(What’s Left of) Our Economy: Why the U.S. Still Holds the Winning Economic Cards Versus China

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Biden, CCP, China, Chinese Communist Party, CNBC.com, consumers, consumption, demographics, Donald Trump, export-led growth, gross domestic product, IMF, International Monetary Fund, per capita GDP, population, technology, Trade, trade wars, workforce, {What's Left of) Our Economy

Since there seems to be no end in sight to the rise in U.S.-China tensions, it’s especially interesting that two analyses of the Chinese economy and its future that challenge some widely held views on the subject have just appeared. Also noteworthy: They matter greatly for America’s perceived prospects for success, and one of them comes from the Chinese Communist Party (CCP) itself.

More important still:  When you put them both together, the implications look positively startling – and encouraging – for America’s prospects in its economic and technological struggle with the People’s Republic.

The first apparently contrarian information comes from the International Monetary Fund in the form of this chart.

It shows recent and projected trends in U.S. and Chinese gross domestic product (GDP) per capita – that is, how much economic output each country turns out adjusted for population. This statistic is a valuable gauge of economic power and affluence because it reveals which national economies (or the economies of any other political unit) are a certain size simply because their populations are a certain size (big or small), and which economies are doing a particularly good or bad job generating goods and services given how many people are doing the producing.

For example: Let’s say you have one economy with a population of 100 and one with a population of 10,000, and the latter generates twice as much economic output than the former. The more populous country would have the larger economy in absolute terms, but its performance wouldn’t be seen as especially impressive because it took so many people to achieve this result – and indeed orders of magnitude more people than the smaller population economy.

Moreover, the latter economy would have much less wealth to distribute among its own people than the former, and therefore each of its citizens would be a good deal poorer than their counterparts in the smaller economy all else being equal.

But let’s not dismiss the bigger economy’s record altogether. For if the two ever fought a war – all else equal again – the bigger economy would have much more in the way of resources to build and equip a military, and keep it fighting, than the smaller.

Throughout modern history, the U.S. economy has greatly exceeded China’s by both measures, but because of the amazing progress made in recent decades by the People’s Republic and a slowdown in U.S. growth, China has been able to close the gap in terms of the size of the two economies. In fact, many forecasters (as made clear in the CNBC.com post containing the chart), believe that the Chinese will catch up before too long. As indicated above, the implications are sobering for Americans if the two countries come to blows, and by extension for any diplomatic jockeying they engage in – for relative military power always casts a political shadow.

China’s overall catch up has been so fast that you might think that the per capita GDP gap that’s been so large because China’s population has been so much bigger than America’s might start narrowing, too. But the chart makes clear that this hasn’t been the case at all. Indeed, the gap has continued to widen, and is projected to keep widening at least for the next four years.

And this finding and prediction suggests that the unquestionable surge in living standards that China has been able to foster due to its rapid growth – which has led so many U.S. and other non-Chinese businesses to pin their future hopes largely on selling to this huge and supposedly ever-burgeoning market – won’t even come close to American living standards for many years. So if the chart is right, the purchasing power growth of the typical Chinese will stall out at pretty low levels and disappoint many of these corporate hopes.

As a result, fears that a thorough “decoupling” of the two economies resulting mainly from U.S. concerns about over-dependence on an increasingly hostile country will kneecap many U.S.-based businesses and possibly the entire American economy could be seriously overblown, at least longer term. For if the chart is right, these expectations will be revealed as unrealistic no matter what course Washington follows – and even if China displayed any willingness (which it hasn’t) to permit foreign businesses to make any more inroads into its economy than are absolutely necessary.  (See here for the latest – and an unsually explicit – official Chinese designation of “complete” economic self-reliance as a goal.)  

All of which brings us to the second contrarian take on China that’s been expressed recently – and by the Communist Party. It’s a finding from the Deputy Director of a party-run research institute that the country’s “Consumption has already past the phase of rapid increase and will only rise slowly in the future.” And his opinion deserves big-time credibility because he clearly believed that he could express such a downbeat view without getting his head chopped off, or being sent for a few decades to a reeducation camp, or risking punishment for any immediate family and relatives.

In addition, however, Xu cited two specific, interlocking reasons for this judgement: an aging population and a shrinking workforce.  And although he seemingly didn’t mention this, if China will need to temper its plans to generate more economic growth through its own domestic consumption, it will need not only to rely more on the kinds of infrastructure investment he did cite.  It will also need to keep relying heavily on exports – which should ensure that the United States will retain plenty of leverage over the People’s Republic with its tariffs as long as the Biden administration decides to leave them in place. 

None of this means that former President Trump was right in claiming that trade wars are “easy to win,” or that maintaining satisfactory technological superiority will be a piece of cake, either, or that generally the United States can stop worrying so much about China threats on these scores.  But it does mean that if American leaders have the will to prevail – and to advance and safeguard U.S. interests adequately – they’ll have plenty of wallet to use.                                    

 

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(What’s Left of) Our Economy: Why China Trade Will Long Remain a Loser for Americans

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China, export-led growth, The Wall Street Journal, Trade, trade surpluses, Trefor Moss, Trump, {What's Left of) Our Economy

Since the United States decided to expand trade and commerce with China as fast as possible, numerous books and studies (including mine – see here and here) have tried to make the case first that this approach was certain to work out disastrously for the domestic economy, and later, that this scenario was actually unfolding.

If only when the major decisions were being made, or when they still could have been reversed relatively painlessly, could something like this new Wall Street Journal article have been published. For Trefor Moss’ report on China’s struggling export industries makes unusually clear that if pre-Trump presidents and Congresses (representing both Democrats and Republicans) truly tried to use trade policy to strengthen America’s productive core and its workers, facilitating business with China would have been one of their lowest priorities.

The reason, as Moss indicates: China’s economic strategy has always been so dependent on boosting exports much more than imports – in the words, on generating and increasing trade surpluses – that ever greater bilateral economic ties were never capable of creating more opportunities for domestic companies and workers than they wiped out.

Indeed, decades after Washington bipartisanly began to champion “coupling” the two countries, and throughout which Americans were constantly promised that China’s was going to become an economy driven more by domestic rather than by U.S. and other overseas demand, and therefore a huge winner for America on balance, Moss’ piece shows that these promises look more specious than ever. For even today, entire geographic regions of the People’s Republic and entire Chinese industries literally have nothing to do with supplying the needs and desires of Chinese customers, and everything to do with servicing foreign – and especially U.S. – markets.

Four particularly revealing observations in Moss’ article:

“Many of the products made [in the huge export hub of Yiwu], such as Christmas decorations and other low-cost, labor-intensive commodities, simply aren’t needed domestically in significant quantities. Only a small percentage of China’s 1.4 billion people are openly Christian, according to the U.S. human-rights group Freedom House.”

>”’Yiwu’s challenge is that the domestic market doesn’t have the stomach to consume all these products,’ said Dan Wang, chief economist at Hang Seng Bank China. ‘They’re not really suitable for domestic use.'”

>”Even getting products that Chinese people do want into domestic circulation will take time since Yiwu’s merchants lack local distribution connections, according to Andrew Batson, director of China research for Gavekal, a Hong Kong-based research firm.”

>”While consumption as a share of gross domestic product has risen over time in the U.S., reaching 68% in 2018, China’s has steadily declined to just 39%.”

Not explained by Moss, however, (and I’m not being critical here) is the fundamental explanation for this Chinese export orientation – and throughout the countries’ leading production cities and regions, not just Yiwu: It’s not simply a preference of the Chinese regime’s. It’s an iron necessity for achieving the country’s ambitious economic development goals, and as a result, for safeguarding China’s rulers paramount priority – keeping the populace happy enough to keep this dictatorship in power.

For as I pointed out most recently in this post, however much wealth it’s gained in recent decades, China’s population collectively still remains too poor by itself to fuel the growth needed to continue raising living standards robustly. Indeed, Chinese incomes have long remained so low in absolute terms that even after its lengthy run of spectacular progress, China still needs foreign incomes to fill the demand gap left by its inability to consume adequately.

In recent years, much of official Washington, and even the Swamp full of hangers on and consultants and lobbyists that surrounds it, have become aware that national security worries call for rethinking longstanding U.S. trade policies with China.  Moss’ article is a valuable reminder that the purely economic case for a trade policy reversal remain compelling, too.

(What’s Left of Our Economy: The Case for Decoupling from China Just Got Even Stronger

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China, consumption, consumption-led growth, decoupling, domestic demand, double-circulation, export-led growth, exports, Financial Times, Michael Pettis, rebalancing, Reuters, semiconductors, tariffs, The Race to the Bottom, Trade, Trump, {What's Left of) Our Economy

Double-circulation is all the rage nowadays in China – or at least among its leaders. No, it’s not anything related to treating the CCP Virus and the blood system. It’s the idea that the People’s Republic needs to shift its economic model away from heavy reliance on growing by exporting to dependence on growing by supplying its own commercial entities and especially consumers.

Double-circulation also could well be seized on by supporters of the pre-Trump U.S. trade policy status quo for easing off on the high tariffs on literally hundreds of billions of dollars worth of Chinese goods aimed at American markets. After all, if China needs to export less, logically anyway, it will also need to resort less to predatory tactics like intellectual property theft, massive subsidies, and technology extortion to juice these exports – whether they come from Chinese-owned entities or from foreign owned companies selling from China in foreign markets like America’s.

A China more focused on domestic demand might even give a break to foreigners trying to reach Chinese consumers, by giving Chinese households and commercial entities greater choices. But even though this point doesn’t follow as closely, the domestic consumption focus of double circulation could produce more opportunities for foreign producers and service providers anyway simply by putting more money in Chinese consumers’ pockets. If so, double circulation could make the Trump administration’s apparent aim to decouple the United States from China whoppingly self-defeating for American businesses and their workers. 

I haven’t bought the double circulation thesis – and its policy implications in particular – ever since I wrote my book on globalization and the U.S. economy, The Race to the Bottom, back in 2000. So I’m especially pleased to report that my case has just been reenforced by a genuinely excellent authority on the Chinese economy, and by the Chinese regime itself. Even better – these reenforcements also strongly support the apparent Trump administration objective of decoupling America’s economy from China’s.  

Just to be clear: At no time during the last twenty years have I doubted that, on the trajectory it was on, China would become much wealthier, and that the purchasing power of Chinese consumers would rise considerably. Moreover, there was no reason to believe that even the protectionists ruling in Beijing would want to shut imports out of the Chinese economy completely.

But I also had no doubt that, however much more the Chinese would consume in absolute terms, the economy’s export dependence would continue for the foreseeable future simply because Chinese incomes were starting from such meager levels. Therefore, the policy challenges created by the growing integration of the Chinese economy into the U.S. and larger global economies would continue as well – and actually intensify.

The reason? The combination of China’s rock-bottom purchasing power in absolute terms, its ambitious and understandable economic development goals, and its determination to advance them by hook or by crook, would keep confronting America and the world with a country that would long need to produce far more than it could consume in order to keep making economic progress.

For it would take decades at best before China’s population could absorb by itself the output needed to fuel Chinese economic development – or even close. The domestic market simply would remain too small. And since that excess output needed to be bought by someone, it needed to be sold overseas. In fact, Beijing would need to constrain the growth of domestic consumption, since in order to keep churning out the goods needed to power more production, most of the economy’s capital needed to be channeled to producers, not consumers.

And just this past week appeared two items strongly indicating that this analysis has always been and remains on target, and highly relevant to the decoupling debate 

The Chinese economy authority I’m talking about is Michael Pettis – who actually teaches at a Chinese university! In an August 25 Financial Times essay, Pettis made the following key points:

>”Double circulation” is nothing more than a fancy new term for “rebalancing” – and has been an officially proclaimed goal in China “since at least 2007.”

>Almost no progress has been made toward rebalancing: “The consumption share of Chinese GDP remains extraordinarily low, just two percentage points higher in 2019 than it was in 2007. Meanwhile, and not coincidentally, during this period China’s debt-to-GDP ratio doubled.”

>And that progress is largely to blame for China racking up so much debt. After all (and here, I’m reading between Pettis’ lines), since the global financial crisis broke out starting 2007-08, slower U.S. and global growth have tightly limited China’s export opportunities. But since even the country’s iron-fisted dictators couldn’t afford politically to antagonize the population by slowing living standards advances, Beijing needed to borrow on an immense scale, and spend most of this credit on an infrastructure binge that included too many unproductive white elephant projects.

>China’s debts are so big that they’re becoming unsustainable. The best way out – while keeping the population’s income progress reasonably intact – is to reignite exports. But – and here’s where Pettis (who details the problem in a new book) echoes my own analysis in an absolutely striking way – such efforts face a fatal contradiction:

“China’s export competitiveness…depends on ensuring that workers are allocated, whether by wages or the social safety net, a very low share of what they produce. China’s export strength, in other words, depends, at least in part, on the low share workers retain of what they produce.”

At the same time, “China can only rely on domestic consumption to drive a much greater share of growth if workers begin to receive a much higher share of what they produce, so the very process of rebalancing must undermine China’s export competitiveness.”

So putting the issue in the terms I’ve been using, and zeroing in on the policy implications – including hopes for the China market – however much Chinese incomes and purchasing power grow in absolute terms, continued Chinese economic progress still depends on its exports growing considerably faster. As a result, whatever U.S. and other foreign producers as a whole gain in selling goods made in their home countries to Chinese customers, they’re bound to lose more in their domestic markets to Chinese-made products. Of course, any number of individual firms will come out ahead. But their domestic economies consistently will come out behind.

Consequently (and these are my ideas, not Pettis’), whatever short-term disruptions, inefficiencies and therefore weakening of growth and employment take place in the course of pursuing decoupling, this strategy is essential for boosting output and employment in the United States over the longer-term, and for making sure that its own economic progress is sustainable – not to mention the decisive strategic benefits of reducing dependence on China in key industries.

The Chinese government confirmation of these China concerns and ideas of mine appeared in a Wednesday Reuters article on the country’s imports of semiconductors from around the world. The fact that they’re so huge (on a pace to top $300 billion this year for the third straight year, despite the Chinese economy’s partly CCP Virus-induced slowdown) is awfully interesting. So is their rapid growth – up from the $200 billion neighborhood in 2013.

But here’s what’s much more interesting, at least for the U.S. debate on China policy: the statement by the vice-chairman of the China Semiconductor Industry Association that “of the chips that China imported, about half would be exported eventually as they are incorporated into other products.”

It’s interesting and crucially important because it undercuts the claim that U.S.-China decoupling could backfire most of all on the companies relied on by America for so much of its technological competitiveness – the semiconductor companies.

The claim is based on the widespread view that these companies earn much, and in some cases most, of their global revenues in China. (See here for specific numbers.) And that’s indeed what they state in their financial reports.

But as the Chinese semiconductor vice-chairman just made clear, these figures are true only in the narrowest, technical sense. Specifically, when firms like Qualcomm or Intel sell a chip to an electronics company that manufactures or assembles in China, the transaction is recorded as a sale in China whose revenue comes from China.

But since half of the chips used in China go into products for export, it’s clear that in many cases, the end user – the ultimate source of the revenue – isn’t in China at all. It’s elsewhere, including prominently the United States.

Put differently, China isn’t simply, or even mainly, a customer itself for foreign-made, including U.S.-made, semiconductors. It’s largely an assembly location and export platform. It’s true that its electronics industry production base overall is now the world’s largest, that much of its output now consists of information technology products as well as consumer electronics, and that reproducing it elsewhere will take major, protracted effort. But the base itself – including China’s own semiconductor industry – could not have been built without the investments of foreign multinational companies. (See, e.g., here and here.) And if the multinationals can create such an immense complex in China, they can create one elsewhere, too, especially presented with the right policy carrots and sticks.

And by the way, the vice-chairman of the China Semiconductor Industry Association isn’t anything like an official from a typical industry association in a place like the United States. He’s a Chinese government official. So there you have it from the dragon’s mouth.

Neither the Pettis article nor the China semiconductor official’s remarks means that the United States should rush headlong into decoupling. But they do indicate that, particularly over the long-term, this dis-integration exercise will be an economic – as well as a national security – winner for Americans.

(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.