(What’s Left of) Our Economy? Did Trump Trade National Security for Soybeans with China?

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agriculture, China, election 2016, election 2020, export controls, extradition, farmers, G20, G20 Summit, Huawei, Meng Wangzhou, national security, Osaka G20 Summit, rural areas, soybeans, tariffs, technology, telecommunications, Trade, trade war, Trump, Xi JInPing, {What's Left of) Our Economy

Did President Trump sell U.S. national security down the river at his meeting with Chinese dictator Xi Jinping in order to make American farmers happy and, he hopes, ensure his reelection? Could be – even though there’s still much that’s not known about the U.S.-China deal reached between the two leaders on the sideline of a big international economic summit meeting in Osaka. In fact, I haven’t even seen any official U.S. government documents describing the agreement in detail. (A further complication: Whatever official Chinese documents come out describing the deal could differ significantly from the American portrayal.)

At the same time, I’ll venture that the major, and from the U.S. standpoint, urgently, needed course change in China policy begun by Mr. Trump hasn’t yet been altered fundamentally. And I still don’t consider that outcome likely, even though events of the last few days reveal that some important loopholes in America’s approach need to be closed, pronto. 

From what I can glean from the just-released official White House transcript of the President’s Osaka press conference is that (as I predicted), Mr. Trump and Xi agreed to resume formally negotiations that fell apart in early May, apparently because China began reneging on commitments it had already made. The quid pro quo that seems to have revived the talks evidently comes down to this:

The President agreed to refrain from imposing threatened tariffs on U.S. imports from China that don’t already face duties or new duties (a little more than half of Chinese goods entering the American market fall into this category), and to make it easier for American tech companies to sell, seemingly on an ongoing basis, parts and components vitally needed by Chinese telecommunications giant Huawei.

In return, China agreed to boost greatly purchases of agricultural products that it had all but shut out of its own large market to retaliate for Trump tariffs, thereby denying U.S. farmers major rivers (not just streams) of revenue. Since rural America went so notably for Mr. Trump in 2016, the political appeal of that approach is easy to see.

The chief uncertainty remaining: What exactly will Huawei be able to buy from U.S. firms? The issue is crucially important to China because, notwithstanding its commanding position in many global markets for advanced telecommunications systems, these Huawei products still depend vitally on information technology hardware and software from American-owned tech companies that have no adequate (if any) substitutes from other suppliers. And if, as was likely, Huawei suffered major damage because these U.S.-origin goods and services weren’t available, a major blow would be dealt to China’s ambitions to gain preeminence in a wide range of advanced technologies – and turn itself into a military superpower in the process.

Factors contributing to the uncertainty? To start, the so-called U.S. ban on selling to Huawei wasn’t technically a ban. It was an announcement that any proposed U.S. sales to Huawei needed to be approved by the American government because Huawei had been placed on a list of “entities” deemed dangerous to U.S. national security. So in principle, some American firms’ products and services could still be sold to Huawei (and several dozen affiliated entities also added to the list). But presumably, the truly valuable inputs would be denied.

Second, President Trump told the Osaka press conference that Huawei would only be permitted to buy from American-owned business “equipment where there’s not a great national-emergency problem with it.” That’s somewhat comforting, but only somewhat. The reasons? First, there’s reason to believe that, even before the Trump-Xi agreement, Huawei could have bought even equipment that did raise national security concerns as long as those computer chips or whatever else consisted mainly of foreign content (which is often the case because production of these goods has become so globalized, and because – irony alert! – some of the non-U.S. content now comes from China itself).

That qualification was shaping up as a huge problem because, if it’s present, then Huawei would still retain access to many of the high tech products it needs; and because the result could be even stronger incentives for American high tech companies to manufacture and develop even more of their most sophisticated offering offshore, including in China.

Third, as Mr. Trump specified, Huawei has not been taken off the “bad entities” list. Nor has there been any change in the U.S. extradition request to Canada for Meng Wangzhou, the CFO of Huawei (and daughter of its founder) to enable her trial for violating America’s export control laws. Why, then, do anything to make life easier for this entity?

Fourth, the Huawei-centric nature of this policy could signal that the President is falling into a China policy trap: Assuming that measures focused on specific entities (remember: nothing in China that’s routinely called a “business” or “company” deserves that label, in terms of how they’re used in most of the rest of the world, because China’s economy is so thoroughly controlled by the state) are adequate to cope with the intertwined China tech and national security challenge.

In fact, such episodic approaches seem doomed to fail because the China challenge is a systemic challenge. The exact names of specific instruments comprising this China challenge don’t matter in the slightest. For instance – let’s say that a truly total Huawei ban did sink this organization. In time, what’s to stop Beijing from simply slapping another name on the same units, facilities, and employees? Would Americans really want their government to have to wait to impose an embargo on this new entity until it began endangering their national security? Wouldn’t it be much better to understand that every Chinese entity big enough to be permitted by the Chinese government to play in global markets is by definition an agent of Beijing’s and of its (distinctly dangerous) ambitions? And to treat the Chinese high tech sector – for starters – accordingly?

As for the Chinese promises of greater imports of U.S. farm products, they’re problematic, too, even if Beijing does keep its promises. Hopefully, American farmers will be smart enough to respond in a measured way, not by simply assuming that they’ve won a free pass back into China forever, and recklessly supercharging and distorting their planting patterns to satisfy this new demand (as was the case especially for soybeans). Instead, hopefully, they’ve learned that Beijing can close the doors whenever it wants to – and that President Trump is kind of mercurial itself.

The President also could well be selling his agricultural record short. For although farmers clearly don’t like the Chinese tariffs on their exports prompted by the Trump levies, they also no doubt recognize how they’ve benefited from his tax and regulatory policies. And those that are culturally and socially conservative probably like what they hear from the President on those subjects – and/or don’t like many Democrats’ statements. Finally, the passage of the Trump administration’s revamp of the North American Free Trade Agreement (NAFTA) – the U.S.-Mexico-Canada (USMCA) deal could ease many farmers’ trade worries. 

In fact, the volatile Trump temperament – and his reelection hopes – look like the best guarantors that this shortsighted high-tech-for-soybeans trade-off won’t last long. Because the main obstacle to the kind of overarching trade deal the President still talks about still remains – the impossibility of verifying China’s compliance adequately. So the longer the Chinese hold out, and deny the President the chance he so clearly covets to claim a big victory, the more irritated with them he’s likely to become, and the greater the odds that some hammer comes down again.

Moreover, if the overall American economy and especially its manufacturing sector wind up slowing down, as some key indicators already suggest they are, increases in tariffs on Chinese manufactures could be the difference between Trump victories in the manufacturing-heavy Midwest states that (narrowly) helped key his 2016 triumph, and defeats.

In addition, it’s critically important to note that the Chinese products still facing tariffs are much more important to China’s economic future than the products that remain entirely or largely duty-free. That’s because the first group overwhelmingly consists of parts and components of industrial products that in turn are pretty advanced goods themselves. They’re the kinds of products that matter crucially to America’s industrial future as well.

So, as observed by this perceptive New York Times article, the China-links to the global supply chains that face such mortal threats from these tariffs still remain endangered, and the more-than-decent odds that these levies will remain in place, and even get raised further, will surely keep prompting multinational companies the world over to move at least partly out of China. And any developments that weaken China economically are by definition good for the United States.

Moreover, despite widespread predictions that Trump tariffs on these so-called intermediate goods would wind up raising consumer prices because their corporate buyers would need to pass along the tariffs’ cost to their final customers, little of such inflation has emerged, for numerous reasons I’ve written on previously.

By contrast, the still un-tariffed goods are consumer goods – like shoes and toys and apparel and consumer electronics products. For various reasons I’ve written about, their prices weren’t likely to budge much even with new Trump tariffs. But for now, the President has foreclosed any such possibility completely. The only drawback for the United States to leaving these goods largely duty-free – because they’re generally very labor-intensive products, they employ unusually large numbers of Chinese workers – is that any movement of production from China to anywhere else (even even it’s Chinese companies themselves doing the moving) would result in greatly increased Chinese unemployment. The regime has long viewed high joblessness as a mortal threat to its survival. So China’s labor-intensive industries, and by extension China’s dictators, have been let off the hook, too.

In all, then, so far it seems fair to conclude that President Trump handed the Chinese some genuinely important concessions in exchange for precious little from Beijing. But it’s also distinctly possible that this trade-off makes so little sense economically, national security-wise, and politically, that it will badly flunk the test of time. And at least as important, nothing in its seems capable of stopping or even greatly slowing the U.S.-China economic disengagement that, as I’ve written, is bound to serve America’s long-term interests, and that’s already underway.

Making News: Two Trade War National Radio Interviews Coming Today…& More!

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Bill Powell, China, G20, G20 Summit, Gordon G. Chang, Group of 20, Japan, Making News, Market Wrap with Moe Ansari, Newsweek, Osaka, The John Batchelor Show, Trade, trade war, Trump, Xi JInPing

I’m pleased to announce that I’m scheduled to appear twice today on national radio to help update the U.S.-China trade conflict.  In addition, I’ll no doubt be previewing the upcoming meeting later this week between President Trump and Chinese dictator Xi Jinping on the sidelines of the summit being held among the heads of the world’s twenty largest economies (the so-called Group of 20, or G20) in Osaka, Japan.

The first will be broadcast at 3 PM EST on the nationally syndicated Market Wrap with Moe Ansari.  Click here to listen live on-line.

The second entails a return to The John Batchelor Show.  Click here to listen on-line at 10 PM EST to the latest in the always lively discussions among John, co-host Gordon G. Chang, and me on the rapidly evolving trade war scene.

As usual, if you can’t listen today (or want to hear the interviews again) I’ll post podcasts of the segments if and when they’re available.

Finally, it was great to be quoted several times in this excellent long look back at U.S.-China economic relations by Newsweek‘s Bill Powell in this week’s edition of the magazine.

And keep checking in with RealityChek for news of upcoming media appearances and other developments!

Im-Politic: September 11 Forgotten at Ground Zero

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Chanel Foundation, Coca Cola, G20, Ground Zero, Group of 20, Im-Politic, International Olympic Committee, Jamal Khashoggi, Port Authority of New York and New Jersey, Saudi Arabia, September 11, terrorism, World Trade Center

On the back of the older of our two family cars is a faded bumper sticker declaring “9-11. We Will Never Forget.” I wish I had a spare that I could send to the folks running the Port Authority of New York and New Jersey, along with the Chanel Foundation, the International Olympic Committee, the Coca Cola Co., and other businesses and organizations like them. Because the Port Authority – a partnership involving the two states mentioned plus the federal government that operates major transportation assets in the New York metropolitan area – and the others just mentioned clearly have forgotten.

My evidence for this charge? Not two decades after the September 11 terrorist attacks, the Port Authority, which developed the World Trade Center (WTC) site that stands in the shadow of the September 11 memorial, installed an exhibit at the Center an art exhibit that showcases the flag of Saudi Arabia – the home country of 15 of the 19 September 11 aircraft hijackers, which is ruled by a monarchy widely accused of (and in fact sued by the families of many September 11 victims for) harboring the terrorist forces responsible for the attacks. In other words, the a Saudi flag image is all but flying above Ground Zero. 

The exhibit, which opened last month, was funded by the Chanel Foundation, the Olympic Committee, and Coke. Although there’s no evidence that these sponsors had any role in the decision to locate the art at the WTC, since money talks, surely they could have prevented this outrage.

To be sure, Saudi Arabia’s is not the only flag displayed. The work consists of candy-shaped sculptures of the flags of all the countries comprising the Group of 20 (G20) – a loose network of the world’s twenty largest economies, which meets periodically to discuss various global issues. The French artist who created the sculptures didn’t mean to single out the Saudis as paragons of virtue, either. And that certainly wasn’t the (stated, at least) intent of the Port Authority, which called installing the work a part of its “continuing efforts to transform the World Trade Center site into a dynamic space in Lower Manhattan….”

Yet even leaving aside the appropriateness of prominently displaying a portrayal of the Saudi flag virtually on the very spot where the Twin Towers stood, the sculptures’ ostensibly intended message is pretty ditzy, or pretty cynical, depending on your standpoint. The flags come in the shape of wrappers around pieces of candy. The sculptor’s objective for this format (though not for placing it at the WTC site, which wasn’t his decision) was “to celebrate mankind on an international level and pay tribute to People of the entire world.” That’s pretty kumbaya-y, especially considering that G20 meetings are combinations of cold-blooded exercises in advancing national interests and multinational business interests (mainly in the case of the pre-Trump United States), with periodic rhetorical lip service to and occasional instances of international cooperation.

But hey, he’s an artist. Coca Cola and the like surely understand the self-interested aims that are served by portraying such arrangements and their workings as high minded (indeed sugar-sweet) efforts to promote international friendship and harmony.

Even so, this kind of globalist propaganda is still much less offensive per se than planting a facsimile of the Saudi flag so close to the scene of an atrocity committed by adherents of the kinds of jihadist movements strongly supported by Saudi leaders. Moreover, it’s especially troubling given the evidence that this same regime killed dissident Saudi journalist (and legal U.S. resident) Jamal Khashoggi in Turkey – an action that ignited much higher profile and sustained domestic and worldwide condemnation. So it’s not as if a lot of post-September 11 reform has taken place.

Like I said, the “Never Forget” bumper sticker on my car is pretty faded by now – and the Port Authority’s decision has prompted me to get a replacement. In fact, I think I’ll make it three (to go onto our second car). Moreover, I am going to send the other to the Port Authority. I hope all RealityChek readers will consider doing the same.

(What’s Left of) Our Economy: It’s “Big Week” on Trade

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100-day China plan, Canada, China, environmental standards, G20, Gary Cohn, H.R. McMaster, James Mathis, labor standards, Mar-a-Lago summit, Mexico, NAFTA, North American Free Trade Agreement, North Korea, Robert Lighthizer, rules of origin, steel, Steve Mnuchin, tairffs, Trade, Trump, Wilbur Ross, Xi JInPing, {What's Left of) Our Economy

During World War II, the United States and the United Kingdom launched a massive multi-day strategic bombing campaign against Nazi Germany called “Big Week.” The stakes are considerably less apocalyptic, but yesterday began a period for U.S. trade policy that qualifies as a big week, too. Here’s why, and what to look for.

First, yesterday marked the deadline for the 100-day plan announced at the summit between President Trump and his Chinese counterpart Xi Jinping to start bringing down America’s immense trade deficit with the People’s Republic. Some near-term deals were announced in May, and the Chinese seem to be playing along, to at least some extent. But even the American offshoring lobby, which has greatly soured on China since its full-court-press lobbying campaign convinced Washington to expand U.S.-China trade exponentially, has been complaining that agreements of this scope are way too small to solve their own problems with Beijing in the Chinese market. These deals have even less potential to stop most of the damage still being inflicted on the American domestic economy from wide-ranging predatory Chinese economic practices.

The results are due to be announced this week – and may be delayed to take into account whatever can be accomplished by a new high-level economics dialogue that will hold its first session in Washington this week. Will they produce some big wins for the administration and the domestic economy? As I see it, reasons for pessimism outweigh reasons for optimism.

The former include the president’s continuing statements about the threat posed by China’s imports (in this case, of steel), and the awareness demonstrated by his campaign of how varied and unconventional (meaning they went far beyond tariffs and quotas) China’s trade and trade-related transgressions have been. Among the reasons for pessimism, though, are intra-administration divisions that entail both economic issues (with the administration’s economic populists arrayed against what’s been called the pro-free trade “Goldman Sachs” gang comprised of top economic adviser Gary Cohn and Treasury Secretary Steven Mnuchin) and security issues (pitting the populists against traditional foreign policy thinkers like national security adviser H.R. McMaster and Defense Secretary James Mattis, who would sympathize with notions like the claim that China should be courted to enlist its help in sitting on North Korea). In addition, the kinds of staffing woes still dogging the administration typically make sharp departures from a policy status quo difficult to engineer.

In fairness, Commerce Secretary Wilbur Ross, who has forthrightly described the China economic challenge, acknowledged when announcing the 100-day trade plan’s first results that three months worth of talks couldn’t possibly be a game-changer precisely because China’s mercantilism was so pervasive. But in so doing, he unintentionally made the argument – which I support for U.S. trade policy generally – for dispensing with talks altogether and capitalizing on China’s urgent need to export to the United States by addressing this issue unilaterally.

Certainly, this kind of course change would be much more consistent with the president’s numerous campaign statements emphasizing the destructive effect of Chinese predation on America’s economy and working class. It’s also the kind of strategy you’d expect from a chief executive whose non-trade agenda is almost completely stalled in Congress, who’s under intense political pressure, and who could badly use a big economic win in order to prevent major Congressional losses in the next off-year elections – whose campaign cycle will be here before he knows it.

Another big (self-imposed) administration deadline falls today. It marks the date by which the White House said it would submit its detailed plan to renegotiate NAFTA – the North American Free Trade Agreement. In May, U.S. Trade Representative Robert Lighthizer sent Congressional leaders a brief letter alluding generally to some objectives, but by tomorrow he needs to fill in critical details. Many might have been contained in a draft letter released March 30, and that plan looked pretty impressive. The big question of course is which ones will wind up surviving – and whether the administration is open to other ideas.

As I’ve written, the most important issue concerns the treatment of “rules of origin” – the provisions of NAFTA aimed at ensuring that any goods sold in the three signatory countries (the United States, Canada, and Mexico) are overwhelmingly made in some combination of those countries. The deal that’s currently in place specifies North American content levels that need to be met to qualify for duty-free treatment inside the free trade zone. But the tariff penalties for goods not meeting these standards aren’t nearly high enough to achieve the goal of increasing the entire region’s competitiveness.

The March 30 letter suggested that the administration would seek origin rules that promote U.S. production and jobs more effectively, but it didn’t say how. If much higher external tariffs aren’t proposed in the plan due today, it’s doubtful that any reforms will result in non-NAFTA countries to make more of their products in any of the countries inside the NAFTA zone. Moreover, it’s of course going to be easier for Washington to persuade Canada and Mexico to go along if it re-emphasizes what President Trump has been saying since his meeting last summer, before the election, with his Mexican counterpart: NAFTA should aim to boost the competitiveness of all three countries.

The brief May 18 Lighthizer letter also suggested obliquely the need to change NAFTA’s dispute-resolution procedures, and the March 30 draft discussed the issue at greater length. But even its recommendations to strengthen America’s authority both to respond to import surges from its NAFTA partners (called “safeguards”) and to apply its own Buy American government procurement rules to intra-NAFTA trade may not go far enough.

As I’ve explained, the fundamental problem is that the current dispute-resolution process treats the three NAFTA countries as legal equals, even though the U.S. market is nearly 90 percent of the total NAFTA market, and clearly remains the most valuable prize for all three signatories. Without closing or somehow changing acceptably, the yawning gap between the NAFTA legal regime and the economic facts on the ground, it’s hard to imagine the system serving U.S. interest on net.

At this point, you might be wondering why I haven’t mentioned NAFTA’s labor and environmental provisions. The reason? Although they’ve been major objectives of Democratic party and other left-of-center NAFTA and broader trade policy critics, as with their counterparts in the Trans-Pacific Partnership (TPP) deal, they’re largely unenforceable. As I’ve asked before, how many American bureaucrats will be needed to run around how many factories in a signatory country (in this case, Mexico) to ensure that companies aren’t abusing workers or dumping sewage into nearby streams? With more effective rules of origin, however, producers in Mexico will feel less pressure to remain competitive versus rivals in China and elsewhere in Asia by offering the worst possible working conditions and ignoring environmental considerations completely.

Finally, there’s the steel tariff issue. The administration has delayed announcing its decision to impose national security-related tariffs on U.S. steel imports, but is expected to reveal its intentions this week. For what it’s worth, the president sounds determined to approve some levies on some countries’ steel. The main question is who the main targets will be. It will also be crucial to see whether and how prominently the announcement emphasizes the need to deal decisively with the underlying problem – the ocean of subsidized steel from China that has flooded and distorted world markets in recent years.

At the same time, there’s a reason for Mr. Trump to punt – or to punt for the most part: At their summit earlier this month in Hamburg, Germany, the leaders of the world’s twenty largest economies (the “G20”) agreed to require an international commission on the subject to deliver a report by November containing “concrete policy solutions that reduce excess steel capacity.” Postponing unilateral action until this mandate is fulfilled could prove a tempting option for a president who doesn’t exactly need to come under fire from new fronts.

Moreover, if the commission’s ideas don’t pass U.S. muster, Mr. Trump would be in a much stronger position to slap the tariffs on everyone, and vow to maintain or even increase them until meaningful, concrete agreements are reached.

President Trump has been sending surprisingly (at least to me) mixed signals on trade since his Inauguration Day two-step – killing the TPP but refraining from labeling China a currency manipulator. Big Week in trade isn’t likely to clarify the picture fully, but we’re bound to know more at its end than we do here at the beginning.

(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.

Making News: Coming up on The Laura Ingraham Show – & More!

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Buy American, Chronicles, G20, Lifezette.com, Making News, North Korea, The Laura Ingraham Show, Tom Piatak, Trump

I’m pleased to announce that my appearance on Laura Ingraham’s nationally syndicated radio show has been rescheduled for 10:15 AM EST today.  Click here to listen live to what’s sure to be a (desperately needed) outside-the-box discussion of the North Korea crisis.  And of course, I’ll be posting a link to the podcast as soon as one’s available.

Further, my views on the prospects for President Trump’s first summit of the world’s top economic powers were featured yesterday in a post on Laura’s Lifezette.com website.

Also yesterday, blogger Tom Piatak quoted me in an essay for the magazine Chronicles on the importance of Buying American.  Here’s the link.

And keep checking in with RealityChek for ongoing reports on media appearances and other developments.

 

Following Up: Link to Today’s CNBC Interview

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American Enterprise Institute, Bill Griffith, CNBC, Following Up, G20, James Pethokoukis, Kelly Evans, Trade, Trump

I’m pleased to present the link to the video of my appearance today on CNBC discussing the Trump administration’s precedent-breaking performance at this past weekend’s big global economic summit.  Click here to see a great discussion of this possible landmark event, and its possible implications, among anchors Kelly Evans, Bill Griffith, James Pethokoukis of the American Enterprise Institute, and yours truly.

And keep checking back with RealityChek for notices of upcoming media appearances and other news.

Making News: CNBC Interview This Afternoon – & a Big Boo for a Washington Post Blog

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CNBC, Economist's View, G20, Making News, Monkey Cage, The Washington Post, TheWeek.com, Trade, Trump

I’m pleased to announce that I am scheduled to return to CNBC this afternoon to talk about the Trump administration’s global trade policies. The segment is slated to begin at 3 PM EST, and its theme is the surprising, precedent-breaking performance of President Trump’s Treasury Secretary at a recent conference of the world’s leading economies.

I’m also pleased to announce that my recent op-ed article for The New York Times about the administration’s trade policy has been cited by the influential Economist’s View blog, and by the webzine TheWeek.com

Less pleasing:  The Washington Post‘s Monkey Cage blog published a piece critiquing my article (which is of course fine).  But the powers that be on the blog refused to consider publishing a response by me (which isn’t so fine).  Monkey Cage says it was founded to enable “political scientists draw on their own expertise and the discipline’s research to illuminate the news, inform civic discussion, and make some sense of the circus that is politics.”

But editor John Sides informed me that “At this point…we’re not going to begin a more extended back-and-forth on this issue.”

That tells me that Monkey Cage actually isn’t so big on fostering civic discussion – and therefore can’t be much of a blog. That should be the message you take away, too.

(What’s Left of) Our Economy: Latest Trade Deficit Scuffles Still Missing Lessons of 2008

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bubbles, finance, Financial Crisis, free trade agreements, G20, Germany, Global Imbalances, investment, Japan, manufacturing, offshoring, tax reform, Trade, Trade Deficits, trade policy, trade surpluses, Trump, Wall Street, {What's Left of) Our Economy

Roughly ten years after it broke out, it’s still incredibly rare to see economists or pundits link U.S. and resulting global trade imbalances with the financial crisis. So I’m always thrilled – as I tweeted this past week – to see it ever happen. All the same, even this insightful column by Reuters’ Edward Hadas simply dances around the crucial link between these imbalances and American trade policies, and in particular, their offshoring-friendly nature.

In a March 15 essay, Hadas commented on the German (and other countries’) trade surpluses that have attracted such attention this past week for two main reasons: German Chancellor Angela Merkel’s first-ever meeting with President Trump, and a conclave taking place at the same time of the finance chiefs of the world’s 20 leading economies (the so-called G20). The author’s main contention is indisputable as far as it goes. According to Hadas, the real problem with these imbalances is financial:

“The euros, pounds and dollars which Germany, Korea et al accumulate inevitably land in the global financial system. There would be no problem – only gains all round – if these monies funded valuable infrastructure, productive factories and other assets which can generate a reasonable economic return.

“Too often, though, though, the extra currency winds up supporting counterproductive finance. It backs ultimately ruinous property speculation, lends support to chronically weak governments, encourages unsustainable consumer spending and destabilises developing economies, not to mention enriching banks and bankers and stimulating corruption. A typical example: the recycled dollars from the U.S. trade deficit helped fund the American housing bubble whose pop created the 2008 crisis.”

But what Hadas – and so many others – fail to do is explain adequately why deficit countries (like the United States) make such dangerously shortsighted choices with their windfalls. Three main (and not mutually exclusive) reasons have been served up. First, financial systems in the deficit countries (especially the United States, which runs the biggest deficits) have over-rewarded uses of capital that produce the fastest possible payoffs, and under-reward longer-term projects. The result is too much investment that encourages speculation, financial monkey business, and simple consumption, and too little investment that builds factories and laboratories and funds other activities that create wealth more slowly, but on a more sustainable basis.

Second, such irresponsible uses of capital have become practically inevitable if only because the deficits have been so enormous, and so much money has become available. When anything is in such abundance, and therefore costs so little, most economists would agree that there’s little reason to use it carefully. After all, it looks like a sure bet that more of that thing at very attractive prices will be readily available.

A somewhat different version of this argument has to do with what economists call “moral hazard.” It argues that the American financial system used over-abundant money so recklessly at least partly because investors felt certain that they’d get bailed out of most or all of their mistakes by government. So why not take maximum advantage of what seems to be a “heads, we win; tails, we lose” proposition?

The third explanation for the irresponsible use of resources focuses on the consumption-heavy nature of the economies of the deficit countries. (This argument also tends to note that the surplus countries frequently try to limit and even depress consumption.) The more capital they take in, in other words, the more such spending (as opposed to productive investment) is likeliest to result either because such behavior is encouraged by government, because a “live for today” has been produced by that country’s culture, or because of some combination of the two.

Whenever something as a big as a global financial crisis strikes, many culprits are responsible. And all of the above explanations should be taken very seriously (along with others, like lax financial regulation). But what Hadas and all the rest continue to miss is how the world trade system, national trade policies, and the trade flows they have fostered have actively fostered in deficit countries like the United States a neglect of productive activities like manufacturing (which is so heavily traded).

Specifically, as Washington in the 1990s and 2000s signed more and more trade agreements structured to encourage multinational companies from all over the world to supply U.S. consumers from locations in super low-cost and virtually unregulated developing countries like China and Mexico, American leaders and other elites (e.g., in the media) naturally sought to rationalize their decisions by spreading the message that sectors of the economy like manufacturing (and the income loss produced by the accelerated offshoring that rippled throughout so much of the Main Street economy) could be neglected with impunity. And the administration of George W. Bush (along with Congress of course) and the Federal Reserve chaired by Alan Greenspan underwrote America’s spendthrift ways with big budget deficits and ultra-low interest rates, respectively.

Even worse, these destructive trends fed on themselves. The more offshoring seemed to pay off, and the more domestic manufacturing operations looked like losing — or at least anachronistic — propositions, the less interested financiers became in investing in them. So the amount of productive activity on which to use incoming capital to start with began shriveling. And the less productive activity available to sustain Main Street living standards responsibly (i.e., mainly through earnings), the greater the political establishment needed to prop up those living standards by providing more easy money — at least if it wanted to stay in power while maintaining the offshoring status quo.

Ironically, even though Hadas emphasizes regulation as the answer to global imbalances, his particular focus has big trade implications:

“Regulation can do more than strengthen bank capital ratios. It can reform the system, so trade surplus funds are not directed to economically counterproductive uses. That will be tough, both politically and practically. But it should be easier – and will be far more helpful – to solidify finance than to try to change the national characters of Germany or Korea.”

I’m all in favor of channeling the use of trade surplus funds by deficit countries into productive activity. In fact, I strongly support requiring such uses by U.S. multinational companies if much-discussed tax reform finally succeeds in persuading them to bring home the vast amounts of earnings they’re currently stashing abroad to avoid paying higher U.S. corporate rates. 

But this requirement needs to be accompanied by (at the very least) strong measures to keep out foreign-made goods that benefit from predatory trade practices like dumping, subsidization, and intellectual property theft. Otherwise, foreign competitors will be able to keep undercutting their domestic American competition in the U.S. market, and these new productive investments will fail. It’s also entirely likely, however, that more sweeping trade curbs will be needed – to offset the scale economy disadvantages created by U.S.-based firms’ inability to sell into so many important markets and their rivals’ ability to sell freely in their home countries and the United States.

And this is in fact where recognition is needed that the trade problem created by American policy concerns not simply inducements to offshore, but the coddling of protectionism in high income countries like Japan and Germany.

The bottom line: As indicated in a post last week, the United States may have to accept that even reasonably balanced foreign trade is not achievable with competitors holding radically different economic priorities (as I argued last week was precisely the case with Germany), and that reducing trade flows is a more than acceptable price to pay for preventing financial crises caused by imbalanced trade. When you add in America’s great capacity for much more self-sufficiency in a wide range of manufactured good, that seems like a more than acceptable trade-off to me. More important, it’s where the Trump administration, admittedly in fits and starts, could be leading us.

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

Tags

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

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

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

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

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

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

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

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