Glad I Didn’t Say That! The IMF’s Muddled Message on Trade and Productivity Growth

Tags

Christine LaGarde, Glad I Didn't Say That!, globalization, IMF, International Monetary Fund, productivity, tariffs, Trade

“[S]ince the mid-1990s….declining tariffs have lifted [worldwide] productivity ….”

–International Monetary Fund, April, 2019

“Over the past decade, there have been sharp slowdowns in [worldwide] measured output per worker and total factor productivity….Even before the global financial crisis, productivity growth was slowing in many advanced economies, such as the United States….”

– International Monetary Fund Managing Director Christine LaGarde, April 3, 2017

 

(Sources Chapter 4, “The Drivers of Bilateral Trade and the Spillovers from Tariffs,” p. 103, World Economic Outlook, April, 2019, International Monetary Fund, https://www.imf.org/en/Publications/WEO/Issues/2019/03/28/world-economic-outlook-april-2019#Chapter%204 and “Reinvigorating Productivity Growth,” by Christine Lagarde, Managing Director, International Monetary Fund, American Enterprise Institute, April 3, 2017, https://www.imf.org/en/News/Articles/2017/04/03/sp040317-reinvigorating-productivity-growth )

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(What’s Left of) Our Economy: The Atlantic’s Hatchet Job on Trump’s Trade Policy and Trade Negotiator

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Chad Bown, China, globalization, James Bacchus, Matt Peterson, Merit Janow, multinational companies, Peterson Institute for International Economics, Robert Lighthizer, The Atlantic, Trade, trade war, Trump, U.S. Trade Representative, World Trade Organization, WTO, {What's Left of) Our Economy

I wish I could say that, in the process of ringing out the old year, America is ringing out incompetent or willfully ignorant journalism about U.S. trade policy. But a looooong article just published by The Atlantic on U.S. Trade Representative Robert Lighthizer makes painfully clear that that point remains as far away as ever.

The article, by Atlantic Senior Editor Matt Peterson, would deserve quick dismissal simply due to one of its major themes: that Lighthizer, President Trump’s chief trade negotiator, takes a hard line on the issue in general, and on China in particular, because he’s long been in the pocket of the domestic steel industry as one of its principal trade lawyers.

This smear is especially rich because a trade policymaker lionized by Peterson as a strong opponent of such conflicts of interest and consequent paragon of policy virtue – another American trade lawyer named Merit Janow – followed her stint as a senior magistrate at the World Trade Organization (WTO) – by accepting a position as “a charter member of the International Advisory Council of China’s sovereign wealth fund, China Investment Corporation or CIC.” That is, she jumped onto the payroll of the Chinese government.

But more fundamentally troubling about Peterson’s piece is its – sadly, standard – description of the WTO as an institution that defends and promotes the interests of the entire American economy. How so? By creating a U.S.-style court of law that would impartially mete out commercial justice but that could be used especially effectively by American diplomats highly skilled in working with such systems. One genuine contribution made by Peterson is reporting evidence that Lighthizer himself once apparently bought into this argument.

These views, however, completely ignore two related, alternative interpretations of the WTO’s creation that at deserve consideration at least because one of them is so regularly repeated by journalists and WTO supporters. That interpretation portrays the WTO as an arrangement that aimed primarily at restraining America’s ability to combat predatory foreign trade practices by enmeshing the United States in a simple majoritarian legal system in which all countries – including the vast majority of members who relied heavily on such mercantilism for their growth.

Chad Bown of the (pro-WTO) Peterson Institute for International Economics, one of the American media’s “go to” trade policy commentators made this point abundantly clear when he told The New York Times that the main foreign impetus for establishing the WTO was a determination to find ways of resisting America’s (successful) 1980s unilateral efforts to frustrate their trade predation and pry open their markets to U.S.-made goods.

Former WTO official (and U.S. Member of Congress) James Bacchus made a similar point earlier this year when he criticized Lighthizer (and other American economic nationalists) for their belief that the United States was better off under the pre-WTO world trade system.  Why?  Because it left the (democratically elected) U.S. government “free to go on the offence aggressively in trade by taking unilateral trade actions without any international legal constraint.”

The second, related alternative interpretation of the WTO’s creation focuses on the U.S. multinational corporations that dominated U.S. trade policymaking under Mr. Trump’s immediate predecessors: They strongly favored subjecting unilateral American power in trade diplomacy because their overseas operations – especially those geared toward supplying the American market – benefited immensely, often at the expense of domestic competitors, from many of the predatory foreign practices targeted by many American leaders who don’t shill for these offshoring interests. China’s longstanding beggar-its-neighbors currency policies have been only one example.

The Atlantic is rightly proud of its long history of publishing “iconic thinkers” and “covering ideas that matter.” Many more articles like Peterson’s, and it will also be known for hatchet jobs.

Im-Politic: Has a Major U.S. Economist Secretly Been in China’s Pocket?

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China, donors, economists, globalization, Huawei, Im-Politic, Isaac Stone Fish, Jeffrey D. Sachs, national security, Project Syndicate, technology, telecommunications, think tanks, trade war, Trump, Trump Derangement Syndrome, Washington Post

I’ve always been skeptical of claims that money explains everything about where prominent folks stand on policy debates. Sure, money talks loudly, and that’s why, for example, I’ve so consistently reported on how leading U.S. think tanks are lavishly funded by corporate interests (e.g., here) and even by foreign governments (e,g, here) with huge stakes in matters on which they regularly comment, such as trade and globalization issues.

But I’ve believed that for the most part, their positions are also at least partly sincerely held – reflecting either an inability even to question what they’ve learned in school, or the power of group-think in their professional and social circles (inside the Washington, D.C. Beltway in particular these realms tend to overlap substantially), their honest convictions, and typically some combination of the above.

I still refuse automatically to write off analysts who disagree with me as simple donors’ mouthpieces, but a recent incident has reminded me that – in the words of a close long-time friend – when seeking to understand political behavior, the most cynical explanation is rarely wrong.

The story begins with an article on the Project Syndicate website – a sort of digital global op-ed page (which, to be sure, overwhelmingly publishes writers with globalist/establishment viewpoints) – by economist Jeffrey D. Sachs.

Sachs is a world-renowned figure in his field, but as with many of his colleagues, seems to assume that mastery of conventional economic concepts translates into expertise on all other subjects. (Google “Krugman, Paul” for perhaps the leading example of this phenomenon.) So I wasn’t entirely surprised to see him writing on the recent American arrest, on sanctions-busting charges, of a senior executive from the Chinese telecommunications entity Huawei – even though he has no special credentials on China, or technology, or national security.

I was very surprised by the nature of Sachs’ attack on the U.S. action, which ran on December 11. Most criticisms of the arrest focused on whether it would escalate the U.S.-China trade war – whether because it signaled a more aggressive turn in Washington’s approach, or because it would trigger Chinese retaliation – or whether the United States ultimately could curb China’s technological development, or whether the American tech industry could continue excelling after a cutoff of its access to Chinese markets or parts and components.

But according to Sachs, the Huawei arrest mattered most because it showed that “The Trump administration, not Huawei or China, is today’s greatest threat to the international rule of law, and therefore to global peace.” That’s pretty out there given that Huawei’s largest shareholder is a Chinese telecommunications company owned outright by the Chinese state, that its close relationship with Beijing has caused governments the world over to limit its presence in their markets for national security reasons, and that the Chinese regime itself has been challenging international law, and in turn peace and security, in the South China Sea region.

Still, I was inclined to write off Sachs’ diatribe as yet another example of Trump Derangement Syndrome, or the outgrowth of idolatry of the globalization status quo fanatical enough to fuel (sincere) outrage at any development threatening to change it – e.g., President Trump’s decision to confront China’s trade predation.

As a result, I was inclined to dismiss as off-base the reaction of one of my Twitter followers to Sachs’ article: “I guess we know who is signing Jeffrey Sachs’ paycheck these days.”

So imagine my surprise when, on December 12, Washington Post columnist Isaac Stone Fish reported that Sachs had written the forward to a big report put out by Huawei in November.

Nothing necessarily improper there. Academics engage in such activities all the time. And if Sachs genuinely believes that an entity that clearly is an arm of the repressive Chinese government deserved “kudos” for “producing… a timely and clear roadmap to help governments, businesses and civil society [emphasis added] to create digital nations on the path to sustainable development,” well that’s his business.

What is massively improper has been Sachs’ reactions to Fish’s questions about Sachs’ relationship with Huawei in light of his glowing praise of the entity both in the report and in his Project Syndicate piece: “Did Huawei pay you for that [the forward]? If so, don’t you think you should disclose that?”

Rather than respond to Fish, Sachs stonewalled – in fact, going so far as to delete his Twitter account.

In the process, he not only made it difficult to avoid the conclusion that he has something to hide when it comes to Huawei. He’s also unavoidably created shadows over two respected organizations with which he’s been closely affiliated: Columbia University’s Earth Institute (which he headed between 2002 and 2016), and that Institute’s Center for Sustainable Development (which he heads now).

I’ve been looking for evidence of Huawei or other Chinese funding for these organizations, and haven’t found any yet. But that doesn’t mean that there hasn’t been any (perhaps funneled through third parties?), and that it hasn’t colored their work. Because like I said, when seeking to understand political behavior, the most cynical explanation is rarely wrong.

Im-Politic: Elizabeth Warren, Nationalist?

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Elizabeth Warren, Emmanuel Macron, global poverty, globalization, Im-Politic, nationalism, progressives, Seattle WTO protests, third world, Trade, World Trade Organization, WTO

Whatever its historical roots, “nationalism” has recently become a dirty word. Among the dangers embodied by this concept, as determined by political correctness authorities such as France’s (politically besieged) President Emmanuel Macron, it’s “a betrayal of patriotism. By saying ‘Our interests first, who cares about the others,’ we erase what a nation holds dearest, what gives it life, what gives it grace, and what is essential: its moral values.”

How stunning, therefore, to read Elizabeth Warren’s recent speech on U.S. foreign policy. According to this definition, the Massachusetts Democratic Senator, progressive heroine, and likely 2020 presidential hopeful, is a card-carrying, selfish, immoral (amoral?) America First-style nationalist – at least when it comes to international trade and related globalization issues.

Skeptical? Just read the Warren transcript. On the one hand, she admitted that “The globalization of trade has opened up opportunity and lifted billions out of poverty around the world” – which by any standard is a pretty remarkable achievement. Yet on the other hand, Warren condemned the “trade and economic policies” behind this epic success for failing to deliver “the same kind of benefits for America’s middle class.”

In fact, she emphasized, “U.S. trade policy has delivered one punch in the gut after another to [U.S.] workers and to the unions that fight for them.”

It’s true that, elsewhere in her speech, Warren briefly referred to revamping American trade policy to ensure “that workers are meaningfully represented at the negotiating table and build trade agreements that strengthen labor standards worldwide.” But much more often, she lambasted agreements like the North American Free Trade Agreement (NAFTA) and its successor, the U.S.-Mexico-Canada Agreement (USMCA) for encouraging “outsourcing jobs to Mexico.”

In other words, either such outsourcing somehow failed to ameliorate poverty in Mexico (even though Warren credits it with uplifting the poor elsewhere), or she assigns little importance to achieving that goal. In either case, Warren has some major explaining to do.

Also fascinating about Warren’s speech: If it’s to be taken seriously (never a sure thing when it comes to politicians’ rhetoric), it would represent a significant, and in my view, welcome change in progressives’ take on trade, globalization, and what’s fundamentally wrong with them.

For since these issues became front-page news during the debate over NAFTA, at the start of the 1990s, critics to the left-of-center have proclaimed that U.S. trade and related policies would remain unacceptable unless they boosted living standards everywhere, not just in America – and that they had betrayed workers in developing countries as completely as their counterparts in the United States.

American progressives’ emphasis on the devastation created in the third world by U.S.-spearheaded trade arrangements came to a head during the Seattle World Trade Organization (WTO) protests in 1999 – as did the companion belief that win-win solutions for workers and consumers everywhere should be and could be the very raison d’etre of the global economy. And as indicated by this 2015 statement from the Congressional Progressive Caucus, it remains their party line today.

The point here is not that no conceivable form of globalization can ever produce globe-wide benefits. Instead, it’s that the road to mutual gain is unlikely to proceed in a straight, smooth, uninterrupted line, and that without recognizing that hard choices are likely for the foreseeable future, and that those global benefits may not be distributed evenly, the worst of all worlds is all too likely.

So here’s hoping that her speech is evidence that Warren is becoming aware of these at-least-likely complications, that she’ll start prompting such globalization realism on the American Left – and that she won’t be deterred by apologists for a failed status quo who, along with most of her fellow progressives, have been reduced to portraying nationalism as part of the problem, rather than potentially part of the solution.

Making News: Podcast Now On-Line of Last Night’s National Radio Interview on U.S.-China Trade War!

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China, globalization, Gordon G. Chang, Making News, tariffs, Thaddeus McCotter, The John Batchelor Show, Trade, trade war, Trump

I’m pleased to announce that the podcast is now on-line of my interview last night on John Batchelor’s nationally syndicated radio show covering the latest news of America’s trade conflict with China. With the U.S. stock market tanking this morning partly because of trade war-related concerns, it’s a conversation (also featuring co-host Gordon G. Chang and former Michigan Republican Congressman Thaddeus McCotter) you won’t want to miss! Here’s the link.

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

 

(What’s Left of) Our Economy: U.S. Trade Policy Deserves Blame for the Caravans

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apparel, asylum seekers, Bangladesh, CAFTA, caravan, Caribbean Basin Initiative, Central America, Central America Free Trade Agreement, China, economic development, El Salvador, globalization, Guatemala, Honduras, immigrants, Immigration, manufacturing, migrants, Multi-Fibre Arrangement, NAFTA, North American Free Trade Agreement, Northern Triangle, Trade, Uruguay Round, Vietnam, World Trade Organization, WTO, {What's Left of) Our Economy

Hot on the heels of the current caravan of Central Americans heading through Mexico to the U.S. border, another such procession is gathering in Guatemala. And these two have followed the flood of unaccompanied migrant children from the area that reached the United States in 2014.

I wish I could tell you that there’s a silver bullet for solving the problem – though nothing could be clearer than that these human tides will keep organizing in even greater numbers if Washington follows the general advice of the Open Borders lobby to view all of the caravan-ers as legitimate asylum-seekers entitled to full due process once they reach the border and request this status. Upon which time current procedures call for recording their claims and then releasing them based on the ludicrous assumption that they’ll report back to immigration court on the appointed date and risk being rejected and thus deported.

What I can tell you is that this crisis has been greatly aggravated by an unforgivably short-sighted U.S. trade policy strategy that emerged in the 1990s. It consisted of indiscriminately liberalizing trade with developing countries, and thereby ignoring the case for targeting trade diplomacy to ensure that countries and regions of greatest importance to the United States receive the lion’s share of the benefits. And the prime victims of this strategic failure – which mainly reflected the determination of offshoring multinational manufacturers and Big Box retailers to gain maximum flexibility to source imported inputs and final products – were the poorer countries of the Western Hemisphere. That group of course includes Mexico and the Central American countries that have sent so many migrants northward.

Interestingly, Central America and the Caribbean countries were placed prominently in line to receive significant shares of the vast U.S. market by a Reagan-era initiative aimed mainly at stemming the spread of left-wing revolutionary forces in the region. But scant years later, any hopes generated by this strategy for fostering more prosperity in these impoverished regions and strengthening the appeal of pro-Western leaders were kneecapped by two big decisions.

The first was the negotiation of the North American Free Trade Agreement (NAFTA) in 1993. The second was the phase out of U.S. and other developed countries’ quotas on apparel imports that was approved the following year as part of the Uruguay Round global agreement that reduced various trade barriers worldwide and created the World Trade Organization (WTO). And the third was the Clinton administration’s subsequent rush to liberalize trade with a host of low-income countries outside the Western Hemisphere.

In principle NAFTA’s tight focus on Mexico was justifiable given Mexico’s size, position as a U.S. neighbor, and history of political, economic, and social policy failure that seemed to be reaching a crisis point. But economic growth and employment could still have been greatly lifted in Mexico and Central American (along with the Caribbean countries) had American trade liberalization stopped or at least paused there.

Yet the quota phaseout forbade Washington from incorporating any strategic or non-economic considerations into apparel trade policy, whether conditions urgently required them or not.  As a result, it ensured that the benefits of freer trade would be greatly watered down (and many garnered by China and the rest of developing Asia in particular), and insult was added to injury by new liberalization deals reached or renewed, or decisions made, regarding Vietnam, sub-Saharan Africa, Jordan, most of developing Asia (in the form of a deal on information technology products, including labor-intensive consumer electronics), and China. Largely as a result, the poorer countries of the Western Hemisphere were left in the dust in the business models of the multinationals and the big retailers.

Nowhere does the opportunity lost by Mexico and Central America come through more clearly than in the apparel trade figures. This sector is almost always the first utilized by developing countries to begin their industrialization and modernization drives mainly because its own labor intensivity means that capital and technology requirements are pretty modest, the relevant skills can be taught fairly easily, and its job-creation promise is substantial.

Here are the figures for apparel imports from Mexico, the three “Northern Triangle” Central American countries, China, and two other current Asian textile giants (Bangladesh and Vietnam) for four key years. Next to them will be the figure for the share of American apparel consumption (market share) won at that point by each. We start with 1997 because that’s the year when the U.S. government began adopting its current dominant system for slicing and dicing trade and manufacturing data – which enables us to see statistics that are apples-to-apples. The second year is 2001 – the year China’s was admitted into the WTO – and thus gained substantial immunity from American laws aimed at curbing predatory trade practices. The third year is 2006 – when Congress approved a Central America Free Trade Agreement (CAFTA) negotiate by George W. Bush’s administration. And the fourth year is last year – the latest for which we have full-year numbers.

1997

Mexico:                       $5.317b                    11.29 percent 

El Salvador:                 $1.052b                     2.18 percent

Guatemala:                  $0.973b                     2.07 percent

Honduras:                    $1.689b                     3.59 percent

China:                          $7.279b                   15.46 percent

Bangladesh:                 $1.442b                      3.06 percent

Vietnam:                      $0.026b                      0.06 percent

2001:

Mexico:                       $8.112b                     12.99 percent 

El Salvador:                 $1.634b                      2.62 percent

Guatemala:                  $1.630b                       2.61 percent

Honduras:                    $2.438b                       3.91 percent

China:                          $8.597b                     13.47 percent

Bangladesh:                 $2.101b                      3.37 percent

Vietnam:                      $0.048b                       0.08 percent

2006:

Mexico:                       $5.514b                       7.16 percent 

El Salvador:                 $1.408b                      1.83 percent

Guatemala:                  $1.685b                      2.19 percent

Honduras:                    $2.519b                      3.27 percent

China:                        $22.405b                    22.09 percent

Bangladesh:                 $2.915b                       3.79 percent

Vietnam:                      $3.226b                       4.19 percent

2017:

Mexico:                       $3.806b                       4.52 percent 

El Salvador:                 $1.920b                       2.28 percent

Guatemala:                  $1.371b                       1.63 percent

Honduras:                    $2.522b                       3.00 percent

China:                        $29.322b                     34.85 percent

Bangladesh:                $5.046b                       6.00 percent

Vietnam:                    $11.613b                     13.80 percent

The big takeaway? Even during the decade after the Central America free trade deal was signed, the three Northern Triangle countries actually saw their share of the U.S. apparel market stagnate or actually shrink. Mexico’s share has been cut by about almost 60 percent. And the business won by China, Bangladesh, and Vietnam has exploded – since 2001 for China, and since 2006 for the two other Asians. Again, the year that the free trade deal that was supposed to benefit El Salvador, Guatemala, and Honduras was inked.

With Mexico, there are of course mitigating factors. Chiefly, although its apparel competitiveness in the U.S. market is way down, its competitiveness in higher value automotive manufacturing in particular is way up. But millions of poor Mexicans still could have benefited from apparel employment, and no such progress has been made in Central America – which is partly understandable since incomes are even lower, and governments and other institutions needed for economic development are so much weaker.

Apparel should have been the great hope for these populations, but that sector’s potential for expanding production (which of course needs to be export-oriented since these countries’ domestic markets are tiny) and employment has been virtually choked off. Just as important, the prospect that apparel wages in the Northern Triangle might rise adequately has been limited, too – since pay throughout developing East and South Asia (even in China, according to the chart below) remains so much lower.

American trade policy could have lent a big helping hand to Central America had it adopted a strategically sensible set of priorities. But it failed to learn a fundamental lesson of strategy: When everything is a priority, then nothing is a priority. You can see the victims of this failure in the flow of human misery heading up from the Northern Triangle.

(What’s Left of) Our Economy: So Far, Trump’s New NAFTA Only Deserves an “Incomplete”

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automotive, China, currency manipulation, dispute resolution, domestic content, exports, globalization, imports, light trucks, NAFTA, non-market economy status, North American Free Trade Agreement, passenger cars, rules of origin, SUVs, Trade, Trump, U.S.-Mexico-Canada Agreement, USMCA, value-added taxes, VATs, {What's Left of) Our Economy

“What was all the fuss about?” is a question that supporters and especially critics of conventional, pre-Trump trade policies are entitled to ask after reading the text of the new “U.S.-Mexico-Canada Agreement” – the brand new revamp of the North American Free Trade Agreement (NAFTA) just agreed to by the three signatories.

Although President Trump has repeatedly called NAFTA “the worst trade deal ever,” the new pact seems to retain the previous deal’s fatal flaw. Interestingly, though, the very modesty of “USMCA’s” departures from NAFTA means that, because U.S. trade is so worldwide in scope, the best chance for Mr. Trump to keep his campaign promises to turn U.S. trade policy into an engine of domestic growth and employment rather than of offshoring depends on two additional steps. The first is following through with his threat to impose stiff tariffs on automotive imports from the rest of the world. The second is expanding his already substantial tariffs on imports from China.

As I’ve explained repeatedly, that fatal NAFTA flaw entailed the treaty’s failure to provide significant incentives to producers outside the free trade zone to supply U.S., Canadian, and Mexican customers with goods – mainly in the automotive sector – produced in the United States, Canada, and Mexico, not in Europe, Asia, or elsewhere.

USMCA does create stricter “rules of origin” governing trade in vehicles and parts – by phasing in increases in the share of inputs provided from inside North America that vehicles and parts will need to contain in order to qualify for tariff-free treatment when traded among the three countries. The new treaty also mandates that a certain percentage of these products be made in factories paying workers wages much higher than prevail in Mexico currently. But the penalties non-North American producers face for ignoring these requirements, at least for duty-free treatment in the U.S. market, by far North America’s largest, are exactly the same sorely inadequate tariffs imposed by NAFTA – 2.5 percent for passenger cars and nearly all parts, and 25 percent for sport-utility vehicles (SUVs) and light trucks.

In other words, non-North American companies and entities (such as are found in China) will find it just about as easy to absorb or evade the costs of exporting to rather than investing in North America – through increased subsidies, currency devaluation, or accepting slightly lower profits – as they have for NAFTA’s entire 24-year history.

Automotive-wise, as previously reported in the news media, USMCA does differ from NAFTA in one seemingly important respect:  The Trump administration won the right to increase greatly tariffs on passenger cars, SUVs, and light trucks from Mexico if these shipments to the United States exceed certain levels (1.6 million vehicles) and on auto parts if these shipments exceed $108 billion per year. Interestingly, no such limits are imposed on automotive imports from Canada.

The catch is that these thresholds significantly exceed current American import levels, so they’ll provide no noteworthy relief for U.S. autoworkers and domestic production facilities for the time being.

The good news for these beleaguered American workers and companies is that major incentives to move non-North American production to the continent can still emerge.  But their fate will turn on whether President Trump imposes stiff tariffs on automotive products from outside North America under Section 232 of U.S. trade law, and whether he keeps curbing American trade with China.

Canada and Mexico have won major exemptions in the USMCA from these threatened levies (see here and here for the relevant side letters), but such new barriers to imports from Germany, Japan, South Korea, China, and others should create plenty of new work and sales opportunities for facilities in all three USMCA countries.

Section 232 auto tariffs alone wouldn’t achieve my own favored goal of turning all of North America and its economy into a genuine trade bloc, which would require non-continental industries across the board to supply North America from North America. In one fell swoop, this approach would solve nearly all of America’s longstanding trade problems with all of the aforementioned non-North American countries along with a host of others. But given the prominence of automotive products in the North American trade and broader economic landscape, it would be an important first step. And more China-specific levies would help as well, given the huge and rapidly growing shares of U.S. manufacturing markets grabbed by the People’s Republic in the last 25 years.

To be sure, other features of USMCA look worrisome to me. Principally, the deal does nothing to eliminate the problems caused by the Canadian and Mexican use of value-added taxes (VATs) and America’s lack thereof. These levies serve as hidden barriers to the Canadian and Mexican markets, and hidden subsidies for exports from Canada and Mexico to the United States.

The Trump administration also has granted Canada’s demand to preserve the old NAFTA’s dispute-resolution process, which greatly helps Canada and also Mexico to frustrate U.S. efforts to curb dumped and illegally subsidized imports from those countries.

On the plus side, the agreement contains enforceable prohibitions against currency manipulation – a first for an American trade deal.  And the administration won for the United States the right to withdraw from the trilateral USMCA and substitute a bilateral deal if one of the parties signs a separate trade agreement with a “non-market economy.”  Since that clearly means, “China,” it’s one more barrier to non-North American economies enjoying some of the benefits of the free trade agreement without incurring any of the obligations.   

But the origin rules have always been central to the promise of integrating the three North American economies for truly mutual benefit. And since the auto tariff decision has now become the development that can make or break the effectiveness of these rules, the only grade merited so far by President Trump’s NAFTA rewrite is “incomplete.”

Making News: Two New Podcasts on Trump, China, Trade, & Globalization

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America Trends, China, globalization, Gordon G. Chang, John Batchelor Show, Larry Rifkin, Making News, Trade, Trump

I’m pleased to announce the posting on-line of two podcasts of interviews conducted with me on trade policy subjects.

The first is of Wednesday night’s segment on John Batchelor’s nationally syndicated radio show covering the latest developments in the U.S.-China trade confrontation. Click here for a great discussion among John, co-host Gordon G. Chang, and me.

The second is a two-parter I did with former Connecticut radio show host Larry Rifkin on his new America Trends podcast series. It’s a wide-ranging examination of America’s position in the world economy and how we’ve arrived here, and although it goes for about 50 minutes in toto, I think you’ll find that sticking with it will be well worth your while if you have any interest in such subjects. Here’s the link to both. And don’t forget to scroll down the page, because the first part is presented below the second!

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

(What’s Left of) Our Economy: The IMF (Unwittingly) Explains Why Trade Deficits Really Do Matter

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China, current account, current account surplus, current deficit, Germany, Global Imbalances, globalization, IMF, International Monetary Fund, Japan, tariffs, The Netherlands, Trade, Trade Deficits, Trump, {What's Left of) Our Economy

One of my greatest professional disappointments has been my failure to help make many converts to the idea that one of the biggest – and possibly the biggest – reason that trade deficits matter a lot (contrary to the insistence of most economists) is that they can lead to global financial crises like the one that struck in 2007 and 2008. The idea is that these deficits lay at the heart of the broader economic imbalances run up during the previous decade – which flooded borrowing- and spending-happy economies (especially America’s) with oceans of cheap credit, and inevitably produced the reckless use of such credit and the inevitable – and terrifying – bursting of the resulting bubbles.

You see? It’s a thesis that’s tough to summarize briefly – even though it’s widely accepted by some of the world’s leading economists, who nonetheless remain reluctant to acknowledge any connection to trade flows.

So I’m gratified that the International Monetary Fund has just lent additional support to this thesis, but I’m under no illusions that the determinedly oblivious conventional wisdom is going to budge – especially since the Fund goes out of its way absolve lopsided trade flows of any blame.

According to the Fund’s new External Sector Report (click here for a link to the PDF), these imbalances (measured in their broadest form, the current account) stayed at about the same share of the world economy last year as they did in 2016 (some 3.25 percent). Yet in the IMF’s view, between 40 and 50 percent of these imbalances were “excessive (that is, not explained by countries’ fundamentals and desirable polices).”

Why should anyone care? Because, as the Fund explains, “Large and sustained excess external imbalances in the world’s key economies—amid policy actions detrimental to external balances—pose risks to global stability.” Specifically, “Over the medium term, sustained deficits, leading to widening debtor positions in key economies, could constrain global growth and possibly result in sharp and disruptive currency and asset price adjustments.”

That last reference to “sharp and disruptive currency and asset price adjustments” is a fancy, and deliberately understated, way of saying “financial crisis.”

The danger is underscored by Figure 1 from the Report (on page five) – which shows how the world’s current account situation has changed over time. Optimists might take comfort from the fact that the overall global imbalance today (showed by the thick, solid line), is considerably smaller as a share of global output than it was at the peak of the last decade’s bubble. Also of interest: China’s current account surplus has shrunk in relative terms, while those of Japan, Germany, and the Netherlands have remained about the same. (For evidence that the better Chinese numbers are largely smoke and mirrors, see this analysis from the Council on Foreign Relations – not exactly a hotbed of protectionist thought.)

But here’s what the pessimists would note – and what should worry everyone: Although the total worldwide current account imbalances is down, so is global growth. During the peak bubble years, it was about 4.30 percent annually after inflation. During the current recovery, it’s been much lower, and last year, it was 3.15 percent. Worse, a new slowdown may well be in the cards.

That is, the world economy seems to be facing all the dangers of a new financial crisis without having received many of the (dubious) benefits of a preceding bubble.

The IMF has a solution: The persistent surplus countries should spend more (which will presumably pull in more imports from the deficit countries) and the deficit countries should take “actions to strengthen public and private sector balance sheets” (that is, in large measure, spend less).

And it sends a warning: “[P]rotectionist policies should be avoided as they are likely to have significant deleterious effects on domestic and global growth, while limited impact on external imbalances.”

These are pretty standard prescriptions. The trouble is, as usual, neither the surplus nor the deficit countries are showing any interest in following them. Moreover, the IMF’s views on the relationship between trade flows on the one hand, and national borrowing and spending and savings rates on the other, seems to repeat the canard that net savings levels determine trade flows. Nowhere do its economists acknowledge that the fundamental mathematical relationship is that of an identity – which says nothing about causation at all. As a result, they also ignore all the ways in which trade flows can determine savings rates.

It’s anything but realistic to expect the Fund to endorse President Trump’s tariffs or any of the rest of his trade policies. But it also seems to remain anything but realistic to expect the Fund to identify any plausible alternative ways to prevent today’s global imbalances from turning into Financial Crisis 2.0.