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.

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(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

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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

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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?

(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

Tags

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.