(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.

Our So-Called Foreign Policy: Evidence that the Multinationals Really Did Sell the U.S. Out to China

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capital spending, chemicals, China, computers, electronics, health security, healthcare goods, information technology, investment, Lenin, manufacturing, multinational companies, national security, offshoring, offshoring lobby, Our So-Called Foreign Policy, pharmaceuticals, research and development, supply chains, tech, tech transfer, U.S-China Economic and Security Review Commission, USCC, World Trade Organization, WTO

RealityChek readers and anyone who’s familiar with my work over many years know that I’ve often lambasted U.S. multinational companies for powerfully aiding and abetting China’s rise to the status of economic great power status – and of surging threat to U.S. national security and prosperity. In fact, the dangers posed by China’s activities and goals have become so obvious that even the American political and policy establishments that on the whole actively supported the policies – and that permitted money from this corporate Offshoring Lobby to drive their decisions – are paying attention.

If you still doubt how these big U.S. corporations have sold China much of the rope with which it’s determined to hang their own companies and all of America (paraphrasing Lenin’s vivid supposed description of and prediction about the perilously shortsighted greed of capitalists), you should check out the latest report of the U.S-China Economic and Security Review Commission (USCC). As made clear by this study from an organization set up by Congress to monitor the China threat, not only have the multinationals’ investments in China figured “prominently in China’s national development ambitions.” They also “may indirectly erode the United States’ domestic industrial competitiveness and technological leadership relative to China.”

Worst of all, “as U.S. MNE (“multinational enterprise) activity in China increasingly focuses on the production of high-end technologies, the risk that U.S. firms are unwittingly enabling China to achieve its industrial policy and military development objectives rises.”

And a special bonus – these companies’ offshoring has greatly increased America’s dependence on China for supplies of crucial healthcare goods.

Here’s just a sampling of the evidence presented (and taken directly by the Commission from U.S. government reports):

> U.S. multinationals “employ more people in China than in any other country outside of the United States, primarily in the assembly of computers and electronic products.” Moreover, this employment skyrocketed by 574.6 percent from 2000 to 2017.

> “China is the fourth-largest destination for U.S. MNE research and development (R&D) expenditure and increasingly competes with advanced economies in serving as a key research hub for U.S. MNEs. The growth of U.S. MNE R&D expenditure in China is also comparatively accelerated, averaging 13.6 percent yearon-year since 2003 compared with 7.1 percent for all U.S. MNE foreign affiliates in the same period. This expenditure is highest in manufacturing, particularly in the production of computers and electronic products.”

> “U.S. MNE capital expenditure in China has focused on the creation of production sites for technology products. This development is aided by the Chinese government’s extensive policy support to develop China.”

> The multinationals’ capital spending on semiconductor manufacturing assets “has jumped 166.7 percent from $1.2 billion in 2010 (the earliest year for which complete [U.S government] data is available) to $3.2 billion in 2017, accounting for 90 percent of all U.S. MNE expenditure on computers and electronic products manufacturing assets in China.”

> “China has grown from the 20th-highest source of U.S. MNE affiliate value added in 2000 ($5.5 billion) to the fifth highest in 2017 ($71.5 billion), driven primarily by the manufacture of computers and electronic products as well as chemicals. The surge is especially notable in semiconductors and other electronic components.”

> “[P]harmaceutical manufacturing serves as the largest chemical sector in terms of value-added [a measure of manufacturing output that seeks to eliminate double-counting of output by stripping out the contribution of intermediate goods used in final products]…” And chemicals – the manufacturing category that include pharmaceuticals – has become the second largest U.S-owned industry in China measured by the value of its assets (after computers and electronic products).

Incidentally, the report’s tendency to use 2000 as a baseline year for examining trends is no accident. That’s the year before China was admitted into the World Trade Organization (WTO) – and the numbers strongly reenforce the argument that the multinationals so avidly sought this objective in order to make sure that the value of their huge planned investments in China wouldn’t be kneecapped by any unilateral U.S. tariffs on imports from China (including those from their factories). For the WTO’s combination of consensus decision-making plus the protectionist natures of most of its members’ economies created a towering obstacle to Washington acting on its own to safeguard legitimate American domestic economic interests from Chinese and other foreign predatory trade and broader economic activity.

At the same time, despite the WTO’s key role in preserving the value of the multinationals’ export-focused China investments, the USCC study underestimates how notably such investment remains geared toward exporting, including to the United States. This issue matters greatly because chances are high that this kind of investment (in China or anywhere else abroad) has replaced the multinationals’ factories and workers in the United States. By contrast, multinational investment in China (or anywhere else abroad) that’s supplying the China market almost never harms the U.S. domestic economy and in fact can help it, certainly in early stages, by providing foreign customers that add to the domestic customers of U.S.-based manufacturers.

There’s no doubt that the phenomenal growth of China’s own consumer class in recent decades has, as the China Commission report observes, generated more and more American business decisions to supply those customers from China. In other words, the days when critical masses of Chinese couldn’t possibly afford to buy the goods they made in U.S.- and other foreign-owned factories are long gone.

But the data presented by the USCC does nothing to support this claim, and the key to understanding why is the central role played by computer, electronics, and other information technology-related manufacturing in the U.S. corporate presence in China. For when the Commission (and others) report that large shares of the output of these factories are now sold to Chinese customers, they overlook the fact that many of these other customers are their fellow entities comprising links of China-centric corporate supply chains. These sales, however, don’t mean that the final customers for these products are located in China.

In other words, when a facility in China that, for example, performs final assembly activities on semiconductors sells those chips to another factory in China that sticks them into computers or cell phones or HDTV sets, the sale is regarded as one made to a Chinese customer. But that customer in turn surely sells much of its own production overseas. As the USCC documents, China’s consumer market for these goods has grown tremendously, too. But China’s continually surging share of total global production of these electronics products (also documented in the Commission report) indicates that lots of this output continues to be sold overseas.

Also overlooked by the USCC – two other disturbing apects of the multinationals’ activities in China.

First, it fails to mention that all the computer and electronics-related investment in China – which presumably includes a great deal of software-related investment – has contributed to China’s economic and military ambitions not only by transferring knowhow to Chinese partners, but by teaching huge numbers of Chinese science and technology workers how to generate their technology advances. The companies’ own (often glowing) descriptions of these training activities – which have often taken the form of dedicated training programs and academies – were revealed in this 2013 article of mine.

Second, the Commission’s report doesn’t seem to include U.S. multinationals’ growing investments not simply in high tech facilities in China that they partly or wholly own, but in Chinese-owned entities. As I’ve reported here on RealityChek, these capital flows are helping China develop and produce high tech goods with numerous critical defense-related applications, and the scale has grown so large that some elements of the U.S. national security community had been taking notice as early as 2015. And President Trump seems to be just as oblivious to these investments as globalist former President Barack Obama was.

These criticisms aside, though, the USCC has performed a major public service with this survey of the multinationals’ China activities. It should be must reading in particular for anyone who still believes that these companies – whose China operations have so greatly enriched and therefore strengthened the People’s Republic at America’s expense – deserve much influence over the U.S. China policy debate going forward.

Im-Politic: On Biden’s New Plan for Medical & Other Supply Chain Security

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alliances, Biden, CCP Virus, China, coronavirus, COVID 19, Defense Department, Defense Production Act, DPA, election 2020, health security, healthcare goods, Im-Politic, manufacturing, offshoring, Pentagon, pharmaceuticals, PPE, supply chains, tariffs, taxes, Trade, Wuhan virus

Joe Biden’s plan for rebuilding U.S. supply chains to ensure American access to critical products like healthcare goods came out yesterday, and any fair reading would have to conclude that these proposals are about as serious as the presumptive Democratic Presidential nominee’s proposals in related areas – like China policy. That is to say, they’re not terribly serious at present.

As with China policy, the first concern entails credibility. In 2011, when Biden was Barack Obama’s Vice President, the Commerce Department issued a report detailing all sorts of dangerous vulnerabilities in U.S. supplies of all manner of vital healthcare goods. The “Obama-Biden administration” did absolutely nothing in response – unless you count avidly pursuing offshoring-friendly trade deals, like the Trans-Pacific Partnership (TPP) that were bound to worsen these vulnerabilities. You could also throw in a record of continually coddling the trade and broader economic predation practiced by China, which surely fostered similar results.

As a result, it’s legit to ask whether any of these proposals will survive Day One of a Biden presidency.

In this vein, it’s more than a little disturbing that Biden proposes to use the Defense Department’s policies to minimize supply chain vulnerabilities as his model for addressing such problems for a wide variety of products –not just healthcare-related goods. These include “energy and grid resilience technologies, semiconductors, key electronics and related technologies, telecommunications infrastructure, and key raw materials.”

Unfortunately, the principal lessons taught by the Defense Department’s record on supply chains are how to duck the problem or define it out of existence, and the administration in which Biden served was no exception. Some of the biggest specific problems (as made clear in this Obama administration report):

>The Pentagon’s overall assessments prioritized financial metrics, not specific domestic production capabilities, as measures of the defense manufacturing base’s health.

>Its treatment of globalization’s challenges placed major emphasis on taking “advantage of emerging capabilities, regardless of where they originate,” not maximizing domestic production capabilities.

>Although specific vulnerabilities – and the related need to maintain or rebuild adequate domestic capabilities – were acknowledged, this vulnerabilities were consistently portrayed as isolated holes that could somehow be plugged without taking into account the dependence of these narrowly defined products on their own supply chains. Indeed, Biden’s new plan seems to reveal a similar flaw when it describes itself as “a set of targeted proposals to ensure the United States has the domestic manufacturing capacity necessary for critical supply chains.”

>Moreover, the Department has long supported objectives such as interoperability with allies’ armed forces and maintaining traditional – pre-Trump – global systems of what it defined as free trade, both of which often clashed with the goal of incentivizing domestic production. These goals were explicitly stated in this George W. Bush administration report, and here’s no evidence that the Obama-Biden Pentagon ever disagreed.

Indeed, the new Biden blueprint indicates that the former Vice President’s definition of supply chain security is pretty global, instead of national, as well:

“Instead of insulting our allies and undermining American global leadership, Biden will engage with our closest partners so that together we can build stronger, more resilient supply chains and economies in the face of 21st century risks. Just like the United States itself, no U.S. ally should be dependent on critical supplies from countries like China and Russia. That means developing new approaches on supply chain security — both individually and collectively — and updating trade rules to ensure we have strong understandings with our allies on how to best ensure supply chain security for all of us.”

If America’s allies were proven reliable suppliers of these products themselves, Biden’s perspective would make sense. But the list of countries that have recently hoarded medical goods for themselves as soon as the CCP Virus pandemic’s full dangers became apparent included most of these allies – meaning that the U.S. vulnerability problem far exceeds “China and Russia.”

Nor is it entirely evident how clearly Biden has thought though the tax policy provisions of his plan. Tax policy’s role is clearly viewed as crucial, as the plan emphasizes that

“Pharmaceutical offshoring has been heavily driven by tax code provisions that have encouraged companies to locate pharmaceutical production in low-tax countries even where those countries have labor and other costs comparable to the U.S.”

Consequently, Biden says he will “eliminate Trump Administration tax incentives for offshoring and pursue other tax code changes that will encourage pharmaceutical production in the U.S.”

At the same time, Biden favors raising the overall U.S. corporate tax rate from the 21 percent to which it has recently been lowered to 28 percent, along with a 15 percent “minimum tax” on large corporations. So good luck to drug companies – or any other companies making goods deemed critical by Biden – gleaning clear reshoring or domestic production ramping signals from this combination.

Perhaps any confusion will be cleared up by other alleged Biden measures to boost U.S.-based production – like “new targeted financial incentives, including tax credits, investments, matching funds for state and local incentives, R&D support, and other incentives to encourage the production of designated critical materials such as semiconductors in the United States”? At best, business will surely need to see many more details along these lines before committing the needed capital.

Unless maybe as President, Biden will simply mandate that the needed new facilities will be built when all else fails (as well as in tandem with those other policies)? That’s obviously the implication of his promise to use the Defense Production Act (DPA) “to its fullest extent to rebuild domestic manufacturing capacity in critical supply chains, using the lessons learned from the COVID-19 pandemic and applying them to our national needs.”

Or does Biden actually view the DPA as his primary tool for “generating the domestic mobilization we need”? That seems like a reasonable conclusion, especially given that it’s the first specific measure he mentions. Maybe instead he’s really talking about using the Act simply “to direct U.S. companies to ramp up production of critical products that will be needed over the near-term.”

Regardless of Biden’s real intentions, though, it’s anything but clear how Biden believes the DPA can be used to increase U.S. production in many of the industries he mentions as vital where such output has largely migrated overseas That’s especially true for the “semiconductors, key electronics and related technologies, [and] telecommunications infrastructure” he specifies. It’s sure going to be far more difficult than, say, ordering auto companies, to make ventilators.

It’s just as unclear how these Biden’s ideas can succeed without a much stronger trade policy dimension – and specifically, continued and even expanded tariffs. And it shouldn’t be limited to straightening out the muddled views mentioned above. 

Specifically, maintaining levies on chronically subsidized and dumped products like metals, along with sweeping tariffs on systemically protectionist China (and on other similar countries) would send the all the companies and sectors concerned an invaluable message. Bipartisan endorsement of these protections would demonstrates that they really can have confidence that new investments won’t be decimated by trade and broader economic predation. Just as important, an enduring commitment to tariffs would help convince overseas competitors (domestic and foreign owned) that if they want to sell the products in which they have big edges to Americans, they’ll need to make these products in America.

The good news is that at least some of these mysteries may be cleared up “soon,” when this Biden plan promises the former Vice President will release his “comprehensive strategy to create American jobs through modern American manufacturing.” The bad news is that if he what he’s said and written so far is any indication, he’ll have a lot of rewriting to do.

(What’s Left of) Our Economy: U.S. Manufacturing Keeps Gaining Independence

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Commerce Department, decoupling, GDP-by-industry, health security, healthcare goods, manufacturing, manufacturing production, manufacturing trade deficit, Obama, tariffs, Trade, trade war, Trump, {What's Left of) Our Economy

Like a strike-shortened sports season’s champion, the conclusion in today’s RealityChek post needs an asterisk. The conclusion stems from this morning’s Gross Domestic Product (GDP) by Industry report from the Commerce Department, which shows that U.S. domestic manufacturing continues to become ever more self-reliant. In other words, it’s reducing its dependence for growth on foreign-made industrial goods of all kinds generally speaking.

The asterisk is needed because the new data covers the first quarter of this year, and therefore it includes March – when much of the U.S economy was shut down by government order or recommendation due to the CCP Virus. As a result, a chunk of the results say nothing about how manufacturing or the rest of economy would have performed in normal times.

Still, this morning’s evidence that U.S.-based industry is becoming more autonomous comes from several different findings calculable from the GDP by Industry’s raw data.

For example, again, due partly to the shutdowns’ effects, the report shows that according to a widely followed measure called value-added, domestic manufacturing’s output dipped by 0.99 percent between the first quarter of 2019 and the first quarter of this year. At the same time, the manufacturing trade deficit during this period shrank by 7.31 percent – more than 13 times faster. During the last comparable period (fourth quarter, 2018 to fourth quarter, 2019), manufacturing production grew by 0.70 percent, and its trade gap narrowed by 7.59 percent – a somewhat better performance on both scores.

At this point it’s vital to note that these growth rates are by no means good. In fact, they’re the worst by far since the final year of the Obama administration – when on a calendar year basis, domestic industry shrank by 1.19 percent. Yet during that same year 2016, despite this contraction, the manufacturing trade shortfall expanded by 4.66 percent. So if you value self-sufficiency (as you should in a world in which the United States has found itself painfully short of many healthcare-related goods, and in which dozens of its trade partners were hoarding their own supplies), it’s clear that during 2016, the nation was getting the worst of all possible manufacturing worlds.

Also important: there’s no doubt that the same Trump administration tariffs and trade wars with which domestic manufacturing has been dealing over the past two years have slowed its growth. In other words, industry has been adjusting to policy-created pressures to adjust its global, and in particular China-centric, supply chains. That’s bound to create inefficiencies.

If you don’t care about significant American economic reliance on an increasingly hostile dictatorship, you’ll carp about paying any efficiency price for this decoupling from China (and other unreliable countries). If you do care, you’ll recognize the slower growth as an adjustment cost needed to correct the disastrous choice made by pre-Trump Presidents to undercut America’s economic independence severely.

Moreover, during the last year, domestic manufacturing output was held back by two developments that had nothing to do with President Trump’s trade policy: the strike at General Motors in the fall of 2019, which slashed U.S. production both of vehicles and parts, and of all the components and materials that comprise dedicated auto parts; and the safety problems at Boeing, which resulted in the grounding of its popular 737 Max model worldwide starting in March, 2019, and in a suspension of all that aircraft’s production this past January.

Also encouraging from a self-reliance standpoint. During the first quarter of 2019, the manufacturing trade deficit as a percentage of domestic manufacturing output sank from just under 43 percent in the fourth quarter of 2019 (and 43.36 percent for the entirety of last year) to 37.27 percent. That’s the lowest level since full-year 2013’s 35.82 percent.

These figures should make clear that the manufacturing trade deficit’s share of manufacturing output kept growing during the final Obama years and into the Trump years. Indeed, on an annual basis, this number peaked at 47.01 percent in the third quarter of 2019. To some extent, blame what I’ve previously identified as tariff front-running (the rush by importers throughout the trade war to bring product into the United States before threatened tariffs were actually imposed) along with those supply chain-related adjustment costs.

To complicate matters further, as suggested above, that very low first quarter result stemmed partly from the nosedive taken by manufacturing and other U.S. economic activity in March. Since that level is clearly artificially low, it’s probably going to bob up eventually – but hopefully not recover fully.

In all, though, the first quarter GDP by Industry report points to a future of more secure supplies of manufactured goods for Americans. And unless you believe that domestic manufacturers have completely lost their ability to adjust successfully to a (needed) New Normal in U.S. trade policy, the release points to a return of solid manufacturing output growth rates as well.

(What’s Left of) Our Economy: Is The Wall Street Journal Now Getting Woke on China Trade?

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allies, China, decoupling, dual-use technologies, health security, high tech goods, Huawei, investment, manufacturing, national security, technology, The Wall Street Journal, Trade, {What's Left of) Our Economy

Hell has frozen over! Death and taxes are no longer certain! Water is flowing uphill!

Those are just some of my calmer reactions upon learning that The Wall Street Journal editorial board has just endorsed the idea of a “partial decoupling” of America’s economy from China‘s.

Given today’s national mood, and the marked turn it’s taken against various domestic and international outrages committed by China, this may not sound surprising – especially if you (unlike me) haven’t immersed yourself in the trade policy wars Americans have waged against each in recent decades. But in a Mainstream Media long world filled with staunch supporters of the kinds of approaches to foreign trade and international commerce generally pursued by pre-Trump U.S. Presidents, the Journal‘s editorial writers have been far and away the staunchest. Indeed, their arguments usually read like they’ve been taken straight out of standard economic textbooks, without even paying lip service to real world complications.

Not that the Journal ever championed unfettered trade and commerce in war-time. (This exception was formally identified by the so-called Father of Capitalism, Adam Smith .) And not that it ever supported selling, say, weapons to the Soviet Union during the Cold War, or encouraging investment in North Vietnam during the 1960s and early 1970s.

But the editorial doesn’t describe today’s world in those terms. Instead, it notes that  “partial decoupling may be necessary to prevent China from accumulating more leverage to bully the free world.” and that “U.S. and allied dependence on Chinese technology in a crisis….could allow the Chinese Communist Party to disrupt or shut down parts of foreign economies—or use the threat as political leverage.”

And the Journal‘s editorial board is right. Those threats are more than serious enough to justify departures from conventional free trade and broader global economic policies – which understandably prize economic efficiency and low prices and individual economic freedoms during peacetime, but which have struggled to deal with those all too commonplace gray periods between tranquility and all-out conflict.

Yet however satisfying this apparent U-turn will be to the Journal‘s longtime trade antagonists (and take it from me – it’s really satisfying), for the sake of intellectual honesty, and of U.S. national interests, its editorial board will need to go much further. And so will other influential voices who are acting newly woke about the China threat, but who may mainly be looking for safe harbors during what they hope is merely a passing storm. Several reasons stand out, and all stem from the critical reality that no industry exists in isolation from other areas of the domestic economy – let alone other industries.

So to all the ostensible pragmatists who, for example have recognized – at least rhetorically – that national security needs to come before free trade and commerce, it’s high time to recognize the implications of a development you’ve long claimed to understand: that many products crucial for national defense also have major and even predominantly civilian functions, and that for such such dual-use goods and technologies (and not only semiconductors, but high-value manufactures of all kinds) strong domestic manufacturing bases are essential.

Moreover, maintaining strong domestic manufacturing bases requires maintaining robust production complexes for all the key parts and components of the final products.

These imperatives also apply to critical healthcare goods. For example, it doesn’t do much good to set as a goal making massive numbers of the most effective facemasks in America without also ensuring adequate domestic supplies of the raw materials and the machinery needed to make them. And currently, the global production centers are in China. Similarly, what’s the point of resolving to restore national self-sufficiency in ventilators when the nation remains woefully short of the circuit boards, sensors, computer chips, tubes, and numerous other parts they’re made of?

In addition, as pointed out repeatedly on RealityChek, the secure supply problem goes way beyond China. During the CCP Virus period, literally dozens of countries, including long-term treaty allies, have embargoed or curbed exports of healthcare equipment of all types. That is, as with war, there are few free traders during a pandemic.

The lessons of dealing with both China and the CCP Virus should be screamingly obvious: In their own ways, they both represent systemic problems, and therefore require systemic, not entity-by-entity or country-by-country, responses. Acknowledging these lessons will be the test of whether the Journal‘s editorial writers and others of their ilk actually are ready to play useful roles in developing realistic U.S. trade policies, or whether they’re simply posturing.

Glad I Didn’t Say That: No CCP Virus Learning Curve for Globalization Zealots

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China, Daniel Griswold, free trade, George Mason University, Glad I Didn't Say That!, global supply chains, globalization, health security, healthcare goods, Mercatus Center, Paul Hannon, Stu Woo, supply chains, The Wall Street Journal, Trade

“US supply chains for medical goods are already diversified and are not overly reliant on China.”

Daniel Griswold, Mercatus Center, George Mason University, April 3, 2020

Number of countries that have imposed export curbs on healthcare-related goods, 2020: 85

Number of individual healthcare-related goods export controls imposed, 2020: 186

– The Wall Street Journal, May 25, 2020

(Sources: “The Coronavirus Should Not Prompt Us to Rethink Globalization,” The Bridge, Mercatus Center, George Mason University, April 3, 2020, https://www.mercatus.org/bridge/commentary/coronavirus-should-not-prompt-us-rethink-globalization and “Steep Drop in Trade Flows Shows Pitfalls of Cross-Border Supply Chains,” by Paul Hannon and Stu Woo, The Wall Street Journal, May 25, 2020, https://www.wsj.com/articles/steep-drop-in-trade-flows-shows-pitfalls-of-cross-border-supply-chains-11590416983)

Im-Politic: A World Trade Organization Pull-Out Proposal that Falls Sadly Short

Tags

America First, CCP Virus, China, conservartives, coronavirus, COVID 19, export bans, GATT, General Agreement on Tariffs and Trade, health security, Im-Politic, Josh Hawley, Marco Rubio, national treatment, nationalism, non-discrimination, Populism, protectionism, reciprocity, Republicans, rules-based trade, sovereignty, Trade, unilateralism, World Trade Organization, WTO, Wuhan virus

I can barely describe how much I wanted to like Missouri Republican Senator Josh Hawley’s May 6 op-ed piece in The New York Times calling for a U.S. withdrawal from the World Trade Organization (WTO). That’s why I can also barely describe the growing disappointment I felt as I read through it.  At best, it deserves only an “A for effort” grade.

First, let’s give Hawley (considerable) credit where it’s due. As I’ve been arguing since it went into business at the start of 1995, and in fact was predicting during the national debate preceding Congress’ approval of the idea the fall before, the WTO has gravely harmed crucial American economic interests. (This recent post briefy summarizes my views.)

Let’s also give The Times op-ed page credit for running an article that’s even more strongly opposed to the pre-Trump U.S. trade policy status quo than President Trump has been – because although he’s approved policies that have thrown the WTO’s future into doubt, he’s never explicitly called for a pull-out, and in fact his administration has portrayed these measures as vital steps toward WTO reform.

Hawley, moreover, articulates many powerful indictments of the WTO’s failure to defend or advance U.S. interests satisfactorily – notably, the cover it’s given to China and other protectionist economies. 

Unfortunately, Hawley’s anti-WTO case and recommendations for going forward are fundamentally basedsed on two big misunderstandings. The first is that the pre-WTO global trading order set up by the United States was based on reciprocity, and therefore adequately safeguarded the interests of American workers. Absolutely not. In fact, the concept of reciprocity – holding that a country has no obligation to reduce its trade barriers any more than those of its partners – was explicitly rejected by the pre-WTO rules, which were known collectively as the General Agreement on Tariffs and Trade (GATT).

Instead, this global trade regime was based on two principles that actually entitled protectionist countries to maintain higher trade and related economic barriers than those of freer trading countries. The first was called non-discrimination. It simply urged all member countries to treat all other countries the same trade-wise. So if, say, Japan largely closed its markets to one country, all it needed to do to satisfy GATT rules was to treat other countries just as badly.

The second core GATT principle was called national treatment. Under its terms, member countries agreed to treat foreign-owned companies the same as their own companies. So if, say, a country like (again) Japan, which was is still known for fostering cartel-like arrangements that favored some of its own companies over others wanted to discriminate against whatever foreign companies it wished, that was OK according to the WTO.

Some limited exceptions were permitted to both principles. But they explain in a nutshell why Japan’s trade predation (among others’) inflicted so much damage on U.S.-based manufacturing during the WTO period, and why its own economy (among others’) remained so hermetically sealed throughout.

The GATT’s only saving grace – as I just tried to hint by using terms like “urged” and “agreed”  – was that its rules were essentially unenforceable. All told, though, it’s a lousy model for post-WTO U.S. trade policy.

The WTO has featured a strong enforcement mechanism, which is why Hawley (and other critics, like me) have rightly argued that the organization has eroded U.S. national sovereignty. But at the same time, Hawley wants to replace it with “new arrangements and new rules, in concert with other free nations, to restore America’s economic sovereignty and allow this country to practice again the capitalism that made it strong.”

If the rules are for all intents and purposes voluntary, as with the GATT, then fine – although the question then arises of why the rules are needed in the first place. And the question becomes particularly pointed when it comes to the United States, whose longstanding role as the world’s importer of last resort has long given it more than enough unilateral leverage to create all by itself whatever terms of trade it wishes with any trade partner.

At the same time, this business about creating new arrangements with “other free nations” reveals a second major flaw in Hawley’s argument: a belief that there are lots of other countries out there that agree with the United States on defining what is and isn’t acceptable in international trade and commerce. That kind of consensus is a sine qua non of any rules-based system. In fact, it needs to predate the formal creation of that system. The existence of the system itself can’t summon it into existence – unless one or a group of members can force holdouts to accept the consensus, which brings us back to the question of why countries with those capabilities need a system in the first place.

But if anyone really believed in the required preexisting consensus before the CCP Virus struck, their conviction should lay in smoking ruins now. Because as of March 21, no fewer than 54 countries worldwide had been imposing export curbs of some kind on medical supplies, and the same think tank that compiled this data reported that, as of early April, that number had risen to 70. And their ranks included many U.S. allies. So it should be obvious that, when major chips are down, global trade becomes more of a free-for-all than ever.

Hawley has been among those leading U.S. conservatives and Republicans who are trying to develop a nationalist and populist approach to both domestic and international U.S. policy-making that can survive President Trump’s departure from the White House. (Another has been Florida Republican Senator Marco Rubio.) And I’ve been very impressed by much of their work so far.

But if they’re genuinely concerned about transforming U.S. trade policy, they’ll recognize the need not only to pull the United States out of the WTO, but to replace that organization with a unilateral strategy incorporating the street smarts and the flexibility to free up America to handle its trade policy needs on its own. If others want to sign on and accept U.S. rules and unilateral enforcement, so much the better. But that kind of “America First” arrangement is the only kind of international regime that can adequately serve the national interest.

(What’s Left of) Our Economy: How Pre-Trump Trade Policies Devastated U.S. Protective Gear Capacity

Tags

apparel, CCP Virus, China, coronavirus, COVID 19, Fed, Federal Reserve, free trade, garments, health security, manufacturing, manufacturing capacity, NAFTA, non-durable goods, North American Free Trade Agreement, offshoring, textiles, Trade, Trump, World Trade Organization, WTO, Wuhan virus, {What's Left of) Our Economy

Recently I put up a post expressing gratitude that, despite their best efforts, pre-Trump U.S. trade policies didn’t manage to send the entire U.S. textile and apparel industries offshore. After all, companies in these sectors are the companies with the greatest expertise and capabilities in making all the personal protective equipment (PPE) crucial in the anti-CCP Virus fight.

Of course, the nation is therefore reliant for these and other medical products on countries, like China, which have responded to the emergency at various times with export bans. And in the case of pandemic-prone China, much production of all kinds was shut down temporarily because of the original virus outbreak.

Thanks to the release of the latest Federal Reserve industrial production data, it’s possible to quantify the damage done to these vital industries in ways other than the output figures I presented in that previous offering. That’s because the Fed’s monthly releases report in detail not only on increases or decreases in after-inflation output for manufacturing (and related) sectors. They also report the monthly changes in industrial capacity – the resources and facilities available to turn out various goods.

The results through last month are below. They use as baselines the month the North American Free Trade Agreement (NAFTA – which has now been turned into the U.S.-Mexico-Canada Agreement) went into effect, and the month that China entered the World Trade Organization (WTO). NAFTA’s January, 1994 onset signaled to many the transformation of U.S. trade policy into U.S. offshoring policy (see my book, The Race to the Bottom, for this argument). The January, 2002 beginning of China’s WTO membership gave the People’s Republic  overall, and its even-then-immense textile and especially apparel sectors, invaluable protection against American responses to its various forms of trade predation. (Limited safeguards versus “market-disrupting” surges in imports from China were written into the WTO agreement.)

For comparison’s sake, the industrial capacity changes for non-durable goods manufacturing (the super-sector into which textiles and apparel are grouped), and total manufacturing are provided as well:

                                                       Since NAFTA onset    Since China WTO entry

Textiles:                                              -37.05 percent              -44.05 percent

Apparel & leather goods:                   -81.97 percent              -77.18 percent

Non-durables manufacturing:           +17.06 percent                -2.23 percent

Total manufacturing:                         +75.54 percent             +10.78 percent

Clearly, the decimation of apparel capacity sticks out prominently. But although the more capital-intensive textiles industry didn’t suffer nearly as much, it fared much worse than either manufacturing in toto or the non-durables sectors overall. That’s largely because as the apparel industry disappeared, so did a prime domestic customer for textiles producers.

It’s also obvious for all these categories that although NAFTA was, to say the least, hardly a bonanza, the big trade-related damage was done by China’s WTO entry. Afterward that event has been when the shrinkage of textiles capacity accelerated, when the vast majority of the post-NAFTA apparel damage was done, when non-durables capacity gains shifted into reverse, and when total manufacturing capacity growth slowed to a crawl.

Calls are now abounding for remedies to the resulting shortages – like greater stockpiling and various tax and subsidy incentives for reshoring at least some of this production. But material in stockpiles can decay if unused too long, and companies would be foolish to spend heavily on new U.S. factories if they still face the likelihood of being subsidized and dumped out of existence by predatory foreign trade policies. As a result, there’s no substitute for stiff tariffs, and a credible national resolve to keep them in place, for ensuring that America’s health security never becomes so degraded again.

(What’s Left of) Our Economy: How Bad Will it Get?

Tags

Baby Boom, CCP Virus, Cold War, coronavirus, COVID 19, Edward Harrison, Federal Reserve, Great Depression, Great Recession, health security, military spending, moral hazard, recession, recovery, secular stagnation, small business, start-ups, technology, Trump, uncertainty, unemployment, World War II, Wuhan virus, {What's Left of) Our Economy

How bad economically? That’s a CCP Virus-related question everyone’s understandably asking these days. In fact, last night one of my social media friends expressed the super-bear case pretty compellingly:

“I can’t see any way this is not going to destroy us. No one will have any money, so they won’t buy anything, won’t pay their bills, can’t pay rent or mortgages. No spending power means no employment. More layoffs. certainly as soon as stores open there wil be a rush to sell everything, a rush to normal, hoping for the best, but I think this is pretty much The End of life as we know it.”

And an economy-watcher I know with an unusually good feel for finance is awfully pessimistic, too – and has been right so far about the virus’ impact on output, employment, and the markets.

I’m feeling even less confident than usual in my economy crystal ball (that’s a low bar). The main reason of course is that the current U.S. nosedive, as I (and nearly everyone else) have observed, isn’t a standard recession or depression. That is, it hasn’t been caused either by some built-in weakness in the economy that finally becomes too big to ignore or paper over, or similar problems in the financial system that wind up wrecking the “real economy.” We can’t even blame the current crisis on some outside economic shock, like the boost in global oil prices that wreaked such economic havoc in the 1970s.

Even so, here are four somewhat related, extremely tentative thoughts that I hope will help readers form their own judgments about the American economy’s future. Spoiler alert: They’re pretty pessimistic.

First, the fundamentally biological nature of the crisis creates the kind of uncertainty that’s unprecedented in modern times, and that consumers, businesses, and investors will hate even more than usual. For example, what if there’s a second wave? Or a third? How will these three groups of economic actors respond to attempted restarts of economic activity that, however gradual or rolling, turn out to be premature?

Worse, what if the CCP Virus is here to stay for the time being, and treatments can only become good enough to reduce it to the status of a really nasty flu? And what if it mutates into something requiring qualitatively different cures?

Second, because of all these possible biology-rooted uncertainties, I fear that many of the standard arguments for expecting a relatively quick, strong rebound should be thrown out the window. All of them, after all – including President Trump’s – apparently assume that the timeout mandated in most of the economy’s consumption (and that therefore inevitably undermines its business spending) is creating lots of frustrated demand that will burst into actual spending once the crisis passes.

One big historical precedent cited: the aftermath of World War II. At that time, officials inside the federal government feared that growth would fizzle at best for two main reasons. First, the massive boost to growth and employment delivered by wartime military spending would dramatically fade. Second, this pessimism was no doubt greatly reenforced by the nation’s immediate pre-war experience – a lengthy and deep depression that showed no signs of ending until the global fascist threat inspired a pre-Pearl Harbor military buildup.

But after the war, consumption came back with a vengeance – because the main threats on everyone’s mind were decisively defeated; because so many Americans had lots of income to spend; because Washington laid the ground for more income-earning with programs like the G.I. Bill, along with war-time advances in science and technology that boasted phenomenal peacetime uses; and because baby-making boomed along with consumption, juicing demand for more housing in particular.

And let’s not forget the Cold War! The household spending binge did slow in 1947 and 1948. But by 1949, defense spending began rising again, and it really took off from 1951 on, once the Korean War in particular convinced policymakers that a global Communist threat was alive and here to stay.

Today, however, determining when the major threat is finally over is much more difficult. Unemployment is sure to rise much higher than the 5.9 percent pre-Korean War peak (in 1949), meaning that not only will incentives to save remain stronger, but that much more income is being lost. And nothing like a post-World War II Baby Boom was even in sight before the CCP Virus struck. Indeed, the arrows were pointing in the opposite direction. A post-virus repeat seems unimaginable.

The one interesting possible reason for purely economic optimism? A new military spending surge – perhaps spurred by worries about China? And new healthcare products investment might jump as well, possibly boosted by government incentives, to prevent a repeat of current supply shortages.

The third consideration weighing on my mind is the separation factor. Even if post-virus improvement is solid, I wonder how sustainable it will be. The main reason is that, at least during past episodes of major job loss (e.g., the last decade’s Great Recession that followed the global financial crisis), many of the unemployed face big difficulties returning to work in any form, and particular difficulties finding work at previous pay levels. Because the longer unemployment lasts, the harder these obstacles generally become, and because of the likely rate joblessness is likely to hit, this separation factor could become considerable even if unemployment insurance and other income supports do turn out to be generous enough to sustain such economic victims until the nation reaches “the other side.” 

The separation factor, moreover, may go beyond workers. I don’t by any means rule out the possibility that significant numbers of small business owners may call it quits, too – either because cratering demand for their products and services will kill off their enterprises, because the the government aid being offered doesn’t cover all their losses for long enough, or because they conclude that applying for the aid just isn’t worth the candle.

Sure, new start-ups will fill part of this gap. But all of it? Not if the abundant pre-crisis evidence of a significant drop-off in such entrepreneurism is any indication.

Fourth, also reenforcing the bear case: Although the roots of the current economic mess are dramatically different from those of the last near-meltdown and recession, the “whatever it takes” response of the federal government and the Federal Reserve are remarkably similar. As pointed out by Edward Harrison, the economy- and finance-watcher I cited above, on the one hand, the authorities probably don’t have a choice. On the other, this thick, pervasive safety net did produce an epidemic of “moral hazard” – financial decisions in particular that turn out to be bad but that initially look smart because confidence in some form of bailout reduces the perceived risks and costs of mistakes.

As I explained previously, the last outbreak of moral hazard took a painful pre-virus economic toll, as the resulting inefficient use of capital helped produce  one of the weakest economic recoveries American history. In fact, it’s produced a theory that I personally find as convincing as it is depressing (personally): secular stagnation. It holds that the economy has become so fundamentally unproductive and inefficient that the only way it’s been able to generate even adequate (not especially strong) levels of growth has been for government to inflate bubbles of various kinds (with all its moral hazard-creating spending and guarantees) that, of course, eventually burst. So it doesn’t seem at all unreasonable to believe that the upcoming recovery will be similarly feeble.

Even worse, according to Harrison, even the current official backstopping might not suffice to prevent defaults by the financially weakest businesses – which would generate their own harmful spillover effects.

I’m not saying that there’s no case for optimism – at least cautious optimism. The overall long-term historical momentum for improvement in living conditions the world over is very impressive. As a result, doom-saying has a lousy record in the post-World War II period in particular. Technological advance isn’t going to stop, and may not even slow much. Maybe most important, at least in the medium-term, the human desire to acquire and consume shows no signs of having vanished.

So maybe the safest conclusion to come to (however unsatisfyingly timid): This time won’t be completely different. But don’t bet on a simple, and particularly a quick, return to pre-virus times.

Making News: Jim Bohannon Interview on America’s Compromised Health Security Now On-Line; Returning Tonight to Batchelor Show on China & Supply Chains

Tags

CCP Virus, China, coronavirus, COVID 19, Gordon G. Chang, health security, healthcare goods, Making News, manufacturing, medicines, pharmaceuticals, supply chains, The Jim Bohannon Show, The John Batchelor Show, Wuhan virus

I’m pleased to announce that the podcast is on-line of my interview last night on Jim Bohannon’s nationally syndicated radio show.  Click here for a great discussion of America’s troubling dependence on foreign sources of supply for vital medicines and other healthcare products.

Also, I’m slated to return on John Batchelor’s nationally syndicated radio show tonight. John, I, and co-host Gordon G. Chang will be looking at how the CCP Virus crisis is likely to change global supply chains and trade products not only for healthcare products, but for all domestic industry, especially when it comes to China.

Tonight’s segment is a little different from usual, because virus-related disruption has led John to tape his programs for now, and I haven’t yet been told exactly when this particular segment will air.

I’ll certainly post that information on Twitter (a compelling reason to follow me there at @AlanTonelson!), but in the meantime, here‘s where you can listen on-line to this evening’s show.  I’ll be posting a link to that podcast as soon as one’s available. And of course, keep checking with RealityChek for news of other upcoming media appearances and other developments.