(What’s Left of) Our Economy: Where Trump Deserves High, Low, and “Incomplete” Marks on Germany Trade

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advanced manufacturing, automotive, commodities, comparative advantage, Financial Crisis, Germany, Global Imbalances, Great Recession, innovation, manufacturing, productivity, Trade, Trade Deficits, trade surpluses, Trump, {What's Left of) Our Economy

As I’ve suggested, President Trump has big, valid points to make about Germany’s auto trade with the United States. Not only does America run an enormous deficit with Germany in vehicles and parts, but claims that Germany deserves great praise from Washington because it makes so many vehicles in the United States are completely unjustified. For they overlook its companies’ very low levels of U.S. content and only very modest improvement on this score. That is, German vehicles are overwhelmingly screwed together in the United States, and therefore add much much less value to the American economy than autos made with domestic parts.

The trouble is that America’s troubles with German trade policies greatly transcend the automotive industry and, to a great extent, Germany. I’ve previously written that there’s a fundamental problem that both the administration and it’s critics are missing:  Germany’s economy, like China’s and many others around the world, is simply not structured in such a way as to make mutually beneficial trade with the United States possible.

But there’s another big U.S.-Germany trade issue that needs highlighting, along with a major danger that Bonn’s approach to trade is creating for the entire world – at least in the medium or long-term.

That other U.S. Germany trade problem has to do with the makeup of bilateral commerce. If you look at the nature of what the United States trades most successfully with Germany and vice versa, you find that the former category contains a mix of high value manufactures and commodities, while the latter is dominated by advanced industrial goods. Here are lists of the sectors in which America last year ran its biggest trade surpluses and deficits with Germany. (To the surplus list should be added – prominently – aircraft, which are not counted accurately in the U.S. International Trade Commission database I’m relying on.)

Top ten U.S. trade surpluses with Germany: 

glass products 

tree nuts 

soybeans 

computers 

non-costume jewelry 

non-anthracite coal & petroleum gases 

fin-fish products

computer parts 

surgical appliances and supplies 

pulp mill products 

 

Top ten US deficits with Germany

autos and light trucks 

pharmaceuticals

goods returned from Canada 

motor vehicle transmissions and transmission parts

aircraft engines and engine parts

construction machinery

miscellaneous general purpose machinery 

miscellaneous basic org chemicals 

miscellaneous engine equipment 

motor vehicle parts

These results are disturbing because, contrary to the superficial conventional wisdom, if you take seriously standard trade theory and its core concept of comparative advantage, sectoral trade balances matter tremendously. For the main idea behind the freest possible international trade is structuring the world economy so as to enable those countries most proficient at producing various goods and services to dominate their output. So surpluses and deficits in different industries show which countries are passing and failing this test – and thus which countries look likely eventually to control worldwide supplies of the sophisticated goods that create so many high wage jobs and foster so much innovation and productivity growth.

Since the U.S.-Germany data aren’t U.S.-global data, in theory they could be anomalies. In other words, Americans could be doing better with the world as a whole, and therefore, the nation’s prospects in high value industries could be a lot brighter. Unfortunately, that’s not the case at all. The makeup of U.S.-Germany trade isn’t terribly different from the makeup of U.S. global trade, in that America’s trade winners are, again, a mix of commodities and high value goods (again, including aircraft), and its losers are nearly all advanced sectors.

Top ten US surpluses globally

petroleum refinery prods

soybeans

special classification goods

plastics materials andcresins

waste and scrap

corn

liquid natural gas

semicaonductor manufacturing equipment

non-poultry meat products

turbines and turbine generator sets

 

Top ten US deficits globally

autos and light trucks

crude oil and natural gas

goods returned from Canada

broadcast and wireless communications equipment

computers

pharmaceutical products

telecommunications equipment

audio and video equipment

aircraft engines and engine parts

games, toys, and children’s vehicles

Yet Germany also is contributing significantly to a major trade-related threat that threatens the entire world, not just the United States. I’ve repeatedly spotlighted blue chip academic research concluding that unprecedented global imbalances centered on American trade shortfalls were instrumental in setting the stage for the last global financial crisis and the painful recession that followed. Worse, evidence keeps accumulating that international commerce is becoming worrisomely lopsided again, and that Germany’s overall international surpluses – currently the world’s largest – have generated much of the problem.

Indeed, a valuable reminder came in this morning’s Washington Post:

“[G]ermany is one of a number of countries, including China, Japan, and South Korea that are now saving far more than they are either consuming or investing….At some point, the world will be unable to absorb the capital surpluses of Germany, China and others, leading to another painful correction that might undermine the liberal order.”

Interestingly, Germany itself has indirectly acknowledged these risks, and hinted that it recognizes some responsibility to get the surpluses down. Unfortunately, Berlin has demonstrated few signs of following through. So although some of President Trump’s focus on the German trade issue seems off target, it’s also clear that the sense of urgency he’s brought to the issue, from both an American and global standpoint, is not only appropriate, but necessary.

(What’s Left of) Our Economy: New Peterson Pro-Globalization Study Only Deserves a “Nice Try”

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China, Financial Crisis, Gary C. Hufbauer, Global Imbalances, globalization, Great Recession, Larry Summers, manufacturing, Peterson Institute for International Economics, productivity, secular stagnation, technology, Trade, trade agreements, trade liberalization, trade policy, World Trade Organization, {What's Left of) Our Economy

The Peterson Institute’s new study of the benefits to Americans of globalization apparently leaves no doubt that the nation should promptly forget about any retreat from conventional trade liberalization policies and resume its aggressive pursuit of new trade agreements like the Trans-Pacific Partnership (TPP). Or does it? A close reading of the report reveals gaping holes in these claims.

According to authors Gary C. Hufbauer and Zhiyao Lu, between 1950 and 2016, “trade expansion” has enriched the overall U.S. economy by $2.1 trillion, and boosted America’s output per head and per household by just over $7,000 and $18,000, respectively. Even better, lower-income households probably gained the most (since the greatest trade liberalization progress has been made in the goods that comprise so much of their consumption).

Yet the phrase quoted in that previous paragraph points to the first big hole in the Peterson findings. “Trade expansion’s” benefits, the authors specify, entails much more than either signing new trade deals or otherwise reducing trade barriers. It also includes “technological advances in transportation and communications [that] have drastically slashed the economic distance between countries.”

Of course, there’s been a lot of the latter over the last 66 years. What share of expanded trade’s benefits has come from trade liberalization policy decisions and what share from that technological progress? Darned if the authors know.

The long time frame, in turn, reveals a second major problem with the central argument. Obviously over that last two-thirds of a century, the world economy, and America’s position in it, have changed in numerous and fundamental ways. One prominent example: For the first roughly three post-World War II decades, the United States was the only fully intact developed country. How could trade liberalization not have been a major net benefit? America produced countless products that the rest of the world desperately needed. And none of its important industries faced significant import competition until the 1970s. That doesn’t sound much like current circumstances.

And in fact, Hufbauer and Lu acknowledge this problem, noting, for example, that “compared to previous decades, increased trade since 2003 has not delivered substantial gains.” At this point, however, their analysis gets dicey. For example, they speculate that that low recent payoff resulted partly from “the lack of fresh policy liberalization on a large scale (the failure of the Doha Round)….” But that period actually saw a hugely important liberalization initiative completed – China’s accession to the World Trade Organization. And don’t forget the numerous free trade deals signed by the George W. Bush and Obama administrations, including with South Korea’s very large economy.

Moreover, although Hufbauer and Lu rightly note that the financial crisis and Great Recession also have marked the post-2003 period, they claim that “The decade that experienced the greatest gains from increased trade was 1970 to 1980.” That decade witnessed no less than two recessions (three if you count the 1980 downturn).

Undaunted, the authors contend that returning to the trade liberalization policy course will result in even more American wealth creation. But here’s where their discussion of the post-2003 period fails badly – and unmistakably. They never mention that, thanks largely to that aforementioned boost to incredibly lopsided U.S.-China the first decade of this century produced the greatest U.S. trade deficits and associated global economic imbalances in world history. They ended in the financial crisis and the nation’s worst economic downturn since the Great Recession.

Since America’s main trade partners – including China – seem either just as export-dependent, and/or just as import-and consumption-phobic as ever, it’s difficult to understand why a return to conventional trade diplomacy, combined with the cumulative and often lagged impact of past deals (as noted by Hufbauer and Zu) wouldn’t end in near-catastrophe again.

Another big problem: Former Treasury Secretary and chief Obama economic adviser Larry Summers, along with many others, worry that the United States has fallen into an economic trap they call “secular stagnation.” They speculate that the nation has become so incapable of generating healthy growth that it’s grown dependent on blowing up credit and consumption bubbles to at least produce (misleading) signs of economic life – and that these bubble’s inevitable bursting keeps creating financial crises and serious slumps. Do Hufbauer and Zu believe that the sandbagging of domestic manufacturing (which hasn’t grown in real terms since 2006) due to import competition and offshoring isn’t partly to blame? 

Finally, and similarly, American leaders have finally recognized that the economy is experiencing a major productivity growth slowdown. Can trade liberalization’s real economic impact be measured without considering the effect on productivity of allowing all that trade damage to manufacturing, which historically has led the nation in productivity growth?  

It’s definitely encouraging that a major think tank like the Peterson Institute is looking in detail at globalization’s impact on America’s economy.  Let’s hope that its next effort reflects some actual thinking.  

(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: Why Trade’s Best Champions Really Need to Raise Their Game

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Following Up: Why Economists & Establishment Media Should be a Little More Humble on Trade

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Adam Davidson, Donald Trump, economics, economists, Federal Reserve, Financial Crisis, Following Up, Global Imbalances, Great Recession, Janet Yellen, Korea, Peter Navarro, The New Yorker, TPP, Trade, Trans-Pacific Partnership

A fascinating and revealing coda has just been provided to my brief brush with fame last week, when The New Yorker deemed my views on trade issues not worthy of consideration.  And the source was, of all people, Fed Chair Janet Yellen.

As I wrote on October 13, in a profile of Donald Trump economic adviser Peter Navarro, New Yorker writer Adam Davidson made clear that he considered one glaring weakness of the Republican candidate’s views on trade and other economic policies to be their lack of support among professional economists. As a result, Davidson was completely unimpressed when Navarro noted that I have endorsed them in general – since I lack an economics degree. Nor was his interest piqued when I reminded him by email that my predictions about the outcomes of major trade policy initiatives, like admitting China into the World Trade Organization, were much more accurate than those of most Ph.Ds .

Enter Chair Yellen. In a speech in Boston the very next day, she focused on “some ways in which the events of the past few years [since the outbreak of the financial crisis and Great Recession] have revealed limits in economists’ understanding of the economy….” And despite her understatement, these limits look awfully important. The subjects to which they apply include how demand influences supply, the makeup of the groups of actors economists study (which these scholars’ models assume are completely homogeneous), how finance affects the real economy, and “what determines inflation.”

Indeed, Yellen’s list raises the question of where economists’ knowledge really is solid – at least in terms of ideas that affect economies’ performance in the real world. And so does the economy’s abysmal performance on net since the outbreak of a near-financial cataclysm that virtually none of its members foresaw.

Yellen did add an international question that she believes deserves much more research: how changes in American monetary policy affect the rest of the world and then feed back to the United States. But even though other aspects of the nation’s relationship with the global economy strictly speaking don’t fall under the Fed’s purview, she still might have noted that major gaps still exist in her profession’s understanding of international trade.

Even more disturbing: Although the trade-fueled global imbalances that built up during the bubble decade have been identified as bearing great responsibility for the crisis’ outbreak, as Davidson’s attitude suggests, international commerce is the one area of economics where no significant thinking has been called for at all since the disaster. Indeed, judging from the reactions to Trump’s trade proposals, the conventional wisdom is more entrenched than ever.

Of course, none of this is to say that economists know nothing useful, whether on trade or elsewhere. But with evidence that those global imbalances are once again nearing pre-crisis peaks (albeit with a somewhat different composition), and with President Obama seemingly more determined than ever to win passage of a trade agreement (the Trans-Pacific Partnership) modeled on a Korea deal that has supercharged the U.S. merchandise deficit, you’d think that both economists and journalists would react to proposals for fundamentally new approaches with at least minimal humility.

Making News: Podcast of Connecticut Radio Interview on Trade Policy and Financial Crises

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bubbles, Connecticut, consumption, credit, Financial Crisis, Global Imbalances, Larry Rifkin, Making News, Trade, Trade Deficits, Waterbury, WATR-AM

I’m pleased to present the podcast of my September 30 interview with Waterbury, Connecticut radio host Larry Rifkin on why wrongheaded U.S. trade policies could bring on a rerun of the 2007-08 global financial crisis.  Click on this link for a provocative conversation originally broadcast on WATR-AM about subjects completely neglected by the Mainstream Media –how huge American trade deficits and the flood of cheap credit they sent into the U.S. economy contributed to the spending and housing bubbles that eventually burst so disastrously, and how they’re building up again.

And be sure to keep checking in at RealityChek for news of recent and upcoming media appearances and other events.

P.S. Sorry for sounding a little out of breath at the beginning!  I’d just run to the phone to answer Larry’s call on time!

 

(What’s Left of) Our Economy: Progress from Progressives on Trade

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America First, developed countries, developing countries, environmental standards, Financial Crisis, GATT, General Agreement on Tariffs and Trade, George W. Bush, Global Imbalances, Global Trade Watch, globalization, Hillary Clinton, Jared Bernstein, labor standards, Lori Wallach, multinational companies, NAFTA, national treatment, non-discrimination, North American Free Trade Agreement, offshoring, progressives, Public Citizen, The American Prospect, TPP, Trade, Trans-Pacific Partnership, World Trade Organization, WTO, {What's Left of) Our Economy

Ever since the debate over NAFTA (the North American Free Trade Agreement) more than twenty years ago turned trade policy into a nationally contentious issue, the American left has provided the overwhelming share of the political money and muscle aimed at creating urgently needed course corrections. So it’s great to see important signs that progressives have finally started touting two ideas that realistically could make a significant difference.

The evidence can be found in an article coming up in The American Prospect by Jared Bernstein, former top economist to Vice President Biden, and Lori Wallach of Public Citizen’s Global Trade Watch. To be sure, the article does dwell overlong on proposals that left-of-center figures have been making for decades, and that hold little, if any, promise of turning trade agreements and related policy decisions into engines of domestic growth.

For example, there’s the usual call for truly enforceable labor and environmental standards in trade deals – even though adequately inspecting enormous third world national manufacturing complexes is a logistically impossible task. Worse, the offshoring lobby and its minions in Congress and the Executive Branch have already twice used the tactic of making cosmetic changes along these lines in trade agreements to call progressives’ bluff: during the George W. Bush administration in deals with agreements with Panama and Peru; and in President Obama’s Trans-Pacific Partnership (TPP).

Don’t think Democratic presidential candidate Hillary Clinton doesn’t recognize how successful this ploy has been in persuading fence-sitting Congressional Democrats to fall in line behind new trade deals.

Judging from the Bernstein-Wallach piece, moreover, the American left still believes that no hard choices need be made in trade and broader globalization strategy, and that with their proposed reforms, growing international commerce can become a win-win for first and third world workers alike around the world. As I’ve recently written, positive sum outcomes for developed and developing country workforces are possible – if, for instance, NAFTA was turned into a genuine western hemisphere trade bloc, as its leading founders once suggested they intended.

On a global basis, though, the surplus of developing country workers earning pauper wages (both in absolute terms and in relative terms in sectors like advanced manufacturing and high tech services) ensures that for decades the third world will remain much more important as a low-wage and low-regulation production site than as a source of new consumer demand. And as long as that situation holds, astronomical growth-, job-, and wage-killing trade deficits in the United States will be inevitable. Also inevitable will be the buildup of enormous international economic imbalances like those that set the stage for the last financial crisis.

But the most encouraging aspect of the Bernstein-Wallach article was indeed encouraging: The authors argued that not all prospective U.S. trade partners should be treated equally – because they differ in crucial respects. Ever since the current global trading system began taking shape in the immediate aftermath of World War II, one of its biggest weaknesses – and one posing special problems for a relatively open economy like America’s – has been its insistence (largely at Washington’s behest, to be sure) on the principles of non-discrimination and national treatment.

In other words, regardless of how open or closed they are, or how wealthy or impoverished, the United States needed to deal equally with all countries belonging to the old General Agreement on Tariffs and Trade (GATT) and to the newer World Trade Organization (WTO). During the early post-war decades, these requirements legally forced American leaders to open their markets as much, say, to relatively open Britain as to hermetically sealed Japan, and to treat identically in the American market businesses from wildly varying countries.

When the end of the Cold War encouraged third world population giants like China and Mexico to introduce selected free market reforms and join the global economy, the option of mass production offshoring was created for multinational companies. As a result, these GATT and then WTO principles prompted the U.S. leaders influenced by these companies to expand trade whether or not the target countries could become significant net consumers, and thus create reasonably balanced trade flows and their economic benefits.

Bernstein and Wallach don’t favor discrimination on grounds like these. (That’s not surprising, since this practice would undercut their positive-sum first-third world trade optimism.) But they do urge selecting

“trade partners based on their countries’ records of compliance with the terms of past trade agreements, international labor and environmental standards, and human rights and other criteria. [The article makes clear that records of currency manipulation would be among them.] While no country has a perfect track record, there is a well-understood continuum of compliance, and known bad actors should be barred from the negotiating table until they’ve made proven, effective efforts to begin cleaning up their acts.”

That’s a start – and a potential wedge.

It’s also heartening to see Bernstein and Wallach emphasize “rewarding those who play by the rules” by creating and enforcing meaningful rules of origin in trade deals. As they rightly note, without such provisions, countries that have not signed various trade deals can still benefit from them because multinationals and other companies will be free to import into member countries goods largely made outside the new trade zone. That’s great of course for businesses seeking the great possible sourcing flexibility. But these practices inevitably render meaningless most of the rest of the given agreement.

And most encouraging of all – although the authors don’t mention this – an American trade policy (robustly) incorporating these features would be in violation of WTO rules. Free of a straitjacket that mandates policy uniformity in a highly diverse world, Washington would be free to choose another globalization lodestar – one that makes far more sense for a country with incomparable market power, potential for self-sufficiency, and thus unilateral leverage. A lodestar like “America First.”

(What’s Left of) Our Economy: Lopsided Trade is Making Financial Crisis 2.0 Likelier

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Bloomberg, dispute resolution, export-led growth, free trade agreements, Global Imbalances, HSBC, IMF, International Monetary Fund, Janet Henry, Korea, Larry Summers, manufacturing, Obama, offshoring, secular stagnation, TPP, Trade, Trade Deficits, Trans-Pacific Partnership, {What's Left of) Our Economy

As RealityChek regulars know, my biggest fear about the U.S. and global economies concerns the likelihood that rebounding, trade-centered current account imbalances around the world will lead to an international financial and economic crisis just as they did in the previous decade. The big difference next time, of course, would be that major central banks would not have already poured trillions of dollars and yen and euros worth into major economies in a vain attempt to promote historically adequate growth.

So it’s great to see these concerns coming from a new source. As reported by Bloomberg last week, on top of the International Monetary Fund, the U.S. Treasury, and, as I’ve reported, leading academic economists) a leading analyst from the HSBC bank is expressing comparable worries.

To review quickly, the idea is that the record trade and broader payments shortfalls run by the United States in the “aughts” sent so much foreign capital flooding into the country that most incentives to use these funds prudently vanished. And with years of deregulation and lax regulation freeing American finance companies to concoct ever more reckless schemes to deliver acceptable returns in the face of this yield-depressing glut, much of the economy turned into a gigantic, housing- and consumption-fueled Ponzi Scheme.

I’d add three extra points. First, the offshored U.S. manufacturing production behind so much of the nation’s trade deficits greatly reduced the number of genuinely productive investments that the American financial sector could contemplate. Meanwhile, the burgeoning narrative that manufacturing was increasingly passe for an advanced economy like the United States kneecapped any expectations that adequate productive investment opportunities would return any time soon.

Second, the neglect of productive domestic sectors like manufacturing played a major role in plunging the United States into the secular stagnation trap so cogently described by former Treasury Secretary and Harvard economist Larry Summers. For an economy lacking adequate productive ways to foster growth – and especially a democracy – will be continually and sorely tempted to spur short-term growth by inflating dangerous credit bubbles.

Third, America’s proposed new trade deals, especially the Trans-Pacific Partnership (TPP) are likeliest to boost U.S. trade deficits further. Their most economically dynamic signatories depend heavily on net exporting for growth. Their foreign market-opening measures are either inherently difficult to enforce or subject to dispute-resolution processes stacked in favor of export-dependent defendants. And America’s remaining trade barriers are easy to identify and will be much easier for the other signatories to eviscerate. Indeed, TPP is modeled on the bilateral U.S. trade agreement with Korea, under which the American merchandise deficit has skyrocketed.

The analysis by HSBC’s Janet Henry doesn’t apparently go into this degree of trade policy detail. But it makes two especially disturbing points of its own. First, as made clear by this chart, the global imbalances in toto are back to their bubble-decade levels – and then some.

True, the American shortfall is down since peak bubble bloat. But it’s up since the current economic recovery began. Moreover, the historic sluggishness of the current expansion is undoubtedly keeping the current account and trade gaps down.

Second, the chart shows that the biggest source of resurgent current account surpluses is “Other Asia” – which of course includes Japan and other important TPP members. China’s chronic surplus hasn’t recovered quite as fast, but TPP could change that as well, since its inadequate rules of origin give outside countries a wide open backdoor into the new trade zone.

As strongly suggested by his renewed TPP push, President Obama either doesn’t know about these developments and relationships, or doesn’t care. If he succeeds in a lame duck session of Congress, or if his successor fails to heed the glaringly obvious trade policy lessons, Americans may look back on their current secular stagnation as an economic golden age.

(What’s Left of) Our Economy: In Case You Thought China is Finished….

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China, competitiveness, consumption, exports, Financial Crisis, Global Imbalances, high value manufacturing, IMF, imports, International Monetary Fund, labor-intensive manufacturing, manufacturing, rebalancing, Trade, {What's Left of) Our Economy

A new International Monetary Fund report on China’s changing trade patterns has challenged so many comforting myths propagated recently by cheerleaders for America’s trade and broader economic policies that it’s easy to lose count.

These myths matter greatly because if you buy them, then it’s logical to buy the approach to globalization pursued by American presidents and Congresses in both parties for the last quarter century. Rather than worry that this U.S. strategy has permitted China to steal the march on America economically, its proponents confidently assert that Beijing’s export- and investment-heavy economic blueprint is reaping rapidly diminishing returns, and urgently needs replacement. Reasons cited focus on soaring Chinese wages and resurgent American competitiveness.

Even better, insist the optimists (which include the authors of this new IMF report), China has already learned this lesson and is “rebalancing” its economy to seek growth led by consumers – which will prove a bonanza for its trade partners. And no need to fret about China mortally threatening America’s domestic manufacturing – with all that’s boded ominously by that possibility for the whole economy as a whole and for national security. The PRC remains stuck turning out mainly labor-intensive goods, or at best simply slapping together more sophisticated stuff from imported high-value components.

Not that the Fund is necessarily the last word on the subject. But its new China trade study sure presents copious evidence for the following conclusions:

>Instead of hitting a wall, China’s exports are more competitive than ever. As I reported earlier this week, calculations based on the IMF’s data show that these shipments are grabbing more global market share than ever. This success, in the meantime, debunks another example of hopium regarding China’s future – that slowing global growth in and of itself means that Beijing’s policies urgently need changing. Such analysis has always ignored China’s potential to keep growing through exports by winning ever larger shares of a stagnant and even shrinking worldwide pie.

China’s exports have indeed been falling lately on a year-on-year basis, as has its worldwide trade surplus. But both remain at lofty levels, indicating that trade’s role in powering the country’s growth is still impressive. These statistics also indicate that if and when global growth revives significantly – as the leaders of the world’s major economies keep trying to achieve – China will be the paramount beneficiary. As a result, the imbalances that helped set the stage for the financial crisis will head back to dangerous proportions again.

>Despite the clearly stunning increase in household wealth throughout China’s population and workforce in recent decades, not only is rebalancing progress painfully slow when gauged by trade’s role in the economy. It’s been at least as slow in the sense that matters most to companies and workers in other countries who hope to supply this larger and potentially immense Chinese consumer market.

For as the Fund observes, (a) “While Chinese consumption is on an upswing, imports of consumption goods and services remain modest except for tourism….” and (b) “even as China succeeds in rebalancing toward consumption, it could be that this increased demand is satisfied by production from within China, and not from other countries.”

>Finally, as I’ve written previously, the IMF and the World Bank have found that China’s manufacturing keeps moving steadily up the technology and value chain – i.e., from low-cost, labor-intensive products to capital- and knowledge-intensive goods. This trend, moreover, includes providing ever more Chinese-made parts and components of advanced manufacturing products. In fact, as the new Fund reports, a higher share of the content of China’s exports is now Made in China than is the Korean content of Korean exports and the Taiwanese content of Taiwan’s exports.

Not that China isn’t experiencing major economic problems – notably, a soaring ratio of the whole economy’s debts to the size of its economy, and state-run or dominated financial institutions and markets that are too easily manipulated – sometimes incompetently so – by the government. But the IMF findings add to the case that the productive sectors of China’s economy are passing the test of global competitiveness – and with increasingly impressive marks. In fact, the only major relevant points omitted are that much of this progress keeps being made in violation of global commercial rules and norms, and at the expense of America’s productive sectors.

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

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

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

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

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

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

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

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

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