectionism.” Leading academics who claim to understand the threats posed by beggar-thy-neighbor currency policies also still appear convinced that more government deficit spending in particular will raise all global boats enough to end the current stagnation even if trade flows are free to stay as lopsided as ever – or worse.

So next year, the safest economic bets seem to be continued sluggish growth, more Chinese trade gains at the rest of the world’s expense, mounting international imbalances, a consequently greater threat of Financial Crisis 2.0 – and repeated insistence that interference with trade must be avoided at all costs. Unless American voters get angry enough?

Im-Politic: Is Trump’s Wall Plan Unrealistic, or All Too Realistic?

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2016 election, capital equipment, Donald Trump, export-led growth, Im-Politic, Immigration, Mexico, remittances, The New York Times, Trade, trade wars, Vicente Fox, wall, Will Olney, Williams College

Since Donald Trump revealed key details behind his proposal to deal with illegal immigration from Mexico by building a wall along America’s southern border, I’ve been waiting for the critics to make abundantly clear why the plan is nuts. Judging from recent attacks from Mexico and in The New York Times, it looks like the wait will be lengthy.

The looniest claim by far is that Mexico would launch a “trade war” with the United States if the Republican front-runner won the White House and used tariffs on Mexico’s exports to the United States to fund the project. This prospect has been raised by no less than former Mexican President Vicente Fox, who told the Associated Press, “Let’s suppose he establishes tariffs, just imagine. We put tariffs on the (hundreds of billions of) dollars that the United States sells to Mexico.’’

It seems that in his golden years, Fox has forgotten that the United States buys nearly 80 percent of Mexico’s exports annually. So that export-dependent economy is going to antagonize its best customer by far? And at a time when sluggish world growth means that no other markets could possibly substitute for America’s? Rotsaruck with that.

Fox also ignores the huge share of U.S. goods exports to Mexico (at least half in 2015) that consists of capital equipment and various other industrial inputs – i.e., the building blocks of Mexico’s export-focused manufacturing base. Talk about cutting off one’s nose, etc. And although it’s true that Mexico could find other suppliers, its own demand for such machinery, equipment, and materials would practically vanish if its access to the U.S. market was lost or greatly reduced.

Equally silly was the op-ed in yesterday’s Times by Williams College economist Will Olney, who argued that if America could overcome the (formidable) legal, financial, and logistical obstacles to financing the wall a la Trump, the plan could harm the United States as much as Mexico. Unfortunately, the two main reasons he provided hold no water.

First, according to Olney, paying for the wall by effectively halting Mexican immigrants’ remittances back home could prevent these immigrants from helping their relatives “invest in education, start businesses and get out of poverty.” As a result, “withholding this money may actually encourage immigration to the United States.” But what seems to have slipped Olney’s mind is that regardless of more adverse economic conditions in Mexico, migrant flows from south of the border logically wouldn’t change once the wall was built because migrants would…face a wall.

Olney would have been better advised to note that bigger migration flows could be expected while the wall was still incomplete. But there’s a fly in this ointment, too: Even though Mexicans have been streaming to the United States legally and illegally for many years, and sending money back home, the impact on Mexican poverty seems unimpressive. For half the country’s population is still classified as poor.

More nonsensical is Olney’s claim that “Banning remittances could also reduce incentives for the best and brightest immigrants to come to the United States. Without the opportunity to provide for their family and friends back home, many talented immigrants might choose to move elsewhere. “ But no one is talking about banning or curbing remittances to any country other than Mexico. And there’s no shortage of the best and the brightest from elsewhere knocking – legally – on America’s door.

Moreover, even remittances to Mexico wouldn’t be banned forever, or even for very long. Under Trump’s plan – which calls for banning remittances only from illegal U.S. residents from Mexico – all restrictions would be lifted once a “one-time payment of $5-$10 billion” to finance wall construction is made by Mexico’s government.

Trump’s wall-financing proposal may indeed founder on many of the aforementioned legal, financial, and logistical obstacles – like keeping track of wired money transfers, and distinguishing between those that will be permitted those singled out for blocking. And the wall itself may prove unfeasible for similar reasons. But it’s also quite possible that these barriers can be overcome – and that Trump’s critics don’t mainly object to the wall because it can’t work, but because it can.

(What’s Left of) Our Economy: Krugman’s Trade Confusion

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Alfred E. Eckes, allies, China, Europe, export-led growth, foreign policy, Great Depression, Japan, Mexico, New York Times, Paul Krugman, Russia, Smoot-Hawley Tariff, South Korea, tariffs, Trade, trade surpluses, {What's Left of) Our Economy

You have to hand it to Paul Krugman. Who else but the New York Times columnist and Nobel Prize-winning economist could contribute to one of the hoariest myths surrounding American trade policy, and then turn around and debunk another vital canard? And all within a week!

Two days ago, Krugman repeated a common but wildly off-base talking point long used by trade cheerleaders when he wrote that a trade critic who won the U.S. presidency “would find it very hard to do anything much about globalization — not because it’s technically or economically impossible, but because the moment he looked into actually tearing up existing trade agreements the diplomatic, foreign-policy costs would be overwhelmingly obvious.”

Fears of significant foreign blowback have always been comical from an economic standpoint because so much of the rest of the world has depended on so much of its growth for so long on amassing trade surpluses with the United States. Endlessly voiced fears of “trade wars” endlessly ignore how self-destructive it would be for these foreign trade powers to engage in protracted economic conflict with their best customer.

The contention about diplomatic costs is no more serious. Of course, the Chinese would complain. But since the trillions of dollars of surpluses Beijing has racked up with America have so lavishly helped finance China’s military buildup, any trade overhaul could only enhance U.S. national security.

America’s allies would grouse also. But since most are in fact protectorates that would struggle – at best – to defend themselves without U.S. military support, which ones are likely to hit back at Washington? The Europeans, who worry about mounting Russian ambitions, but whose continued flirtation with recession is bound to keep restraining already inadequate spending? The Japanese and South Koreans, who face a Chinese adversary at least as powerful, and comparably dismal economic outlooks? And how much meaningful diplomatic retaliation could be expected from low-income, export-dependent Mexico, which more than two decades after the North American Free Trade Agreement went into effect still relies on the American market for 80 percent of its foreign goods sales?

Much more convincing was Krugman’s post five days earlier, which took on the Smoot-Hawley fallacy. As the author noted, a mainstay of the case for current trade policies is the belief that any interference with trade flows will start the U.S. and world economies down the slippery slope toward recessions. And as he has also noted, the American Smoot-Hawley tariff is widely blamed for triggering or deepening the Great Depression of the 1930s (and, he could have mentioned, the political and military horrors that followed).

So kudos to Krugman for pointing out that “trade fell a lot between 1929 and 1933, but that was almost entirely a consequence of the Depression, not a cause,” and for spotlighting research making clear that “Trade actually fell faster during the early stages of the 2008 Great Recession than it did after 1929.” Incidentally, much more data debunking the standard Smoot-Hawley claims can be found in this scholarly history of U.S. trade policy by Ohio University’s Alfred E. Eckes.

Neither of these Krugman posts proves (wittingly or not) that big changes in America’s longstanding trade strategies are essential. But if it’s this easy to shred arguments this central to the trade status quo for so many decades, it’s time to start wondering what’s left of the case for standing pat.

 

Following Up: The IMF Again (Unwittingly) Undermines Obama’s TPP

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Canada, Christine LaGarde, export-led growth, Following Up, IMF, International Monetary Fund, Japan, lobbies, Malaysia, Mexico, multinational companies, Obama, offshoring, TPP, Trade, trade balances, Trans-Pacific Partnership, Vietnam

Does the International Monetary Fund (IMF) have it in for President Obama’s trade agenda? Last week, I noted that a speech by IMF chief Christine LaGarde threw freezing water all over the major economic argument made by Mr. Obama and other supporters on behalf of his Trans-Pacific Partnership (TPP). This morning, the Pacific Rim trade deal was drenched by a similarly frigid bucket when the Fund released the data underlying LaGarde’s remarks.

The economic case for the TPP serving U.S. interests holds that it will speed up the nation’s historically phlegmatic recovery by enabling American businesses and their workers to sell to exciting new growth markets overseas. Unfortunately, as LaGarde’s speech confirmed, everything we’ve learned about the world economy in the last year or two is that the globe’s biggest out-performer – at least among the major powers – is none other than the United States. And as I keep writing, America is also a growth champion when it comes to the TPP countries themselves. Today’s latest set of IMF global growth projections provide yet more evidence.

Like all economic forecasts, the new IMF projections should be viewed with some skepticism. But it’s surely noteworthy that they leave intact, and even may strengthen slightly, the story that TPP will tie the United States more closely to global economic laggards, not leaders. Therefore, it’s likeliest to drag America’s own performance down even further.

The new IMF figures update the last set of projections, issued in October, and nearly every major region and country receives a growth downgrade – including the United States. TPP supporters can also in principle take heart from the Fund’s prediction that America’s growth from 2015 to 2017 will be slower than overall global growth. In absolute terms, the ongoing U.S. expansion will also lag those of TPP signatories like Mexico, and apparently Vietnam and Malaysia.

But it’s vital remember that those countries grow mainly by exporting, and more specifically by improving their trade balances. Since the United States is a major customer for all, their growth is unlikely to benefit America on net.

Moreover, economists pay at least as much attention to changes in growth rates as to the growth rates themselves, and in all three cases, slowdowns are expected this year and next. In Mexico’s case, it’s expected to match the U.S. rate (by 0.2 percentage points compared with the October forecast for each year). The Fund doesn’t provide specifics for Vietnam and Malaysia, but it does believe that expansion in their Southeast Asian region will be weaker by nearly the same degree (0.1 percent this year and 0.2 percent in 2017).

And for the larger TPP signatories, the IMF outlook is gloomy as well. The Fund has downgraded expected Japanese and Canadian growth rates for 2016 and 2017 by a bit less than their U.S. counterpart. But both expansions are still expected to lag America’s in absolute terms. Further, in both these cases, too, net exporting to the United States, will be central to any growth hopes.

Given the size and diversity of the U.S. economy – and its consequent potential for even more self-sufficiency than it’s already displayed – American political leaders logically would be trying to separate America from a weak-growing world still further. But lobbies that benefit over the short run from continued trade expansion (like offshoring-happy multinational companies) still wield the whip hand over Washington, D.C. trade policymaking.  So a slowdown in the foolhardy U.S. rush toward greater integration with that feebly growing, export-dependent world is clearly the best that can be realistically hoped for.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(What’s Left of) Our Economy: Debt-Strapped America is Still the World’s Leading Growth Engine

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China, Congress, consumption, debt, export-led growth, exports, Financial Crisis, Information Technology Agreement, intermediate goods, Obama, offshoring, South Korea, TPP, Trade, trade Deals, Trade Deficits, Trans-Pacific Partnership, {What's Left of) Our Economy

Although I wasn’t planning on posting today, some data was released yesterday that underscores two major points about the nature of the world economy and the dangers it still face it that can’t be repeated often enough.is

The data seem pretty arcane – on South Korea’s exports. But that country’s trade patterns exemplify broader flows that have created a dangerously lopsided international economic system, that in fact set the stage for the last financial crisis, and that threaten to create a rerun.

The headline development is that Korea’s exports dropped sharply on a year-on-year basis in December – which in a conventional sense spells bad news for the U.S. and world economies. Korea’s, after all, is an economy heavily dependent on exporting. If its overseas sales are crumbling, that’s a strong indication that the economies of customer countries are too weak to buy much of what the Koreans sell.

But the real import of the new statistics concerns where the fall-offs have been biggest and smallest. Most important of all, virtually none of it took place in shipments to the United States. Specifically, Korea’s overall goods exports (no figures were provided on services exports) plunged by 13.80 percent from December, 2014 to this past December. But they dipped only 0.60 percent to America.

This disparity is the latest evidence that the United States is still playing its traditional contemporary role of global importer of last resort – even though its own growth is lagging. In fact, America’s overall goods imports have been growing much faster than its goods output (let alone its goods exports!) since the current economic recovery technically began back in the summer of 2009. That kind of growth can only be fueled by debt accumulation – which led to such misery in 2007 and 2008.

More broadly, because of the losses in real incomes resulting from years of the offshoring-friendly trade policies they pursued so avidly, U.S. leaders during the previous decade recognized that their ability to stay in power depended on one of two hopes materializing. First, against all odds and evidence, incomes in offshoring destination countries would rise so dramatically that Americans could increase their own earnings by supplying those new markets. Second, Washington could encourage the public to maintain its living standards by substituting borrowing for earnings. Since the first hope was dashed, the second was peddled – and like all houses of cards, ultimately collapsed.

But in addition to showing that the United States and its binge consuming remains the world’s import sponge – and thus growth engine – the Korea trade data make clear that China is not, as widely supposed, performing this function. Here’s why. China’s ostensible growth role stems from its status as the top export market for not only Korea, but most of East Asia. That, however, doesn’t mean that China is where most Korean or other Asian exports are finally consumed – which is what would be needed for China to deserve its growth leader title. After all, China’s economy is export-led itself. So what gives?

As reported in a Bloomberg article on the new trade figures, two-thirds of Korea’s goods exports to China are intermediate goods. They’re the inputs for final products – parts, components, materials, and the like, along with machinery and equipment – that are assembled in the People’s Republic. Many of the final products are sold in China, whose own growth is slowing. But many others need to be exported from China. And a large share goes to the United States.

So U.S. growth is what really pulls along economic activity throughout throughout the string of countries that largely serve as its supply chain – which includes China itself. And lagging American growth is what sends this process into reverse, including in China, even though cheap credit continues enabling U.S. imports to grow much more than they should.

It would be great to report that Washington is on the case and working to diligently to prevent worsening trade imbalances from moving the nation and world closer to another near-financial collapse – and perhaps a bigger one. But in 2012, President Obama and Republican Congressional leaders cooperated to win approval of a U.S.-Korea trade deal practically formulated to supercharge America’s bilateral deficit. And this past year, they secured trade promotion authority for the president that greatly increases the odds of Congressional passage of a Pacific Rim trade deal (the Trans-Pacific Partnership, or TPP) structured in much the same way. Moreover, a less publicized global trade deal covering high tech products, the Information Technology Agreement, is likely to have similar effects. And you thought Charlie Brown letting Lucy hold for his place kicks had a shallow learning curve?