(What’s Left of) Our Economy: Manufactured Bad News About Trump’s Manufacturing Record

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Barack Obama, Financial Times, Great Recession, manufacturing, real value-added, recovery, Trump, {What's Left of) Our Economy

So here I was, planning to spend a nice, quiet, blogging-free day on this Fourth of July, when some casual web surfing revealed that the Financial Times, a newspaper I genuinely respect, runs an article besmirching President Trump’s record on reviving manufacturing. And it did so in an unusually intellectually dishonest way.

The Times‘ news coverage usually plays it straight on Trump-ian issues like trade and manufacturing, however vehemently its editorial page opposes the President’s stances. But in its review today of the current U.S. economic recovery (which this month became the longest in American history), it claimed that “The relative weakness of the current economic expansion is owing to the underperformance of the manufacturing sector.”

Fair enough. But then came this contention:

“Despite Mr Trump’s rhetoric in the 2016 election campaign about sparking a revival in the traditional industrial regions of the US, this expansion has been overwhelmingly based on services, which were responsible for two-thirds of the increase in value added from 2009 to 2018.”

And that swipe was completely inexcusable. Perhaps worse – it’s transparently and incompetently inexcusable. Because Donald J. Trump wasn’t President for most of the current recovery, which began in the middle of 2009.

In fact, when you look at the relative performance of manufacturing under Mr. Trump, and under his predecessor, Barack Obama, it becomes embarrassingly clear that industry through 2018 (the latest data year examined by the Times – and naturally so, since it’s the last full year for which statistics are available) has fared much better in the Trump years, and made a far greater growth contribution. Here are the numbers.

Between 2009 and 2018, in terms of real value-added (the measure of output properly used in the Times article), the U.S. economy grew by $3.3576 trillion. Manufacturing production increased by just over $300 billion. So industry only contributed 8.94 percent of the growth during this period.

But then break down these developments by administration, and…what a difference! Under President Trump, starting in 2017 and running through 2018, the total economy in real value-added terms expanded by $907.2 billion. Manufacturing’s contribution totaled $140.5 billion – or 15.49 percent.

During the 2009 through 2016 Obama period, total real value-added increased by $2.4504 trillion. Manufacturing’s contribution was $159.7 billion – or 6.52 percent. That’s way less than half of its contribution during the Trump years.

Moreover, nearly 61 percent of manufacturing’s growth during the Obama administration took place in a single year – 2009-10. That’s when industry engineered a strong comeback from a near-death experience during the Great Recession. In other words, once the economy regained something like a normal footing, annual manufacturing growth slowed practically to a standstill.

Another way to illustrate manufacturing’s out-performance during the Trump years. In 2016, in standstill terms, manufacturing real value-added represented 11.29 percent of after-inflation gross domestic product. Fueling 15.49 percent of the economy’s overall inflation-adjusted growth over the next two years is what’s known as “punching above your weight.”

In 2008, manufacturing real value-added accounted for 12.94 percent of the total economy in constant dollar terms on a standstill basis. And from then through 2016, it fueled 6.52 percent of total price-adjusted growth. That’s known as “punching below your weight.:

Is American manufacturing today “Great Again?” In my view, it’s clear it’s got a long way to go (and no more so than in reducing its gargantuan, chronic trade deficit, a key measure of global competitiveness). Moreover, so far this year, domestic industry has gone through a tougher slog. In fact, since July, 2017, after-inflation domestic manufacturing production has been down on net – which means that it’s been in recession. (And which also means I should have caught that development when the last Federal Reserve industrial production figures – for May – came out. So apologies for that oversight.)

But even a poor full 2019 for manufacturing could still leave the Trump record considerably better than Obama’s. And for the time period examined by the Times, despite the impression it tried to leave, there’s simply no contest. In fact, you could call the report manufactured news.

And before I forget:  Happy Birthday, America!

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(What’s Left of) Our Economy: A Laughable Indictment of Trump’s World Bank Choice

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David Malpass, economic development, Financial Times, globalism, multilateralism, third world, Trump, World Bank, {What's Left of) Our Economy

I was going to post this morning on more implications of yesterday’s new monthly U.S. trade figures, but as so often happens, the Mainstream Media has just come out with an article whose mind-boggling cluelessness reveals such deep-seated biases that I had to switch gears. Special bonus – it didn’t even come from a mainstay of the establishmentarian U.S. foreign policy and globalization Blob. Instead, we have the Financial Times editorial board to thank.

What other conclusion can be reasonably drawn from the FT editorial slamming President Trump’s appointment of David Malpass to head the World Bank?

Not that Malpass has been God’s Gift to Economics or to the cause of third world economic development. But according to the FT, a big problem with Malpass is that he lacks the leadership experience as well as intellectual and often political heft of previous U.S. choices like – wait for it – Robert S. McNamara.

That’s right – the same Robert McNamara who deserves such blame for the American disaster in Vietnam. What’s next for the FT? Criticizing Mr. Trump for appointing a senior military adviser lacking the battlefield genius of George Armstrong Custer?

Almost as bad: What’s given the FT editorialists the idea that McNamara, or any of his pre-Malpass successors, was such a whiz at the Bank? Here’s an appraisal of McNamara’s tenure arguing that he unintentionally created “incentives for Bank staff and management to push money out the door, sometimes with relatively little regard for how it would be used—a practice that still bedevils the Bank’s work today.” And this was from an admirer.

A second major FT argument against Malpass looks more reasonable at first glance:

“His judgment even on economics, his supposed speciality, is wanting. Notoriously, as then chief economist at Bear Stearns, Mr Malpass was blithely confident about the strength of the US economy in 2007 — a year before the global financial crisis hit and his own employer went under.”

What the FT conveniently forgets, though, is that using this standard would rule out virtually every economist in the world as World Bank president.  

Considerably stronger is the FT‘s observation that “As early as 2011 [Malpass] suggested tightening monetary policy and driving up the dollar, a hard-money philosophy entirely at odds with the reality that the Fed had averted economic disaster.”

The problem with this school of thought is that, although the Federal Reserve’s flooding of the American economy with easy money may have been necessary to keep the nation (and world) afloat, it’s also arguably created a global addiction to super-cheap credit that’s kneecapped chances of restoring genuine long-run economic health.

As contended by no less an economic authority than Lawrence Summers (a former World Bank research chief), the result has been “secular stagnation” – the inability of the United States or other major countries to grow acceptably without inflating lending and spending bubbles that are doomed to burst disastrously.

As the editorial makes clear, the FT mainly objects to Malpass because he’s “deeply sceptical of multilateral institutions.” Which would be funny even if the FT itself didn’t describe the Bank as already “dysfunctional” – despite being led by McNamara and all his supposedly genius successors.

More fundamentally, all else equal, why should anyone lack skepticism about any means to an end? Worshiping multilateralism is like worshiping a hammer. Sometimes is the best tool to use; sometimes it’s not.

The FT reasonably argues that “With an increasing number of rival sources of development finance — not to mention private capital — the bank needs to think hard about where it can best add value.” The paper just as reasonably concludes that effecting change requires its president “to be a critical friend of multilateralism who recognises that its institutions need to be adapted to a changing world, not an instinctive ideological enemy.”

But given that these – and other – problems with the Bank have persisted for so long, it’s hard to imagine that a leader accepted by multilateral fetishists like the FT would generate the necessary push.

As a result, the Malpass nomination can just as reasonably be viewed as a Trump administration attempt to change the kind of losing game coddled for so long by diehard multilateralists like the FT editorial board. Such critics should exhibit a little more humility before writing him off as a sure failure. Not to mention minimal historical memory. 

(What’s Left of) Our Economy: Mainstream U.S. Trade Policy’s Main Rationale Has Just Been Blown Up

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Bill Clinton, BRICS, China, emerging markets, EMs, Financial Times, globalization, Jim O'Neill, multinational companies, offshoring, Project-Syndicate.org, Sherrod Brown, The Race to the Bottom, Trade, trade agreements, {What's Left of) Our Economy

I’m always struck by how often in the news media or policy writing (e.g., in journals like Foreign Affairs), genuinely game-changing points are made in passing, and for folks with any interest in the trade and globalization issues raised to such prominence by President Trump. And two such instances dealing with this subject just came in the Financial Times newspaper and the website Project-Syndicate.org.

The observation they both made with mind-boggling offhandedness – economic growth in countries dubbed “emerging markets” (EMs) is slowing to rates no faster than those of the rest of the world, and thus rendering them incapable as far as the eye can see of replacing the United States as a global growth engine.

This claim matters decisively for trade policy because these EMs have dominated America’s approach in this field for more than two decades. First identified in the early 1990s, they consist of economies in the developing world that not only boasted enormous populations. But largely because communism and a heavy state role in economic policy had been so thoroughly discredited due to the end of the Cold War, they were steadily transitioning to more free market approaches, and thus were seen to have huge growth potential. China and Mexico were the leading examples, but various definitions of the main emerging markets also included India, Brazil, Russia, Turkey, South Africa, and others.

According to trade enthusiasts, this combination of characteristics was going to make the EMs so important that accessing their vast current consumer markets and even greater consuming and importing potential needed to be Washington’s top trade priority. Their significance was portrayed as all the more important given America’s status as a “maturing” economy whose growth was bound to continue slowing. (Former President Bill Clinton used exactly this term while advocating for an emerging markets push in a document that’s not on-line but that’s cited in my book on globalization, The Race to the Bottom. The document was the 1995 Report of the President of the United States on the Trade Agreements Program and it was published by the Office of the U.S. Trade Representative at the start of 1996.)    

Yet however impressive and promising they seemed, the idea was a crock from the beginning – at least in terms of its importance in driving American trade policy for the foreseeable future. EM cheerleading suffered two fatal flaws. First, despite rapid growth and immense growth potential, the emerging markets were starting from such low bases – especially in terms of their populations’ consuming power – that they wouldn’t become significant markets in absolute terms for many years at best. Second, precisely because they remained so poor and under-developed, their governments invariably realized that their own best growth opportunities came from exporting to much wealthier countries like the United States – where the needed consumption power already existed.

So why the EMs euphoria? As documented exhaustively in The Race to the Bottom, the multinational corporations that dominated American trade policy-making never saw the emerging markets as final consumption markets. They viewed them as super low-cost production bases from which they could supply the U.S. market much more profitably than possible from their domestic factories. Which is exactly why, starting with the pursuit of trade expansion with Mexico at the onset of the 1990s, American trade policy almost exclusively targeted the emerging markets and other very low-income countries (like Vietnam and the countries of Central America) for negotiating new trade deals.

Ohio Democratic Senator Sherrod Brown (a possible 2020 Democratic presidential contender) described the multinationals sales pitch to leading EM China somewhat too charitably when he said in 2015, “while walking the halls of Congress, [lobbyists for the multinationals] talked about they wanted access to 1 billion Chinese customers. What they didn’t say is they also wanted access to 1 billion potential Chinese workers.”

As The Race to the Bottom also made clear, EM touting was star-crossed from the start – even embarrassingly so. As it peaked, in the mid-1990s, many of these same countries started experiencing problems that led to major financial crises even before the decade ended. That is, their markets became evaporating, not emerging, and in numerous cases they kept afloat only by cheapening their currencies, limiting their own consumption and importing still further, and making them more powerful exporters than ever.

Yet the multinationals’ power and influence remained so decisive throughout America’s political (and media) establishment that emerging markets hucksterism continued to justify trade agreements with such countries. Hence the continued repetition of wholly misleading contentions like “95 percent of the world’s consumers live outside the United States” (which I debunked here).

So that’s why I was so interested to see the following in a Financial Times blog post – and by no less than a former senior official at the International Monetary Fund and another leading international economic institution:  

“EM growth has slowed to about 4.5 per cent at present….In the long run, according to the OECD, the potential growth rate of the Briics (Brazil, Russia, India, Indonesia, China and South Africa — accounting for most of EM GDP) is expected to slow further, converging to mature market trend growth of 2 per cent. In other words, the growth advantage of more than 4 percentage points that EMs enjoyed over mature markets in the 2000-2010 period has narrowed to about 2 percentage points and will probably disappear in the long run.”

And guess what? Unlike in the United States, in particular, even much of this EM growth will rely on maximizing exports and minimizing imports. So their importance as markets for American-made goods and services will be even less impressive than this impeccably mainstream analyst suggests.

Equally startling: This Project-Syndicate column by Jim O’Neill. O’Neill, for the unitiated, was perhaps the highest profile EM cheerleader, and coined a popular acronym for those economies that described those he believed most promising: BRICS (Brazil, Russia, India, China, South Africa).

The former Goldman Sachs banker has remained a believer in China, and has actually added some countries to his list of economies he believes will loom much larger in this century. But in the column, he also argued that, if China falters in what he (wrongly, in my view) considers its role as a global growth engine, and the American consumer gets tapped out, none of the other emerging economies “is in a position to match the growth of Chinese consumption today, or even over the course of the next decade.” And by extension, the likelihood of these countries replacing the United States is even more infinitesimal.

Former French leader Charles de Gaulle once famously said that “Brazil is the country of the future…and always will be.” The two examples above show that the same solidly grounded skepticism is also finally seeping into the ranks of globalization cheerleaders. How long will it take before the American political, business, academic, and media establishments finally start paying attention?

Glad I Didn’t Say That! U.S. Automakers Debunk Their Own Tariff Fear-Mongering

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automotive, China tariffs, FCA, Financial Times, General Motors, Glad I Didn't Say That!, metals tariffs, msn.com, Patti Waldmeir, tariffs, Trade, trade war

“The auto industry…fears that new tariffs, on top of those already enacted on Chinese-made vehicles and imported aluminum and steel, could have a major negative impact on the American new car market.”

–MSN.com, November 18, 2018

 

General Motors’ “head of US sales, said on Thursday: ‘We feel confident heading into 2019 because we have more major truck and crossover launches coming during the year and the US economy is strong.’”

–Financial Times, January 3, 2019

 

FCA’s head of US sales “also predicted a ‘solid’ 2019, attributing the company’s strength in 2018 to ‘the efforts we undertook to realign our production to give US consumers more Jeep vehicles and Ram pick-up trucks.’”

–Financial Times, January 3, 2019

 

(Sources “Hit hard by trade war, automakers hoping Trump will hold off on new round of tariffs,” Money, MSN.com, November 18, 2018, https://www.msn.com/en-us/money/markets/hit-hard-by-trade-war-automakers-hoping-trump-will-hold-off-on-new-round-of-tariffs/ar-BBPOjRn & “US car sales defied predictions of a slowdown in 2018,” by Patti Waldmeir, Financial Times, January 3, 2019, https://www.ft.com/content/e538e316-0f52-11e9-a3aa-118c761d2745)

Our So-Called Foreign Policy: The Saudis May Be Killing Globalism as a U.S. Strategy, Too

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Council on Foreign Relations, Financial Times, globalism, Jamal Khashoggi, Mohammed bin Salman, Our So-Called Foreign Policy, Richard Haass, Saudi Arabia

Here’s the latest noteworthy indication that (1) the globalist approach that dominated U.S. foreign policy during the pre-Trump decades is dissolving into not only incoherence but transparent virtue-signaling; and that (2) the apparent murder of Saudi journalist (and legal U.S. resident) Jamal Khashoggi at the hands of thugs linked to the Saudi monarchy is turning into a big contributor:  It’s a Financial Times essay from no less than Richard N. Haass, who is nothing less than the President of the Council on Foreign Relations, which is nothing less than the world’s premier globalist think tank.

For good measure, Haass has also held senior positions in both Bush administrations and, if a mainstream, pre-Trump-style Republican ever wins the White House again, would be a likely Secretary of State or national security advisor candidate. (Full disclosure – he also preceded me at Roslyn High School on New York’s Long Island by two years, but we moved in different circles.)

Haass’ subject was no surprise. The Mainstream Media and bipartisan globalist national foreign policy establishment evidently views the Khashoggi affair as the most important story of the day. And week. And month. And possibly year.

What was striking, though, was the completely confused nature of Haass’ recommendations, and in particular, how he struggled – ultimately unsuccessfully – to reconcile the peer pressure he obviously felt to urge a (seemingly) tough U.S. response to Khashoggi’s demise, and his own convictions as a card-carrying globalist that because of the United States’ still-vital interests in the Middle East, Washington has no choice but to view Saudi Arabia’s ultimately as one of those distasteful regimes that the United States nonetheless needs as an ally.

In fact, Haass explicitly recognizes the dilemma thereby created:

“The choices facing the US and other governments are not easy. They are the latest example of the foreign policy predicament of having to deal with flawed leaders of important countries. Principle and interests inevitably collide, as they often did during the cold war and when it came to dealing with the Shah’s Iran in the 1970s.”

And he tries to make the case for “doing something” significant in coolly unsentimental terms:

“The war in Yemen, arguably Saudi Arabia’s Vietnam, is a humanitarian and strategic disaster. MbS’s [Crown Prince Mohammed bin Salman] effort to destabilise Qatar has weakened a country that is home to the principal US military base in the region. There was also the bizarre kidnapping and detention of Lebanon’s prime minister in 2017. And the Saudis failed to bring Israelis and Palestinians together. Moreover, the fate of Mr Khashoggi will make it much more difficult to line up international support to pressure Iran. Riyadh will appear to many to be at least as much of a problem as Tehran.”

But what is the “something” that Haass believes will thread the policy needle and make clear to the royal family that “US and western support for [MbS] cannot be taken for granted?” “Distinguishing” between MbS and the rest of the Saudi monarchy. Dropping him from any White House invite lists. A “reconsideration” by American businesses of (all? some?) “partnering” with the government in Riyadh as long as MbS is in charge. “Constraints on the [Saudi] use of American-supplied military equipment and intelligence” especially for the “misguided war in Yemen.” But on efforts to counter Islamic extremists? The Iranians? Heaven only knows.

Additionally, Haass wants Western governments to press publicly “for an independent and unconstrained investigation of what happened in Istanbul.”

Sadly, however, these measures either amount to transparent bupkis, or steps that – if Haass’ words are taken at face value – could easily endanger interests that Haas and nearly all other globalists have long regarded as crucial for the United States. But it’s far from clear that these proposals should be taken at face value, or anywhere close. In fact, Haass himself argues that President Trump is correct in noting that Saudi Arabia

“is an important and valuable ally that buys significant amounts of arms, is helpful in Syria and in the fight against terrorism, and is a partner versus Iran. Saudi Arabia still produces about one out of every 10 barrels of oil in the world. Its investments are large and important to a number of businesses and projects.”

Hence this point which, for all the above analytical meandering, seems to be Haass bottom line: “[I]t could prove counter-productive and risky to call for the departure of [MbS], who enjoys broad popularity at home. The alternative to him is not clear. Broad instability would serve the interests of no one.”

Of course the Saudis will focus on these sentences above all others. But at least Haass – like other posturing globalists – has achieved the only objectives that could logically explain this exercise in internal contradiction: He preserves his globalist-in-good-standing status. And he’s signaled his supposed virtue.

(What’s Left of) Our Economy: Trump Metals Tariffs Coverage has Just (Again) Been Exposed as Largely Fake News

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ABC News, aluminum, Associated Press, Bloomberg, CBS News, CNN, durable goods, Financial Times, Jobs, Mainstream Media, manufacturing, Marketwatch.com, metals, metals-using industries, NBC News, PBS, private sector, Reuters, steel, tariffs, The New York Times, The Wall Street Journal, Trade, Trump, Washington Post, {What's Left of) Our Economy

In case you still think that President Trump’s charges of fake news-peddling by the national news media are fake news themselves, consider this: For the second time in two months, if you decided to hold your breath till you found a Mainstream Media item reporting that the America’s metals-using industries have been major job-creation leaders, not laggards, you’d have died.

Such omissions are especially important because since the Trump administration began imposing tariffs on steel and aluminum imports (in March), the media has been filled not only with predictions of massive employment and production losses in metals-using manufacturing (because the prices of two noteworthy inputs for these industries was bound to rise), but with accounts of actual economic damage that numerous companies in these sectors have already suffered. (See here and here for just two examples.) 

Last month, I noted that, for all these accounts, authoritative government data (through June) showed that the metals-using industries’ performance by both measures had both generally improved, and had indeed both generally improved more than job creation and output in the rest of manufacturing.

Since then, more steel and aluminum tariffs were put in place (mainly because some major U.S. trade partners initially exempted from the tariffs were subjected to the levies). And what did we learn from the newest jobs report, which was released last Friday, and took the story through July (on a preliminary basis)? That the metals-using industries continue to set the national job-creation pace for the entire economy, not simply for manufacturing.

Here are the percentage gains for employment in some major sectors of the economy from April (the first month during which any metals tariffs effects would have been felt) through July except for the industries noted:

entire private sector: +0.53 percent

overall manufacturing: +0.73 percent

durable goods: +0.96 percent

fabricated metals products: +1.10 percent

non-electrical machinery: +1.43 percent

automotive vehicles & parts: +1.06 percent

household appliances (thru June): -0.63 percent

aerospace products & parts (thru June): +1.05 percent

Unfortunately, it was not possible to learn any of this from America’s leading news organizations. For these figures were completely ignored.

To their credit, some leading media mentioned that Trump tariffs and trade war fears in general seemed to be having no effect on manufacturing job creation overall despite industry’s exposure in principle to the fall-out. These included the Associated Press, The New York Times, the Financial Times, CNN, ABC News, and NBC News. Yet the metals-using sectors were never mentioned.

As for The Wall Street Journal, the Washington Post, and CBS News, they made no connection of the tariff/trade war-manufacturing job connection whatever.

And several news organizations actually tried to rationalize the unexpected results. Reuters, for example, claimed that “With manufacturing payrolls increasing by the most in seven months, the moderation in hiring reported by the Labor Department on Friday likely does not reflect the rising trade tensions between the United States and other nations including China.”

According to PBS, “Economists say it is too early to tell whether the Trump administration’s tariffs on imported steel and aluminum are having a significant effect on manufacturing jobs.”

Bloomberg and Marketwatch.com weren’t as disingenuous, but still felt compelled to contend that rising trade tensions continued to cast a long shadow on the job markets’ future – without reporting that, if anything, new U.S. policies and statements were so far having exactly the opposite effect on parts of the economy most exposed to existing metals tariffs.

But no account of press coverage of these Trump trade policies would be complete without observing an equally weird development: Neither the President nor anyone else in his administration has pointed to the outperformance of the metals-using industries, either.

In a little over a week, the nation will get its next major opportunity to gauge the impact of metals and other tariffs, and future possibilities thereof – when the Federal Reserve releases the July industrial production data, which includes detailed statistics on inflation-adjusted manufacturing output. Will the Mainstream Media finally zero in on the sectors where the tariff rubber hits the road? At this rate, Americans should be grateful if they simply ended the string of job loss and other Chicken Little metals tariff impact stories.

(What’s Left of) Our Economy: More Trade Derangement Syndrome – on China & Currency Wars

Tags

China, currency, currency manipulation, currency wars, Financial Times, Martin Wolf, Paola Subacchi, Project Syndicate, renminbi, Trade, Trump, yuan, {What's Left of) Our Economy

Trade issues’ ability to completely muddle the thinking of supposed experts has never been more prominently displayed than in this recent column, from a leading European economist, on China’s manipulated currency.

Writing for the Project Syndicate website (which bills itself as “the world’s opinion page”), Paola Subacchi insists that China is not likely to turn the recent slide in the value of its renminbi (also called the yuan) into an “’engineered’ competitive devaluation” because “a weak renminbi has more costs than benefits” for the People’s Republic.

Of course, the case for worrying about a Chinese drive to weaken its currency stems from fears that a cheaper renminbi/yuan would give Chinese goods wholly artificial price advantages over U.S. and other foreign counterparts in markets the world over. The result would be a big trade lift for the Chinese economy at the expense of its competitors — and for reasons that have nothing to do with either free trade or free markets.

Anyone pretending to know what Chinese leaders are really thinking about such vital economic (or other) matters is blowing smoke. But it’s nothing less than absurd to suppose that the considerations Subacchi cite for her China currency optimism are taken the slightest bit seriously in Beijing.

For example, the author argues that “by increasing import prices and bolstering export sectors, a weaker renminbi would undermine the Chinese government’s goal of shifting away from export-led growth and toward a model based on higher domestic consumption.” But although it’s true that Beijing has long talked about this goal, it’s highly doubtful that China’s are prioritizing these days – if they ever have.

After all, as made clear in this new column from the Financial Times‘ Martin Wolf, China in recent years has been relying on domestic purchases (especially investment spending) supercharged by official stimulus policies to keep growth at satisfactory levels. This shift, however, has scarcely been voluntary. The choice was essentially forced on China by the sharp downturn in global trade triggered by the last global financial crisis and recession, which pummeled foreign markets for Chinese products. The results, Wolf shows, have not been a healthily rebalanced Chinese economy, but one that’s growing more slowly, and whose growth is dangerously reliant on an explosion in the country’s indebtedness. Is it really plausible that China is seeking more of the same?

According to Subacchi, “a weaker renminbi could [also] invite renewed US complaints about currency manipulation.” President Trump has just revived this charge. But the Chinese so far seem to be counting on blunting the new U.S. trade offensive by imposing their own retaliatory tariffs on American products (especially from politically important states and Congressional districts), and thus prompting a decisive counterattack by vulnerable political and economic interests. A continuingly weakening renminbi/yuan would plainly help, too. 

Moreover, Subacchi herself clearly regards Trump-ian U.S. trade policies as a major mistake, describing them (as well as China’s currency policies) as “not good for anyone.” Yet for those renewed U.S. complaints about currency manipulation to matter to Beijing, they’d need to be followed up with a credible threat of tariff responses – and, if needed, actual levies. Is she therefore suggesting that playing trade hardball makes no sense unless the target is China? Maybe she’ll explain in her next article.

“Finally, and more crucially,” the author writes, “a weak renminbi at the same time that dollar-denominated assets become more attractive could cause China to suffer capital flight.” She’s correct  – but oddly overlooks Beijing’s option of tightening capital controls – a policy that’s not exactly unprecedented for Chinese leaders.

Subacchi does deserve praise for spotlighting major actual and potential weaknesses in China’s economic and financial position. Unfortunately, the response she says she favors to the prospect of a full-fledged Chinese-launched currency war – “the world should call its bluff” – is wishful thinking. For the world as a whole – which remains heavily dependent on growing by selling to America’s gargantuan, wide open market – has displayed much more interest in protecting this convenient, though dangerously unsustainable, arrangement from vigorous U.S. responses than in imposing any significant disciplines on China.

In other words, the odds remain high that unless the prospect of a China-launched currency war is met with unilateral – i.e., Trump-ian – American counter moves, it won’t be met at all.

(What’s Left of) Our Economy: More Evidence that Trade Wars are Absolutely Winnable for America

Tags

Apple, China, Financial Times, global supply chains, globalization, manufacturing, Paul Krugman, Rana Foroohar, tariffs, Trade, trade wars, {What's Left of) Our Economy

Throwaway lines are among my favorite aspects of opinion writing, largely because in a simple, usually brief, and almost by definition understated sentence or two they can thoroughly debunk or at least gravely weaken shibboleths that have reigned virtually unchallenged for decades. And Financial Times columnist Rana Foroohar had a doozy yesterday.

As is well known by anyone who’s been closely following the development of President Trump’s trade policies and the uproar they’ve triggered, some of the biggest fears surrounding the prospect of the “trade wars” they’re deemed all too likely to ignite concern the impact on global supply chains. As explained this morning by Nobel Prize-winning economist and New York Times columnist Paul Krugman;

“[C]orporations have invested trillions based on the assumption that an open world trading system, permitting value-added chains that sprawl across national borders, was going to be a permanent fixture of the environment. A trade war would disrupt all these investments, stranding a lot of capital.”

And since lots of capital would be stranded, lots of employment patterns worldwide would be disrupted, too – including in the numerous American manufacturing industries that have been thoroughly globalized and whose ability to assemble, further process, or produce goods in their U.S. facilities therefore depends on the smooth operations of these corporate networks.

Further, tariffs on imports from China allegedly would be especially damaging, since Chinese factories play such key roles in so many manufacturing supply chains, and since China’s prominence in globalized manufacturing in large part stems from so many special manufacturing strengths that the Chinese have developed – often by hook or by crook – in recent decades. If you need a compelling example, check out this early 2012 article on why Apple, among many others, has concentrated its industrial operations in the PRC.

At the same time, since Mr. Trump won the White House, not a few companies have either started relocated some production in the United States in response to actual or threatened tariffs, or made public remarks indicating that supplying the U.S. market from abroad would make no sense if trade barriers impeded their access. Other corporate leaders were saying even before Mr. Trump’s election that mounting protectionism and populism worldwide were bound to result in more localized manufacturing.   

So it’s become clear in recent years that however much they’ll complain about moving supply chains, business leaders scarcely view the challenge as impossible. Still skeptical? Recall how easy it’s been for them to send even the largest supply chains from inside the United States to outside American borders, or capitalize on the existence of overseas networks. And recall how quickly many of these transfers happened.

Just how fast they took place, and can still take place, is where Foroohar’s column comes in. In yesterday’s column, she echoed my point about supply chain movements that are either already underway or being contemplated:
“Over the long term, China and the US are headed towards regional supply chains for high-growth technologies of the future.” She continued – consistent with the conventional wisdom, “But in the short term, the interdependencies will be difficult to untangle.”

Then, however, came the kicker – which received no special emphasis from the author at all:

“Several executives who supply Fortune 500 companies have told me it would take months if not years for the biggest US companies to break completely free of Chinese components.”

To repeat: Months – and at the outside years – for many companies to marginalize China’s role in particular in global supply chains. And then remember the reward: Greatly diminishing China’s still-burgeoning influence over the American economy and over the broader global economy, and in the process blunting the growing threat it poses to U.S. security interests both in the Asia-Pacific region and around the world.

That sounds like an appealing – indeed, no-brainer trade-off – to me. For an American leader hoping to disrupt U.S. trade and globalization policy for long-term gain, and facing numerous raucous short-term complaints, it should be an especially effective pitch to make, and an urgent policy target to prioritize explicitly and pursue systematically. Anyone seen any politicians like that lately?

(What’s Left of) Our Economy: Trump’s China Trade Deal May be Even Worse Than it Looks

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China, Financial Times, intellectual property, intellectual property theft, Lucy Hornby, Made in China 2025, manufacturing, national security, subsidies, tech transfer, Trade, trade deficit, Trump, {What's Left of) Our Economy

So much is so obviously wrong so far with the trade agreement just reached by the Trump administration and China that even Mainstream Media reporters have correctly identified many major flaws. As the joint statement released by the U.S. and Chinese governments made embarrassingly clear, Beijing has not made a single commitment that’s comprised of any specifics, that creates any time-frames for compliance, or that entails any penalties for non-compliance (although the United States considers the tariffs threatened to punish China for intellectual property theft to have only been “suspended”).

Despite the importance placed by almost everyone involved in America’s China policy inside or outside the government on doing something about that intellectual property theft, and about the Made in China 2025 program aimed at creating Chinese global dominance in numerous high tech industries crucial to prosperity and national security, Beijing pledged exactly nothing concrete on the former, and the only possible reference to the latter was a pledge by both countries “to strive to create a fair, level playing field for competition.”

And the sectoral priorities were discouraging from a U.S. standpoint – at least if you believe (as you should) that manufacturing actually or potentially creates outsized economic (not to mention national security) benefits for the nation in terms of productivity growth, jobs and output multipliers, and capital and technological intensiveness. For whereas “Both sides agreed on meaningful increases in United States agriculture and energy exports,” they simply “discussed expanding trade in manufactured goods and services.”

Possibly worse still: For all the references to “[working] out the details” and “[continuing] to engage at high levels on these issues,” the economic engagement between the two countries is not even being called a “negotiation.” Instead, it’s been termed a “consultation.”

But perhaps most troubling of all about the Trump approach is that even if the President’s core aims remained intact, and tariffs were imposed in order to halt China’s intellectual property theft, combat the Made in China 2025 program, and slash the trade imbalance, it’s unclear at best how effective they would be.

Leave aside the question of whether President Trump could convince affected chunks of the American economy ranging from agriculture to high tech to support any tariffs, and accept any short-term costs and disruptions in order to achieve China trade-related goals that all these industries consider crucially important. In the case of intellectual property and China 2025, how would Beijing’s concessions, or even outright capitulation, be measured? And what difference would actually be made?

For instance, would the tech companies whose knowhow is being stolen or extorted (via threats to cut off their access to the Chinese market if they don’t cooperate) really start pointing publicly to ongoing Chinese transgressions, after decades of lying low and hoping against all reason that the problem would simply go away or at least not worsen?

Even if they did grow spines and/or believe that the Trump or successor administrations would back them up by imposing prompt and severe punishments, would these companies suddenly become more careful about the technology that they transfer voluntarily? That sounds far-fetched because it would involve these firms backing away substantially from their longstanding strategy of supplying the world with their increasingly sophisticated products and services from China – and sacrificing the immense sunk costs they have already incurred in developing the Chinese supply chains needed to accomplish this goal.

Acquiring cutting edge intellectual property by hook or by crook is also central to the Made in China 2025 program. However unlikely in practice, smart and tough enough U.S. policies can in principle overcome the above obstacles to halting tech theft and extortion. But what about another aspect of this Chinese program – massive government subsidies for the industries involved? Is it the slightest bit realistic to believe that Washington will even be able to track these funds as they make their way from China’s secretive bureaucracies to its equally opaque production entities (which don’t really deserve to be called “companies” or “businesses” because they’re all to varying degrees arms of the state)? How on earth would that work? And when has the United States succeeded in halting subsidization in other Asian countries where the government’s role is equally pervasive?

Moreover, as the Financial Times‘ Lucy Hornby has just pointed out, ending yet another objectionable feature of the Made in China 2025 program – strong preferences for Chinese participants and various forms of harassment and discrimination for their foreign-owned rivals – would kneecap two other major and related Trump administration China goals: reducing the bilateral trade deficit and curbing the offshoring of American production and jobs to the PRC.

For if China becomes an easier place to do business, U.S.- and other foreign-owned multinationals would become that much more likely to use China as their global production bases.

President Trump correctly understood that a critical mass of U.S. voters were fed up with his predecessors’ Offshoring Lobby-dominated China policies and hankering for a strategy that put domestic production and employment first. He was also right in insisting that such a course change would strengthen the nation’s long run economy and its national security. But the latest trade agreement he’s reached with China, however tentative, makes painfully clear either that the President and his main advisers don’t yet know how to achieve these vital goals, or that he hasn’t yet been able to choose between competing approaches with which he’s been presented.

(What’s Left of) Our Economy: Trump Tariffs Evoke Summers Snake Oil

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Al Gore, China, Clinton administration, current account surplus, Emergency Committee for American Trade, exports, FDI, Financial Times, forced technology transfer, foreign direct investment, General Motors, intellectual property theft, Larry Summers, Obama administration, offshoring lobby, tariffs, Trade Deficits, Trump, {What's Left of) Our Economy

Larry Summers doesn’t like President Trump’s China trade policies – that’s not news. After all, he served in senior economic policy posts both in the Clinton administration, which proudly championed expanded trade with China and laid the groundwork for the PRC’s entry into the World Trade Organization, and in the Obama administration, which less proudly but nonetheless effectively coddled much of the Chinese trade predation (including intellectual property theft) that even most globalization cheerleaders now admit is a major problem.

Newsier are two arguments Summers made yesterday in the Financial Times that indicate how dishonest years of justification of the China trade policies by globalist U.S. administrations have been, and how clueless they remain.

The dishonesty entails Summers’ dismissive treatment of China’s intellectual property “extraction” (as he calls what is usually and rightly recognized as “extortion”) from U.S. and other foreign companies that are forced by Chinese policy into joint venture partnerships with Chinese entities. According to Summers, this form of theft is no big deal for Americans because these episodes

“typically involve cases where the company in question produces for China in China and so have little impact on US employment. In many cases a substantial number of the company’s shareholders are foreign and it pays taxes to many governments. It is more than a little ironic that an administration that condemns outsourcing should make standing up for those who move production to China so central a priority.”

As should be clear to anyone who has followed U.S. trade policy toward China and other offshoring-friendly countries, that’s a heckuva way to describe the outbound American investment that’s been encouraged by the trade deals and related policy decisions enthusiastically supported by Summers and his White House bosses.

For especially during the Clinton years, when so many of these policies were put in place, the construction of American-owned factories, labs, and similar facilities in China was depicted not as activity that would substitute for American exports, or for U.S.-based production (in the form of goods shipped from these factories to the U.S. market), but as activity that would benefit the domestic American economy and its workers by supercharging U.S. exports – which would comprise much of the content of these foreign-made products.

Here’s a typical example from a 1998 report by the (Offshoring Lobby-funded) Emergency Committee for American Trade:

“American companies with global operations ship the large majority — between 60 percent and 75 percent — of total U.S. exports. Their foreign affiliates are important recipients of these exports; their share has increased to over 40 percent today.”

And let’s not forget one of the showcase examples of such Clinton-era investments – General Motors’ 1997 agreement with a Shanghai-run entity to produce autos in China. GM gushed that the joint venture would generate billions in American auto parts exports to China, and the importance attached by the Clinton administration to such deals was made clear by the decision to send Vice President Gore to the PRC to attend the signing ceremony. (Neither GM Chairman John Smith nor Gore mentioned that the agreement’s provisions mandated that the factory achieve 80 percent Chinese content levels within five years.)

Now, according to Summers, these joint ventures don’t significantly benefit the American domestic economy at all. Of course, there’s still the matter of how this Chinese tech theft – including from world-leading U.S. companies in cutting edge industries – will affect America’s innovation and technology futures. But these critical issues don’t seem to be on Summers’ screen.

The author’s cluelessness is evident from his insistence that

“it is wrong to say nothing has been achieved through negotiation with China. Only a few years ago, China’s current account surplus was the largest relative to GDP among significant countries….Today China’s global surpluses are far below past US negotiating targets of a few years ago….”

Here’s the (glaringly obvious) problem. During the current economic recovery, China’s total trade surplus with the United States (including its services deficit) jumped by 75 percent – from $219.47 billion in 2009 to $385 billion in 2016 (the last year for which such figures are available). Can a piece from Summers expressing his astonishment that so many U.S. voters opted in 2016 for a candidate promising to look after “America First” be far behind?