(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?

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(What’s Left of) Our Economy: Martin Wolf Whiffs on the Trump Tariffs

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allies, aluminum, EU, European Union, Financial Times, General Motors, Martin Wolf, Mary Barra, national security, steel, tariffs, Trade, Trump, World Trade Organization, WTO, {What's Left of) Our Economy

I hate to go after the Financial Times‘ Martin Wolf, because he’s definitely one of the world’s smartest and most responsible economics commentators. Unfortunately, his March 6 column on the Trump tariffs fell so far short of his standards – and in fact simply parrots so much wrongheaded and/or simplistic trade-related conventional wisdom – that a response is essential. Let’s take his main arguments seriatim.

Wolf is apparently upset that the tariffs are “explicitly intended to last a long time.” But what could make more sense? If the aim is to spur more American steel and aluminum output, which requires major capital investments that need time to pay off, short-term tariffs, or tariffs with a publicized termination date, are bound to fall way short of their mark. The former will naturally scare off investors that simply have the requisite time horizon; the latter will additionally tell potential capital sources and foreign steel and aluminum exporters exactly when they can resume dumping subsidized product.

Wolf believes that the tariffs will so raise the costs of steel- and aluminum-using U.S.-made products that these industries and their workforces, which vastly outnumber those of the metals-makers, will suffer major losses of global competitiveness. In making this claim, he both overlooks the relatively small steel and aluminum content of many of these products, and oddly dismisses any possibility that these businesses will find ways to offset any notable input price increases with greater efficiencies elsewhere in their operations.

I say “odd” because that’s exactly what conventional economics tells us will happen – at least with companies determined to stay in their respective businesses. It’s one main reason why productivity growth exists at all. It’s also at the least significant that no less than General Motors Chair and CEO Mary Barra has stated that that’s exactly what her company will do: “We would look to find offsets and efficiencies to offset that [higher steel prices] and not have to pass it on to the customer.”

Wolf worries about the spread of what he admits are trade actions confined to steel and aluminum because so many American trade partners will retaliate. I was waiting for him – as a major supporter of free trade – preemptively to scold these countries for not realizing that theory holds that the best way to respond to tariffs is by compensating losers, not by retaliating. But it doesn’t appear to think that this venerable maxim applies outside the United States.

Wolf predicts that this retaliation will take the form of World Trade Organization  (WTO) challenges and safeguards “to forestall diversion of imports on to their markets.” But because the global steel market is a single integrated market (like so many other markets in this era of extensive globalization), such country-specific measures will fail to prevent diversion as completely as have similar past U.S. Measures. That’s probably why the European Union, for example, has hinted that it won’t wait for the WTO Good Housekeeping Seal for any retaliation. Which of course would be illegal according to WTO rules.

Wolf regurgitates the argument that the sweep of the Trump tariffs will hit “friends and allies” – belying the claim that they’re based on national security considerations. As I’ve noted, though, many of these supposed friends and allies have long been directly or indirectly helping make sure that an outsized share of Chinese-spurred global overcapacity in steel and aluminum winds up being sent to the United States. With allies like these….

Wolf expresses bewilderment that the United States would seek protection for its steel and aluminum industries because output in both has been “stable” since roughly 1990. But in the business world, that’s a euphemism for “no growth since roughly 1990.” Does that scream “competitiveness” to you? Moreover, Wolf overlooks the loss of global and U.S. market share for both sectors – not normally a sign of companies or industries with bright or even viable futures. (See here for the steel data and here for the aluminum figures.)

Wolf uses tariffs as his main measure of whether, as many trade policy critics argue, the United States really is the world’s least protectionist major economy. But nowhere in his article does the term “non-tariff barriers” appear – a shocking omission given their prevalence and strong growth as global negotiations have reduced tariff rates worldwide.

Finally, Wolf alludes to the canard that America’s national savings rate is overwhelmingly responsible for its bloated trade deficits. In fact, the relationship between the trade and broader current account balances on the one hand, and the savings rate on the other is a mathematical identity. As such, it says nothing whatever about causation – which could easily flow the other way.

It’s understandable that Wolf doesn’t like the Trump tariffs per se – I’ve been critical of them in some respects myself. But the scornful tone of his article, and its utter failure even to consider obvious rejoinders (much less address them) indicates that something deeper is at work here: One of our most thoughtful and knowledgeable economics analyst has come down with a bad case of Trump Derangement Syndrome.

Our So-Called Foreign Policy: Why America’s Alliance Strategy Can’t Have it All

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alliances, allies, burden sharing, China, defense spending, Financial Times, Germany, James Mattis, Japan, NATO, North Atlantic treaty Organization, North Korea, nuclear war, Our So-Called Foreign Policy, Russia, smothering, South Korea, Trump

Decades ago (literally!) I came up with an insight that’s stood the test of time pretty well. When my main professional focus was American foreign policy, I began realizing that the best way to describe the U.S. approach to its major security alliances with East Asian and European countries was to call it a “smothering strategy.” That is, American leaders were trying not only to protect Japan and Western Europe specifically from communist aggression. They were also trying to make sure that those critical regions never exploded into major war again – and principally, that Germany and Japan never resumed their roles as aggressors.

The characteristic U.S. solution? Washington would try to smother these German and Japanese impulses by removing their need to conduct any kind of independent foreign policies of their own in the first place. That’s why the United States pledged to take care of both their national security interests (with dangerous nuclear defense commitments) and their economic interests (by opening its economy much wider to their exports than vice versa). As a result, for decades, Germans (and other Europeans) and Japanese could avoid the expenses of maintaining big military establishments and concentrate tightly on the peacetime pursuits of life, liberty, the pursuit of happiness – not to mention building great wealth.

How good was this insight? To me, the proof of the pudding was America’s determination to preserve these alliances almost unchanged even after the Cold War ended, the Soviet Union disappeared, and China had not yet launched a drive to boost its influence in East Asia. To put it bluntly, U.S. leaders were still terrified that, if they were forced to face the world on their own once more, the Germans and Japanese would go bonkers again.

But this past week came some evidence that the smothering strategy is still firmly in place – despite the election of an American President who has complained loudly as a candidate as well as in office about how these arrangements are inexcusable rip-offs of the American public and especially taxpayers. At a big national security conference held each year in Germany, Trump administration officials expressed alarm at the prospect that some European initiatives to boost military spending that have barely advanced past the talking stage could might result in European forces at least sometime operating independently of their alliance with the United States – the North Atlantic Treaty Organization (NATO) – and even excluding America.

According to a Financial Times account of the meeting, U.S. Defense Secretary James Mattis reacted by insisting that these European Union “defence plans…enhance Nato’s common defence rather than detract from it. And he put down an important marker: there was, he said, a clear understanding that common defence is a Nato mission that belongs to Nato ‘alone’.”

In other words, the Trump administration has now fallen into both of the traps that ensnared U.S. alliance policy during the Cold War. It has assured the allies that its commitment to their defense is absolute – including the risk of fighting a nuclear war on their behalf – thereby gutting any incentives for them to stop “free riding” on the United States militarily and bearing a greater share of the defense burden. And it has made clear that, although it wants the allies to assume more responsibilities for their own defense, it opposes the allies gaining any more control over their own defense. Instead, the United States must remain firmly in charge.

As a foreign policy realist, who believes that national interests are much more important than particular alliances, and can clash with the preservation of these alliances, I don’t blame the Trump-ers for wanting to have their cake and eat it, too on this score – i.e., more allied resources to use as Washington wishes. Nor do I blame the Europeans for wanting as much defense assistance from Americans as they can get while continuing to skimp on their military budgets.

But as an American, I wish the administration would recognize two fatal flaws in this alliance strategy status quo. The first is the un-realism of straining to freeze alliance structures in place when the common enemy that represented their raison d’etre has been gone for nearly thirty years. The second entails the needless dangers created by continuing to provide nuclear guarantees – and the tripwire forces needed to draw it into Armageddon – for these allies when not even the partial revival of Russian and Chinese threats (along with North Korea’s development of ever more advanced nuclear weapons) has fostered consensus in how to handle them.

Of course, dissolving these alliances will entail risks. But the risks of trying to square these circles look far greater. And when considering the nuclear threats they now pose (from those North Korean as well as Chinese forces that are much more capable of credibly threatening the United States with nuclear attack, along with Russia’s Cold War holdover arsenal), they look harder to justify than ever.

Our So-Called Foreign Policy: Now the Establishment Media is Praising the Perps on China Policy

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artificial intelligence, Barack Obama, China, Eric Schmidt, Evan Osnos, Financial Times, Google, Jake Sullivan, John Reed, Our So-Called Foreign Policy, tech transfer, The New Yorker, Tom Mitchell, Trump

As RealityChek‘s slogan surely makes painfully clear, the interlocking worlds of politics and policy and media are so shot through with outright hogwash that producing it now looks like standard operating procedure. But every now and then, I come across items that, even by the debased standards of our time (which, contrary to establishment conventional wisdom, loooong predated the Trump era) belong in a class by themselves. And in the last week alone, that category has grown by two statements.

The first came in a January 3 Financial Times report on China’s growing power and influence in Asia and around the world. Authors Tom Mitchell and John Reed seemed bent on making the case that President Trump’s policies and statements had created or threatened to create vacuums around the world that Beijing is (brilliantly) moving to fill – an allegation that’s fact free but now so commonplace that it’s no longer newsworthy or comment-worthy.

Here’s what is – and jaw-droppingly so: letting a former senior Obama administration foreign policy adviser get away with making a statement like this: “There is a sense in Asia that Trump’s election may portend a dramatic power shift.”

The aide, Jake Sullivan, was not only a foreign policy adviser to Hillary Clinton’s presidential campaign and to Obama’s Vice President Joe Biden. He was the head of the State Department’s policy planning staff under Obama. So surely he had something of a hand in making U.S. policy toward China during the Obama years.

And what were the hallmarks of this policy? Doing nothing of consequence to halt the predatory Chinese trade policies that helped Beijing stockpile literally trillions in hard currency that have come in awfully handy for financing a major military buildup and government-sponsored research into advanced defense-related technologies. Doing nothing of consequence to stop China from stealing this knowhow from American companies, or to stop U.S. tech firms from handing it over voluntarily, in exchange for favorable treatment by Beijing. Doing nothing of consequence to stop China’s expansionism in the South China Sea. And doing nothing of consequence to halt or even slow North Korea’s drive to develop state-of-the-art nuclear weapons – including nuclear-capable missiles capable of striking American territory, and thereby of undermining Washington’s commitments to the defense of major allies like South Korea and even Japan.

And Sullivan has the nerve to insinuate that say that Trump’s election is responsible for tilting power balances in China’s favor? That’s like Neville Chamberlain blaming Winston Churchill for giving Nazi Germany the confidence to invade Poland.

The second example concerns the aforementioned U.S. corporate tech transfer to China, and comes from a ballyhooed January 8 New Yorker piece devoted to the same mission (#amazing!) as the Financial Times piece – blaming Mr. Trump for giving away the global store to China.

Catching my attention in particular was author Evan Osnos’ decision to quote the former chairman of Google follow-on company Eric Schmidt’s warning that (in Osnos’ words) “reductions in the funding of basic-science research will help China overtake the U.S. in artificial intelligence (AI) within a decade.” Osnos also let Schmidt speak for himself: By 2030, they will dominate the industries of A.I.”

I have no problem with Schmidt’s opposition to the funding cuts. In fact, I strongly agree. I also take especially seriously his prediction about China’s rapid tech progress. Why? Because under Schmidt, Google was a prime China tech enabler. As I wrote in a Bloomberg View column in 2012, Google products have helped China perfect its (highly effective) internet censorship programs, and its “China University Relations” program had by then established relationships with no less than 15 Chinese institutions. In addition, in 2005, it set up its own research and development center in Beijing.

In other words, Google (and most of the rest of Silicon Valley) has been actively helping China develop the tech capabilities about which its former head is now ostensibly worried.

But it gets much better: Somehow, Schmidt forgot to tell Osnos – and somehow the latter’s own wide-ranging reporting in China missed the fact that – Google has just decided to set up another research facility in China. And its focus? Artificial intelligence. According to its director,

“Besides publishing its own work, the Google AI China Center will also support the AI research community by funding and sponsoring AI conferences and workshops, and working closely with the vibrant Chinese AI research community.”

You’ve heard of “blame the victim?” These two articles could reveal a growing media tendency to “praise the perp.” And evidently if the result is to exalt the establishment, and discredit its critics (especially Trump-ian), so much the better.

(What’s Left of) Our Economy: More Evidence of Germany’s Stealth Protectionism

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Angela Merkel, consumers, consumption, developing countries, Financial Times, Germany, Global Imbalances, globalization, imports, Matthew C. Klein, protectionism, savings, taxes, Trade, Trump, value-added taxes, VATs, wage suppression, wages, {What's Left of) Our Economy

President Trump’s charges that the United States has signed terrible trade deals in recent decades, and that foreign economies have been the main beneficiaries, inevitably have triggered a potentially useful debate over which major countries are most open to trade and which are tightly closed. Unfortunately, such arguments won’t actually be useful until “open” and “closed” are properly defined, and a new Financial Times column on Germany’s economic policies nicely illustrates how remote that goal remains.

I’ve previously made the case that accurately measuring protectionism – and thus accurately gauging which countries are contributing adequately to global prosperity and which are free-riding – entails much more than adding up individual trade barriers. Such simple counts also mislead on the equally important question of which countries the United States can reasonably hope to trade with for mutual benefit, and which countries can’t possibly qualify.

And because Germany’s government has both taken trade fire from Mr. Trump and vigorously replied, I’ve used it to illustrate the above points. In a short op-ed for USA Today and a much more detailed RealityChek post, I’ve noted that, as with many other leading foreign economies, the main problem with Germany as a promising trade partner stems at least as much from its overall national economic strategy as from its specific trade practices. That is, countries like Germany, which heavily emphasize growing by saving, producing, and exporting, can’t possibly be good trade matches for countries like the United States, whose priorities have been the diametric opposites.

Of course, those national economic strategies manifest themselves in specific practices and policies. (How else could their focus be established?) But the links to trade flows aren’t always clear. For example, there’s widespread reluctance to acknowledge the trade impact of value-added taxes (VATs), which promote exports and penalize imports. The role played by other German policies, like suppressing wages or skimping on infrastructure spending, has been even less apparent.

What the new Financial Times post adds to the mix is a generally neglected form of wage suppression: Germany’s taxes on low-wage workers – which author Matthew C. Klein describes as “among the highest in the world” since at least the turn of the century.

These taxes inflict an outsized blow on Germany’s imports – and on the the world economy as a whole – in at least two important respects. First, economists tend to agree that the lower an individual’s or household’s income, the higher the share of that income will be spent (as opposed to saved). If they’re right, then these taxes ave been hitting Germany’s overall consumption and import levels especially hard. Therefore, these levies look like notable contributors to the bloated German trade and current account surpluses that are not only detrimental to America, but that could threaten the entire world’s financial stability.

Second, as supporters of pre-Trump U.S. trade policies constantly point out, much of what low-income consumers buy is produced and exported by low-income countries (e.g., apparel or school supplies or furniture). So since high taxes on low-wage workers in Germany prevent them from importing as much from the developing world as they could, third world countries need to focus more on customers in more promising markets – like America’s.

Germany and its leader Angela Merkel lately have been basking in the glow of praise from the political classes in the United States and abroad, which have anointed them as among the new, post-Trump champions of free trade and all its purported benefits. (China’s another alleged globalization champion, but that’s another story.) Its lofty taxes on low-wage workers add to the evidence that these titles are wildly premature.

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

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

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

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

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

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

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

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

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

(What’s Left of) Our Economy: Why Trade’s Best Champions Really Need to Raise Their Game

Tags

Brad Setser, China, Council on Foreign Relations, Financial Times, George W. Bush, Global Imbalances, manufacturing, Martin Wolf, non-tariff barriers, offshoring, offshoring lobby, tariffs, Trade, Trump, World Trade Organization, WTO, {What's Left of) Our Economy

When you’ve been in the trade policy trenches as long as I have, it’s important these days to look up from time to time and pinch or otherwise remind yourself how dramatically Donald Trump’s election a president has changed the policy landscape. And I’m of course someone who broadly supports his stated objectives in this field.

Weirdly, however, folks who oppose Mr. Trump’s views keep showing that their need to wake up is even greater, and this goes double for backers of the general trade status quo intellectually honest enough to acknowledge many of its serious problems. The biggest adjustment they need to make? Demonstrating that they can develop approaches to solving these problems that are realistic alternatives to the tariff-centered measures that the president is apparently contemplating. Recent offerings from the Financial Times‘ Martin Wolf and the Council on Foreign Relations’ Brad Setser reveal how much more progress is needed.

In Wolf’s latest column, he heaps scorn on the Trump-ian claim that expanding trade with China (or with any country) has played a “significant” role in causing any of U.S. manufacturing’s problems. And he declares that “Nothing [President Trump] does will reinstate manufacturing to its lost role as the dominant provider of “good jobs”.

But Wolf continues to see a different – and arguably more important – danger stemming from preserving the global trade status quo:

“[H]uge current account surpluses in some countries forced deficit countries into financial excesses as an (ultimately unsustainable) way to maintain demand in line with potential output. The [2007-08 financial] crisis vindicated the concern of John Maynard Keynes about the potentially malign role of surplus countries in the global economy.”

So logically, Wolf is telling readers that if better balance doesn’t come to global trade, Financial Crisis 2.0 could easily result – echoing a warning made both by me and by many eminent economists.

What does he recommend to stave off such a catastrophe? A “proactive, not defensive” approach that includes a drive to “open global markets” (as if this hasn’t been tried before?) and – most interesting in light of his opposition to U.S. trade barriers – “forcing” chronic trade surplus countries like China “to rely more on domestic and less on external demand.” It’s somewhat encouraging that Wolf recognizes that the surplus countries (read “protectionists”) won’t take these steps voluntarily. But what could he possibly mean by “forcing” if no “defensive,” or even punitive, measures like tariffs are permissable? Maybe he’ll tell us in his next column?

The gap between diagnosis and prognosis is at least as wide in Setser’s January 18 post on “China’s WTO Entry, 15 Years On.” The essay is worth reading in its entirety, for it decimates the arguments made by the entire bipartisan U.S. globalization cheerleading policy establishment (not to mention the corporate Offshoring Lobby) about the unprecedented benefits that would flow from admitting China into the global trade rule-making and enforcement body – and thereby shielding it legally from most American unilateral economic power and leverage. Here, though, are a few key examples:

>”It now seems clear that the magnitude of the post-WTO China shock to manufacturing was significantly larger than was expected at the time of China’s entry into the WTO. China already had ‘most-favored-nation” (MFN)/“normal trade’ access to the U.S. Market….But China’s pre-WTO access to the U.S. came with an annual Congressional review, and the resulting uncertainty seems to have deterred some firms from moving production to China.”

>”Moving final assembly of electronic goods to Asia created pressures for the full supply chain [i.e., the much more valuable and innovative production of parts and components, as well as the research and development and engineering work] to move to Asia….Even if the currency issue is taken off the table, I suspect that the trade gains—or really the export gains— from integrating China into the WTO’s “rules” were overestimated.”

>“It is now clear that WTO accession was not enough to make China into an easy market for foreign firms to supply from outside China.

“Here is a point that I think should get a bit more emphasis. China’s imports of manufactures, net of its imports of imported components, peaked as a share of Chinese GDP in 2003—and have fallen steadily since then. There is no ‘WTO’ effect on China’s imports of manufactures, properly measured (i.e. leaving out imports for re-export).”

>”Some firms have succeeded in China, but generally by producing in China for the Chinese market, not by selling to China. Successful challenges to some specific Chinese practices in the WTO have yet to alter this pattern….The WTO rules aren’t all that constraining in a country like China—thanks to state control of commanding heights enterprises and banks, and institutions, such as the National Development and Reform Commission (NRDC), that assure party control of major state firms and large investment projects.”

>Many WTO-legal remedies that might have worked were not used “because U.S. and European firms benefited from making use of Chinese production to meet global demand” – and because George W. Bush’s administration danced to their tune.

But Setser’s policy recommendations seem no more realistic than Wolf’s, especially if significant, unilateral tariffs are ruled out:

“The correct fight right now is against the domestic policies that keep China’s savings so high, against a surge in capital outflows that leads to a yuan depreciation that then becomes entrenched (if China’s currency goes down, I worry it won’t go back up), and against Chinese import-substituting industrial policies that aim to displace major exports to China.”

In the pre-Trump period, the diagnosis-prognosis gap unaddressed by intellectually honest supporters of the trade status quo didn’t matter much, since American presidents were so determined to preserve that status quo. But this time, it seems to be different.  And if these trade advocates hope to prevent what they tend to describe as a counterproductive – and maybe worse – shift in American policy, they’ll need to do a much better job of showing that no major course change is needed at all.

(What’s Left of) Our Economy: Will Tech Kill Too Many Jobs?

Tags

Alan Turing, artificial intelligence, automation, Financial Times, Gillian Tett, Jobs, Paul Wallace, Reuters, robots, tech, technology, Turing Test, work, {What's Left of) Our Economy

One of the biggest issues facing our whole human species is one that I have (uncharacteristically!) written on little: whether or not the latest and future generations of technology will kill off way more jobs than they will create. One big reason: I’m still trying to bone up on this question, and I’m still very much in the learning phase about the future of work – and especially work that will pay a living wage..

But despite my limited knowledge, I’m pretty sure that two recent articles on the subject are especially valuable for shedding light on dimensions that demand a lot more attention.

The first is a recent column on the Reuters site presenting a case for optimism that the new robots and artificial intelligence will turn out to be big net new jobs creators. Author Paul Wallace, a former editor at The Economist magazine, definitely makes some strong points. For example, he argues that too much of the research underlying the case for pessimism wrongly assumes that all positions in sectors considered highly vulnerable are equally vulnerable.

Indeed, Wallace spotlights a study finding that a focus on tasks rather than occupations can dramatically reduce the numbers of workers at risk – at least, it seems, for the time being. One big reason? Many seemingly vulnerable positions allegedly involve “crucial social interactions” that no hardware or software or combination (on the horizon?) can replicate.

Yet those possible qualifications I just mentioned point to one major potential vulnerability in Wallace’s argument – and in the study he cites. Both seem to assume that the technologies in question won’t advance much more – and possibly that they will never, or not for decades, reach the stage where they can interface adequately with human customers or colleagues. You don’t need to be a science fiction buff to understand the implausibility of that scenario.

In fact, recall that pioneering computer scientist Alan Turing displayed unmistakable confidence that such progress was at least theoretically possible. Why else would he have developed his famous test of whether machines could be genuinely intelligent, and even, by extension, conscious?

“Turing put forward the idea of an ‘imitation game’, in which a human being and a computer would be interrogated under conditions where the interrogator would not know which was which, the communication being entirely by textual messages. Turing argued that if the interrogator could not distinguish them by questioning, then it would be unreasonable not to call the computer intelligent, because we judge other people’s intelligence from external observation in just this way.”

The article also raises big questions about the quality of the jobs that Wallace (and other optimists?) are confident won’t be robot-ized out of existence. Some definitely seem desirable – like “designing smartphone apps that have only just sprung into existence” – although I still wonder whether sooner rather than later apps won’t be designing themselves much more efficiently.

But the other examples of safe jobs sound a lot like dead-end jobs – e.g., restaurant jobs, personal trainer positions, and tour guides. And I continue to struggle understanding why they’re thought to be especially safe, either, over any meaningful stretch of time.

Gillian Tett, the managing editor for U.S. news at the Financial Times, seems fairly upbeat about employment and automation, too, and also cites research purporting to undercut techno-alarmism. Like Wallace’s examples, it’s worth considering. Her summary of the message: “[P]eople are also working with robots in new roles.” But also like Wallace’s examples, it raises the question, “For how much longer?”

Much stronger is this point made by Tett: “[T]here is a burning need for policymakers to obtain much better data on what is really happening in the American workplace. Anthropological studies are small scale, while the macro-level data are surprisingly weak, partly because the Bureau of Labor Statistics tends to collect data through traditional channels.”

My contacts with the Trump transition team convince me that upgrading American government statistics bearing on trade and offshoring are due for a big rethink. The clearly surging importance of the latest actual and potential labor-saving technologies means that their actual and likely impact on the world of work demand the same treatment.

(What’s Left of) Our Economy: No, America Doesn’t Have a Manufacturing Demand Problem

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Census Bureau, exports, Financial Times, gross output, Im-Politic, imports, Institute for Supply Management, ISM, manufacturing, manufacturing trade deficit, Trade

Because the Financial Times is one of the world’s truly great newspapers (no, it’s not a long list), I was surprised to see its latest coverage of U.S. manufacturing data make a fundamental mistake. The paper’s report on yesterday’s December figures from the Institute for Supply Management (ISM) confuse the demand for manufactured goods with the production of manufactured goods. As a result, readers got an off-base description of the state of American manufacturing and its main challenges, and an equally erroneous picture of how these challenges can be overcome.

As I’ve written repeatedly, surveys like those conducted by the ISM are deeply flawed measures of manufacturing’s health to begin with. The main problem: their “survivorship bias,” which means that they only provide readings on the well-being of companies remaining in the sector at a given time. They say nothing about whether the industry itself is growing or shrinking.

But the Financial Times‘ article was comparably misleading when it claimed that the poor ISM December numbers showed that U.S. manufacturing’s problem nowadays is weakening demand for its products. Where recent months are concerned, that may be partly true. And certainly, many of the biggest foreign economies to which American manufactures sell have seen their own economic growth remain sluggish or slow further.

The ISM, however, also reported that America’s manufacturing imports have fallen on a monthly basis for three straight months. We’ll need to wait until the Census Bureau’s December U.S. trade figures are released (early next month) to know if that’s really true or not. (Census’ methodology is not affected by survivorship bias, and in fact its latest data show that America’s manufacturing imports rose between August and September, and between September and October.)

But what’s unmistakably true over the longer, and more meaningful, run is that whatever total slackening there has been in overall U.S. demand for manufactures, the sector’s main main headwind comes from elsewhere – specifically, abroad. In fact, through the first ten months of this year, although manufactures exports were down by 6.10 percent over 2014 levels, imports were up by 1.52 percent. In other words, the biggest demand problem facing domestic industry is that too much of the demand for this sector’s output in America – its biggest market by far- is being supplied from abroad. And it’s a problem that’s far from new.

The inadequacy of demand for domestically produced manufactured goods is evident from the ongoing surge in the U.S. manufacturing trade deficit – which keeps setting new annual and monthly records. But this particular demand problem is also clear from different figures that compare the growth of America’s manufacturing production versus the growth of the country’s market for manufactured goods – i.e., its purchases of such goods from all sources, at home and abroad.

The U.S. government’s statistical agencies don’t make displaying his comparison inordinately easy. But a reasonably accurate and up to date picture can be created by combining separately compiled figures – on the gross output of manufacturers located in America, and on the nation’s foreign trade. The U.S. market for manufactures consists of domestic output plus imports (which are, after all, consumed domestically) minus exports (which are consumed abroad).

For these purposes, the gross output data is more appropriate than the value-added data, since they reflect the production of all the manufactured inputs used in final products, rather than seek to avoid “double counting” both these inputs and the final products that contain them. The more comprehensive measure allows a more valid comparison with the export and import figures, which count inputs and final products separately, too.

Measured by gross output, American manufacturing production grew by 38.06 percent (before inflation) between the start of the current weak recovery in the second quarter of 2009 and the second quarter of 2015 (the latest available figures). That’s actually faster than the growth of total U.S. gross output during this period (28.59 percent). But the American manufacturing market – the demand for manufactured products – grew by 44.41 percent.

Moreover, most of this manufacturing gross output growth took place during the early part of the recovery, when the sector was snapping back from a near-death recessionary experience. Between 2009 and 2011, this production expanded by 24.89 percent in current dollars. From then until 2014 (the last full-year numbers available), this rate slowed to 10.68 percent, and 2015 will undoubtedly come in even worse.

To be sure, there’s been a bigger percentage slowdown in manufacturing import growth between 2009 and 2014 – 38.95 percent between 2009 and 2011 versus 11.94 percent since. But in addition to the absolute numbers being much bigger, the slowdown in export growth has been even greater: 39.31 percent to 10.21 percent.

Obviously, the faster the American economy grows, the faster its demand for manufactures will increase, and more production will result. But to achieve the industrial rebound so many U.S. leaders – including President Obama – have identified as necessary – much more will be needed. And given the persistently wide gap between American manufacturing demand and American manufacturing production, a thoroughgoing trade policy overhaul must be part of the mix.

(What’s Left of) Our Economy: Media Flattery for America’s Corporate China Lobby

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China, cyber-security, Financial Times, hacking, lobbying, multinational corporations, offshoring, protectionism, technology, technology transfer, The Wall Street Journal, {What's Left of) Our Economy

Even before checking out The Wall Street Journal this morning, I was going to post an item on some truly weird material quasi-buried in a Financial Times piece from last week. The Journal article, however, showed  that it’s become nothing less than vital to spotlight this latest instance of how the media spreads the most whoppingly one-sided information on many U.S.-China-related subjects in the most offhanded ways.

According to FT writers Geoff Dyer and Richard Waters in a September 11 piece on “High-tech diplomacy” between the United States and China, “The American business community once saw itself as almost a go-between in the US-China relationship, an embodiment of the two countries’ intertwined economic fates and a diplomatic actor that was sometimes able to take the edge off political arguments” and a “conduit between governments.”

More recently, they observe, the companies have “started to lean more heavily on Washington for support against Chinese policies that seemed designed either to shut them out of large sections of the Chinese market or pressure them to hand over key technologies.” And of course, the article dutifully quotes an “expert” from an American think tank (which happens to be heavily funded by such businesses) sympathetically describing the companies as “being pulled in many directions by both governments in what has become a much more complicated relationship….Most of them do not like being caught in the middle.” Who could help but feel their pain?

These offshoring companies have indeed been hoisted by Beijing on the petard of their longtime claims that expanding trade with China would greatly benefit the U.S. economy, too; that China was moving steadily towards Western business and even legal, and political norms; and that therefore Washington should mainly turn the other cheek in response to any continued economic predation by the Chinese. The firms also undoubtedly told the two FT reporters that they previously saw themselves as valuable diplomatic intermediaries – as is their right. And perhaps some executives actually believed that.  It’s true, moreover, that the FT didn’t present these descriptions as fact.

At the same time, because an alternative perspective was completely ignored, what else could a reader not steeped in these subjects conclude? And omissions like this matter, because what Dyer and Waters didn’t mention is all the evidence that American companies operating in China have actually served, and every effectively, as de facto lobbyists for a Chinese government. Their common interest? Preventing American officials from rocking the boat of bilateral economic relations in order to preserve profits both were reaping at the expense of domestic U.S. producers and their employees – aka the productive core of the American economy. For as the media has ignored ever since China trade issues have been stirring controversy, U.S.-owned firms whose products are made in China for export to the United States benefit every bit as much from Chinese subsidies and protectionism as Chinese-owned companies.

Where the Journal piece comes in is in providing crucial perspective about the growing number and volume of corporate complaints about China’s increasingly brazen protectionism. On top of refusing to support measures that arguably could counter China’s latest moves, the American firms – especially the tech companies – have massively caved to the pressure. As reported by the Journal’s Eva Dou and Don Clark (and as described by RealityChek for months), these companies are doubling down on their longstanding policies of transferring capital and, most important, cutting-edge technology, to Chinese enterprises. The FT referenced these moves, but only briefly, and deep into the second half of the article.

And by the way, if you look at the types of knowhow being provided to China (as I’ve been doing for years), it’s no mystery why it’s become so adept at hacking key U.S. government and private sector computer systems. In other words, reasons abound for viewing the corporations so indulgently portrayed in the FT not only as whiners, but as dangerously two-faced whiners.

No one should want the FT or any other news organization to take sides in this debate. But the media needs to do a much better job remembering that these giant companies already have their own flacks.