(What’s Left of) Our Economy: Without Supply Chain Transparency, There’s No Supply Chain Security

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Bureau of Economic Analusis, Defense Department, Defense Innovation Unit, defense manufacturing, election 2020, FDI, foreign direct investment, GAO, Government Accountability Office, health security, Joe Biden, medical equipment, national security, offshoring, Pentagon, supply chains, Trump, {What's Left of) Our Economy

Earlier this month, I criticized Joe Biden’s new plan to strengthen U.S. domestic manufacturing with a special eye toward boosting the security of key supply chains for holding out as a model the Pentagon’s work on defense-related manufacturing. Just this week, I found even more evidence to support the view that if the presumptive Democratic presidential nominee is really serious about achieving this goal (and given his longstanding record on trade and globalization issues, ample doubt is warranted) he’ll need a dramatically new model.

By the way, these findings show that the Trump administration also remains too far from getting its own supply chain act together.  And the main reason is a dangerous – and wholly unnecessary – lack of supply chain transparency.

The evidence comes from a September, 2019 report from the U.S. Government Accountability Office (an investigative arm of Congress) that summarizes the views of a panel of specialists convened to discuss foreign threats to the U.S. defense manufacturing base, and presents findings on the subject from various U.S. government agency, private sector, and university studies. The threats include the offshoring of the production of key defense-related goods; takeovers by foreign entities of U.S.-based facilities that supply these products, along with important services, or foreign acquisitions of significant stakes in these facilities; and the loss of U.S. competitiveness in these areas for market- and competition-related reasons and the resulting turns to foreign suppliers.

And crucially, the panelists consulted (listed on p. 40 of the report) include no notable supposed globalization alarmists or China hawks. In fact, one panelist was a senior executive of the U.S.-China Business Council, which has been a major pillar of what I call the nation’s Offshoring Lobby.

The report correctly noted that the use of foreign-origin goods and services can benefit U.S. national security interests. Specifically, it can “lower costs and provide better access to foreign workers and markets [which can help the companies in question gain the benefits of economies of scale by winning more customers].” Moreover, “When companies that offshore contract with DOD [the Departent of Defense], they can pass those benefits along. Foreign investment can help U.S. companies grow.”

So as in all areas of public policy, the key is finding the best balance, and reasonable people can always legitimately disagree on where it’s found. But here’s what’s really alarming about the message sent by the GAO report – and collectively by all the specialists and materials consulted: Neither the Defense Department nor any other branch of the U.S. government has the ability needed to achieve this goal partly because they lack the information needed to identify vulnerabilities, and partly because much helpful information is kept confidential at the request of private industry.

Here are the main relevant observations and conclusions presented in the report making emphatically clear that the nation lacks the supply chain transparency vital to improving supply chain security:

>”[T]he absence of a common definition of offshoring makes it difficult to analyze the extent to which offshoring is occurring in general as well as its effect on the defense supplier base. As such, the extent of offshoring and its effects are largely unknown.”

>”[P]ublicly available data do not provide granularity to analyze foreign direct investments in industry subsectors that comprise the defense supplier base.”

>”Pentagon “industrial policy officials told us that BEA’s [the Commerce Department’s Bureau of Economic Analysis] publicly available data are not complete enough to assess foreign investments in U.S. defense industrial subsectors. We also found that BEA does not disclose certain data for industry subsectors if the data would disclose the identity of individual companies, as these data are considered confidential. For example, BEA data on new foreign direct investment from China in the U.S. industry subsector “electrical equipment, appliances and component manufacturing” are not publicly available for 3 of the 5 years we reviewed.”

>”[A]ccording to BEA, new foreign direct investment data do not capture foreign investment transactions that involve less than 10 percent voting ownership in a U.S. enterprise. This may include data on venture capital investments in U.S. start-ups. According to a report by the Defense Innovation Unit (DIU) within DOD, there are an increasing number of investments in U.S. venture-backed startups from China-based investors that are not tracked by the U.S. government. This limits full visibility into foreign investors and the technologies they are investing in, as well as any increase or decrease in investment flows.”

>The DIU “echoed concerns about the limitations of U.S. government data and stated that the U.S. government does not comprehensively track all available data on investments, including those from private sources to assemble a complete picture of the level of foreign investment in U.S. companies.”

One big takeaway from the above is that the Defense Department is far from the only culprit here. Much more important, though, nothing could be clearer from this list of information gaps than that the Pentagon that Biden would rely on hasn’t made much of an effort to close them. And although the Trump administration has rhetorically prioritized reshoring manufacturing back to the United States in part for national security-related reasons, and can boast noteworthy progress in changing the U.S. trade policies that have encouraged so much defense-related offshoring, it’s clearly made little progress in making sure that it has the most fundamental information it needs to make sound decisions.

Also critical to recognize: It’s not that this information doesn’t exist. As I’ve previously noted, the companies that produce these goods and provide these services know exactly they, and most of their own contractors and subcontractors, are doing. Fully understanding and optimizing their own operations, after all, is one of the main ways they make money.

And the best way to extract what the government needs is to require legally what I’ve described as “Truth in Globalization” – and require it fast. Otherwise, no matter who wins the Presidency in November, the U.S. government will needlessly keep flying blind on supply chain security.

Im-Politic: The CCP Virus and…Impeachment??

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Articles of Impeachment, CCP Virus, China, Comptroller General, Congress, coronavirus, COVID 19, Democrats, GAO, Government Accountability Office, House of Representatives, Im-Politic, impeachment, Impoundment Control ct of 1974, Senate, Trump, Ukraine, WHO, World Health Organization, Wuhan virus

I’m actually glad that Congress’ Democrats are accusing the Trump administration of violating the same law in its decision to suspend funding for the World Health Organization (WHO) as it allegedly did in halting military aid to Ukraine – which of course was a central impeachment charge.

The point here is not to debate the merits of the WHO action (for the record, I’m strongly in favor) or of the impeachment effort (for the record, I strongly opposed) but to make clear how transparently partisan and Trump-ly deranged inclusion of the Ukraine aid accusation actually was.

Specifically, the Democrats’ allegation that “President Trump is violating the same spending laws that brought about his impeachment” represents a golden opportunity to point out that, legally speaking, jumping to the conclusion that the Ukraine decision was impeachable arguably violated those spending laws, too.

Let’s say that the way the Ukraine aid disbursement delay was carried out did clash with the terms of the Impoundment Control Act of 1974 – signed into law to prevent Presidents from blocking arbitrarily the actual expenditure of public funds as required in approved legislation. The word “arbitrarily” is important here, because the law has always been flexible enough to authorize such blockages and delays. It simply mandates that these actions to meet certain conditions.

But the law also sets out certain procedures for remedying these situations, and guess what? Quickly turning a claimed violation into an Article of Impeachment isn’t one of them. Or even close.

What’s supposed to happen legally is that an arm of Congress, the Government Accountability Office (GAO), determines whether a violation occurred. (It did.) And then the Comptroller General (the GAO’s head) is supposed to “bring a civil action in the United States District Court for the District of Columbia to require such” funds to be spent.

The case was never brought to court, however. And why not? Because the Democratic-controlled House had already impeached President Trump by that time! In fact, the GAO report didn’t come out until scant hours before the Senate impeachment trial began (on January 16).

The impeachment articles contained other charges of course, but the impoundment law allegation deserves emphasis because it was the only claimed legal violation for which a clear procedure for going forward was specified – in the statute itself.

The House unmistakably ignored that procedure. Meaning maybe we need an impeachment proceeding for the House leaders?

Making News: Interviewed on Buy American and Trade-Related Infrastructure Issues

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Asset Leadership Network, Buy American, GAO, Government Accountability Office, infrastructure, Making News, Trade

I’m pleased to announce that the video is now on-line of an interview I gave last week on the intersection between infrastructure and trade policy issues – and specifically, on the future of the Buy American programs governing the public sector’s multi-billion dollar purchases of goods and services.

The session was sponsored by the Asset Leadership Network, an organization of professionals in engineering, architecture, construction, land-use planning, and related fields. One of their highest priorities: making sure that whatever infrastructure build-out and repair efforts the nation launches results in the best quality systems that create the biggest growth and employment bangs for taxpayers’ bucks.

It was gratifying to learn of the Network’s interest in my research into whether recent trade agreements covering government procurement – which affect the extent to which infrastructure systems are made out of American-produced manufactures and materials – are leveling global playing field as promised, and giving a fair-shake to U.S.-based businesses and their employees.

As RealityChek regulars know, the answer – according to a recent report from the Government Accountability Office (GAO) – is an emphatic “No.” And in this video, I describe the GAO’s main findings, as well as what they tell us about U.S. trade policy’s broader failures.

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

Following Up: Why Buy American Reform is More Urgent – & Feasible – Than Ever

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Buy American, Following Up, free trade agreements, GAO, Government Accountability Office, Government Procurement Agreement, GPA, NAFTA, North American Free Trade Agreement, Obama, The Wall Street Journal, Trade, World Trade Organization, WTO

Although it doubtless wasn’t an intention of Wall Street Journal reporters Coulter Jones and Shane Shifflett, their article this morning on President Trump’s recent efforts to strengthen the U.S. government’s Buy America regulations considerably bolstered the case that overhaul is indeed vital – and within reach politically.

As I reported last month, a February Government Accountability Office (GAO) study showed that the United States is getting completely fleeced by its adherence to provisions in various bilateral or regional trade deals (like the North American Free Trade Agreement), along with a worldwide plurilateral agreement, that aim at eliminating domestic preference programs like Buy American regs.

The two main problems, according to the GAO? First, the best available data reveals that the United States has opened up its government purchases to foreign competition much wider than the nearly 50 other signatories of the Government Procurement Agreement (GPA) sponsored by the World Trade Organization (WTO). Second, Washington’s implementation of this arrangement and of similar provisions in other trade deals has been so negligent that the U.S. government never bothered even to find out how well the GPA, or any of the similar agreements, was working until two Democratic Senators commissioned the GAO study – more than twenty years after the global agreement was signed.

Journal correspondents Jones and Shifflett spent most of their article purporting to explain that any administration efforts to boost Washington’s purchases of U.S.-origin goods and services would amount to “swimming against the tide.” After all, as they documented, “For the current fiscal year beginning in October, foreign businesses have received a bigger share of federal contract dollars than in any other year since at least 2009.” In fact, “foreign-owned companies already hauled in more money from federal contracts in the past three months [i.e, during the Trump presidency] than in any corresponding period in a decade.”

Moreover, any changes to procurement policy made by President Trump “would likely face legal challenges….Additionally, any executive order Mr. Trump may issue requiring the government to buy exclusively American-made products has the potential to be challenged in court, or overturned by Congress or a future administration” – because of trade treaties that aimed “to make it easier for U.S. companies to compete overseas by mutually easing trade restrictions with other countries.”

But the recent rise in federal contracts for foreign-made goods, according to the article, has nothing to do with either Trump administration negligence or uncontrollable forces. As the authors point out, “Much of the payout to foreign-owned firms in the first quarter of this calendar year was set in motion by the Obama administration.” Of course, that was the same Obama administration that came into office in 2009 and oversaw that previously noted longer-term surge in contracts awarded to foreign goods and services providers.

Further, those trade treaties described by the Journal piece as such towering obstacles to a Buy American overhaul are the same trade treaties that the GAO has strongly indicated are utter failures.

The administration knows about the unacceptable record of these arrangements, as do the Democratic Senators who requested the GAO study. How difficult, then, would it really be for the president to muster bipartisan Congressional support for declaring these deals null and void – at least pending convincing evidence that they’re working after all? And given the pervasive discrimination U.S.-based goods and service providers clearly face in most foreign government markets, how difficult would it be for Mr. Trump to win similar legislative backing for narrowing the loopholes and waivers contained in the current Buy American regulations – and monitoring and enforcing tighter rules much more effectively?

In other words, how many American lawmakers would insist on continuing to obey broken treaties and on refusing to re-level the procurement playing field unilaterally for domestic businesses and their employers? The answers may not be obvious to Mainstream Media journalists. They’re surely more obvious to politicians accountable to American voters.

(What’s Left of) Our Economy: How Trump Can Get His Trade Chops Back

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bilateral trade agreements, China, dispute resolution, free trade agreements, Government Accountability Office, Japan, managed trade, Mike Pence, multilateral trade agreements, North Korea, Robert Lighthizer, semiconductors, South Korea, tariffs, Trade, Trump, U.S. Trade Representative, U.S.-Japan semiconductor agreement, {What's Left of) Our Economy

Comments made by Vice President Pence on his Asia trip concerning America’s trade relations with Japan and South Korea show both the promise and peril of the Trump administration’s approach to international commerce and globalization. Major gains for the economy are possible from negotiating a bilateral trade agreement with Japan and revamping what Mr. Pence described as a failed deal with South Korea. But first, the president and his aides must show more awareness than to date of why accords with countries like these keep failing.

According to candidate Trump, and President Trump, the main problems with such measures have been, variously, incompetent U.S. negotiators, dominance of the policy process by offshoring and similar interests, and a mistaken preference for multilateral arrangements over bilateral deals where America’s leverage is less likely to be watered down.

The second reason for failure cited above has certainly shaped U.S. trade agreements with super low-cost countries that have been tempting locations for production and job offshoring, and that have revealingly comprised the vast majority of trade deals initiated and signed by Washington since the early 1990s. But footloose multinationals have played a much smaller role when it comes to higher income countries like Japan and South Korea. There, achieving better results for the American domestic economy has faced two leading obstacles.

The first has been widely noted: the longstanding tendency of the U.S. leaders to elevate geopolitical aims like strengthening security alliances over economic aims like removing distortions to trade flows. Here, strangely, the administration has been giving off mixed signals lately. The president is now clearly treating the security-related objective of gaining more Chinese cooperation in resolving the North Korea nuclear weapons crisis as a higher priority than combating the numerous predatory Chinese trade policies that have hurt domestic employers and their workers. But he blasted such priorities as recently as last month. And the Pence statements indicate that trade and security issues will be handled on separate tracks for Japan and South Korea.

The second obstacle has been less widely noted – although it’s been a major theme of mine: Opening markets in highly protectionist countries like those Asian powers is fiendishly difficult, at best. As I’ve written, these economies are most accurately seen as nation-wide systems of protection and mercantilism. The particular form taken by any of their trade barriers or subsidies at any given moment matters much less than the underlying intent to manage trade flows to their advantage. In addition, these protectionist systems are run by powerful bureaucracies whose secretiveness and agility makes even identifying problematic practices – much less combating them – excruciatingly difficult.

The bottom line is that trade agreements with such countries are virtually impossible to monitor and enforce effectively, and because their governments know this, the provisions are violated routinely.

By contrast, because the U.S. government is so transparent, almost of America’s trade barriers and subsidies are easy to identify and attack, and American compliance with trade agreements is easy to measure. So it’s easy to see how these agreements strongly tend to create more (and more strongly guaranteed) access to the U.S. market than vice versa. This new report from the U.S. Government Accountability Office shows how these damaging results can stem from multilateral agreements, but the Korea deal spotlighted by Spence and a long string of agreements with Japan show the similarly dismal record of bilateral arrangements.

That’s not to say that worthwhile trade deals with Japan and South Korea are impossible. But they’ll require thinking that’s much further outside the box than the administration seems to be engaged in. The best possibility would be going the managed trade route. That is, rather than accept unverifiable promises to dismantle trade barriers or end subsidies, America’s interlocutors would commit to allot specific shares of their domestic markets to specific U.S.-origin goods and services. There’s even a precedent for this practice – the 1986 semiconductor trade agreement reached between Washington and Tokyo.

Managed trade of course isn’t free trade. But little about Japanese and South Korean policies fits the definition, either. And the history of the semiconductor deal is well known by President Trump’s choice to head the U.S. Trade Representative’s office, Robert Lighthizer, because he was personally and deeply involved.

Another possibility would be to expand one of the few modestly worthwhile leafs from former President Obama’s 2012 trade agreement with South Korea. Precisely because Seoul’s predatory practices in the automobile sector specifically were so difficult to combat via the standard, legalistic procedures used in the dispute-resolution systems in most American free trade agreements (and the international counterpart run by the World Trade Organization), Mr. Obama secured South Korean acceptance of provisions that are especially appropriate in dealings with opaque bureaucracies that prevent significant evidence gathering.

Specifically, if a dispute-resolution panel convened under the agreement decides that Seoul is violating the auto provisions, and the United States restores pre-agreement tariffs on Korean products, it’s up to the Koreans to prove that they’re back in compliance with the treaty before the new tariffs are removed. Even better, however, would be to impose the burden of proof on South Korea, Japan, and similar countries as soon as a complaint is filed.

Yet there’s a strong argument that the very structure of dispute-resolution mechanisms is fatally flawed. Whether the trade agreement in question is bilateral or multilateral, these arrangements treat the United States as an equal party. But given the huge size of the U.S. economy relative to any other trade agreement signatories, and therefore given its status as the paramount prize in any such agreement, this “one country-one vote” set-up is as absurd as it is detrimental to American interests.

Rather than agree to such standard dispute-resolution systems – which invariably result in deadlocks that penalize open economies like America’s – Washington should insist that dispute-resolution votes be allotted more realistically. Basing them on the sizes of the various signatory economies is one obvious formula.

And don’t forget the ultimate America-First trade policy: Dispense with negotiations altogether, or for the most part, and start imposing tariffs on the imports of predatory trading powers, or on all imports (in order to prevent offshore exporters from switching production sites). Of course, that universalism is a big virtue of the border adjustment tax proposed by the House’s Republican leaders. In return, Mr. Trump could offer greater U.S. market access to those countries that prove (after years of good behavior according to exclusively American judgments) that they’re giving American exports a fair shake. This form of unilateralism should have special political appeal for an administration that’s increasingly in need of some big early economic wins.

President Trump (at least the pre-China currency version) has been termed a trade policy disrupter. If he wants to re-earn that label, getting the nation’s Japan and South Korea trade right after decades of frightful losses would be a great place to start.