(What’s Left of) Our Economy: Encouraging Brexit Lessons for the United States

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Brexit, China, decoupling, European Union, Eurozone, Financial Times, France, Germany, IMF, International Monetary Fund, United Kingdom, {What's Left of) Our Economy

Some awfully interesting evidence supporting my view (see, e.g., here) that the United States is uniquely positioned in the world to prosper quite nicely from seeking to maximize its already high degree of economic self-sufficiency has just emerged — and from some awfully unlikely sources.

It’s indirect evidence, to be sure, and concerns the United Kingdom’s (UK) economic perfomance since the Brexit referendum of 2016 that mandated its pull-out from the European Union. But it’s relevant to the United States’ situation because the U.S. economy is far more actually and potentially self-sufficient.

The evidence – from the ardently globalist International Monetary Fund (IMF) and from the just-as-ardently anti-Brexit Financial Times – makes clear that since the UK finally left the EU at the end of January, 2020, it’s gross domestic product (GDP – the standard measure of a national economy’s size), has not only risen about as fast as those of the major members of the EU, but that it’s closed the gap that existed pre-withdrawal. And all the while, the UK has reaped a crucial benefit – much more control over its future.

The IMF evidence came in today’s release of its World Economic Outlook – a twice yearly Fund publication that surveys the state of the globe and includes growth forecasts for major countries, geographic regions, and formal groupings of countries like the eurozone (which overlaps pretty thoroughly with the EU).

According to the Fund, last year, the UK economy expanded by 7.4 percent in inflation-adjusted terms (the most closely monitored gauge of growth). The figure for the countries using the euro as their currency? A mere 5.4 percent. And it’s not like the lagging eurozone performance was dragged down by its long-time economic laggards. Germany’s real 2021 growth was a measly 2.8 percent, and France’s much better seven percent still trailed the UK’s.

In other words, a single country that’s cut itself off from all the alleged benefits of economic integration with a much larger market had out-grown the collective members of that market that presumably were enjoying all the economic advantages of such integration.

Moreover, the IMF’s latest projection for this year crowns the UK as a growth winner, too. Its 2022 price-adjusted GDP is forecast to improve by 3.7 percent, versus 2.8 percent for the euro area. The French after-inflation growth rate is expected to top the UK’s slightly (2.9 percent), but Germany’s will be stuck at a lowly 2.1 percent.

The only solace Brexit-haters can take from the IMF analysis is that the UK supposedly will fall way behind growth-wise next year. Its real GDP performance is pegged at a mere 1.2 percent – slower than that of the euro area (2.3 percent), France (a not-so-impressive 1.4 percent), and Germany (a respectable 2.7 percent, but a performance coming off an unusually low baseline). Yet needless to say, it’s much more reasonable to put more stock in near-term predictions and longer-term predictions.

In addition, even with this possible slowdown, the Financial Times graph below (taken from this article) shows that, despite its glass-half-empty title, if the IMF is right about 2022, the UK will have turned itself from a growth laggard in 2019 compared with France and Germany to a growth equal. And although the 2023 projections are tough to see in this graphic, they show near parity among the three.

Two qualifications to these findings need to be made. First, as I’ve repeatedly noted, all economic data for the last few years has been dramatically affected and surely distorted by the CCP Virus pandemic. Second, although the UK left the EU, it still does business with the bloc and its economic ties with the rest of the world stayed the same organizationally.

At the same time, for years after the referendum vote, businesses in the UK had been dealing with major uncertainties and the inevitable short-term costs of the negotiations over Brexit’s precise withdrawal procedures and terms. And the growth figures make obvious that, on the whole, they and the entire economy have managed to navigate them successfully.

And if the UK has so far emerged successfully from its Brexit-style decoupling from the EU, it’s hard to imagine that the much more economically diverse United States can’t emerge from a much more determined decoupling from China – which will promote vital and intertwined economic and national security interests – at least as well.

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(What’s Left of) Our Economy: The IMF Strikes Out on Supply Chain Security

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antitrust, Biden administration, Buy American, CCP Virus, competition, coronavirus, COVID 19, health security, IMF, International Monetary Fund, manufacturing, national security, reshoring, supply chains, Ukraine, Ukraine-Russia war, World Trade Organization, WTO, {What's Left of) Our Economy

An impressive body of evidence (see, e.g., here and here) is now shedding light on the dangers of letting specialists in a single field (in this case, public health) dictate policy toward a multi-dimensional challenge like the CCP Virus. For all their supposed expertise on virology and epidemiology, the leaders of the U.S. Centers for Disease Control and Prevention and the National Institutes of Health simply weren’t qualified to take into account the affects of indiscriminate lockdowns and mandates on measures of well-being like economic growth, employment and living standards; educational attainment; and even other dimensions of physical and psychological well-being like opioid use and childhood development.

The best outcomes were always likeliest to come from elected leaders able to see the bigger picture (at least in theory) by drawing on the views of experts from all relevant disciplines.

Just recently, the International Monetary Fund (IMF) has unwittingly exposed the dangers of letting economists dictate national responses to the varied perils underscored first by the pandemic and now by the Ukraine war of over-reliance on problematic suppliers of critical goods in a wide range of industries.

According to a chapter in its new forthcoming World Economic Outlook, the kinds of “Policy proposals to reduce dependence on foreign suppliers, especially in strategic sectors [that] have gained prominence…including in major markets such as Europe and the United States…may be premature, if not misguided.” Instead, “greater diversification in international sourcing of inputs and greater substitutability in input sourcing” would be a much better approach to strengthening supply chain resilience and ensuring adequate access to these products.

But at least when it comes to the United States, the IMF doesn’t even describe the situation accurately. It’s true that during his presidential campaign, Joe Biden set a goal of boosting U.S. manufacturing output, that a principal aim has been improving supply chain security, and that one element of his plan has been to replace imports with U.S.-made goods via better enforcement of the federal government’s Buy America programs. Moreover, the President has been following through.

But it’s also true, as I’ve pointed out repeatedly, that the Biden approach also includes exactly the kind of supplier diversification urged by the IMF – specifically to countries like treaty allies that supposedly deserve to be “trusted.”

And even though these new supply chain policies are mainly intended to achieve crucial goals like enhanced national security and health security, the Fund’s study defines these aims out of existence. As observed in the Wall Street Journal‘s coverage, “The analysis didn’t address that some countries are seeking to bolster domestic supply chains as a national-security issue, and not strictly as the most economically efficient option.”

In fact, like the Biden administration, the IMF study also overlooks a major lesson on the reliability of diversity that became glaringly obvious during the worst days of pandemic. During that terrible first wave in early 2020, no fewer than 80 countries imposed limits on their exports of healthcare goods. These countries – which clearly prioritized the health of their own citizens over that of foreign populations, much less over global trade rules – included all the major economies of Western and Central Europe (even the United Kingdom), along with South Korea.

Yet this IMF study fails on some major purely economic grounds, too. Most important, it ignores the United States’ vast and distinctive degree of self-sufficiency in a wide range of goods and services, and its impressive potential to achieve more. As I wrote in this 2019 article, there’s no reason to doubt that the huge and already highly diverse U.S. economy can handle the great majority of its own economic needs while maintaining entirely satisfactory degrees of the benefits of competition (e.g., low prices, high quality, continuous innovation) by taking anti-trust enforcement much more seriously.

In short, I noted, what’s essential for keeping pressure on businesses to keep getting better isn’t “international competition.” For an economy the scale of the United States, domestic competition should nearly always suffice if government policies help maintain its intensity.

In fact, some confirmation of this claim just appeared in a new study by the World Trade Organization (WTO) on how the Ukraine war could well affect global trade and economic development. Looking further down the road, the WTO examined five possible post-Ukraine scenarios for global trade, with the most extreme being the splitting of the world “into two hypothetical blocs with only low trade barriers remaining within each bloc. This means that trade between blocs would be replaced by trade within blocs in this scenario.”

The WTO’s economists believe that this outcome would reduce global output of goods and services by five percent as compared with a future in which world trade patterns remain basically the same. But the cost to the U.S. economy was much less – just one percent.

The WTO calls all these projections under-estimates because trade within these blocs probably won’t increase, and because for several other reasons, such decoupling would create a much messier and even less efficient structure for global trade.

Yet the United States, for its part, has ample incentive to replace its imports of relatively unsophisticated manufactures from East Asia with purchases from Mexico and Central America – curbing immigration. In fact, the American textile industry has just informed us that this scenario is beginning to play out.

Moreover, there’s no reason to think that even WTO’s relatively optimistic decoupling projections for the United States have taken into account America’s extensive possibilities for replacing imports with domestic goods if competition levels within the country are ratcheted up by breaking up monopolies and oligopolies.

Finally, both the IMF and the WTO completely overlook the enormous purely economic advantages the U.S. economy would reap from decoupling – like better chances of preventing and mitigating the staggering economic costs of future pandemics, and the greater certainty businesses would enjoy from reduced vulnerability from geopolitical turmoil abroad, or from the caprice that even allied countries displayed during the pandemic. Think of decoupling as insurance – which businesses and individuals alike seem to view as a pretty economically sensible investment, even if the IMF and the WTO apparently have never heard of the concept.

Following Up: Podcast Now On-Line of National Radio Interview on Ukraine War, Manufacturing, & Reshoring

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CBS Eye on the World with John Batchelor, China, Following Up, globalization, Gordon G. Chang, IMF, International Monetary Fund, lockdowns, logistics, manufacturing, reshoring, supply chains, Trade, transportation, Ukraine, Ukraine-Russia war, Zero Covid

I’m pleased to announce that the podcast of my interview Wednesday night on the nationally syndicated “CBS Eye on the World” with John Batchelor is now on-line.

Click here for a timely discussion (with co-host Gordon G. Chang, too) on how U.S. domestic manufacturing is coping with the Ukraine war and other global supply chain snags – including a possible scenario John brings up that clearly throws me for a loop.  We also comment on a new report from the International Monetary Fund questioning whether reshoring industry back to the United States makes sense in the first place. 

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

 

(What’s Left of) Our Economy: Why the U.S. Still Holds the Winning Economic Cards Versus China

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Biden, CCP, China, Chinese Communist Party, CNBC.com, consumers, consumption, demographics, Donald Trump, export-led growth, gross domestic product, IMF, International Monetary Fund, per capita GDP, population, technology, Trade, trade wars, workforce, {What's Left of) Our Economy

Since there seems to be no end in sight to the rise in U.S.-China tensions, it’s especially interesting that two analyses of the Chinese economy and its future that challenge some widely held views on the subject have just appeared. Also noteworthy: They matter greatly for America’s perceived prospects for success, and one of them comes from the Chinese Communist Party (CCP) itself.

More important still:  When you put them both together, the implications look positively startling – and encouraging – for America’s prospects in its economic and technological struggle with the People’s Republic.

The first apparently contrarian information comes from the International Monetary Fund in the form of this chart.

It shows recent and projected trends in U.S. and Chinese gross domestic product (GDP) per capita – that is, how much economic output each country turns out adjusted for population. This statistic is a valuable gauge of economic power and affluence because it reveals which national economies (or the economies of any other political unit) are a certain size simply because their populations are a certain size (big or small), and which economies are doing a particularly good or bad job generating goods and services given how many people are doing the producing.

For example: Let’s say you have one economy with a population of 100 and one with a population of 10,000, and the latter generates twice as much economic output than the former. The more populous country would have the larger economy in absolute terms, but its performance wouldn’t be seen as especially impressive because it took so many people to achieve this result – and indeed orders of magnitude more people than the smaller population economy.

Moreover, the latter economy would have much less wealth to distribute among its own people than the former, and therefore each of its citizens would be a good deal poorer than their counterparts in the smaller economy all else being equal.

But let’s not dismiss the bigger economy’s record altogether. For if the two ever fought a war – all else equal again – the bigger economy would have much more in the way of resources to build and equip a military, and keep it fighting, than the smaller.

Throughout modern history, the U.S. economy has greatly exceeded China’s by both measures, but because of the amazing progress made in recent decades by the People’s Republic and a slowdown in U.S. growth, China has been able to close the gap in terms of the size of the two economies. In fact, many forecasters (as made clear in the CNBC.com post containing the chart), believe that the Chinese will catch up before too long. As indicated above, the implications are sobering for Americans if the two countries come to blows, and by extension for any diplomatic jockeying they engage in – for relative military power always casts a political shadow.

China’s overall catch up has been so fast that you might think that the per capita GDP gap that’s been so large because China’s population has been so much bigger than America’s might start narrowing, too. But the chart makes clear that this hasn’t been the case at all. Indeed, the gap has continued to widen, and is projected to keep widening at least for the next four years.

And this finding and prediction suggests that the unquestionable surge in living standards that China has been able to foster due to its rapid growth – which has led so many U.S. and other non-Chinese businesses to pin their future hopes largely on selling to this huge and supposedly ever-burgeoning market – won’t even come close to American living standards for many years. So if the chart is right, the purchasing power growth of the typical Chinese will stall out at pretty low levels and disappoint many of these corporate hopes.

As a result, fears that a thorough “decoupling” of the two economies resulting mainly from U.S. concerns about over-dependence on an increasingly hostile country will kneecap many U.S.-based businesses and possibly the entire American economy could be seriously overblown, at least longer term. For if the chart is right, these expectations will be revealed as unrealistic no matter what course Washington follows – and even if China displayed any willingness (which it hasn’t) to permit foreign businesses to make any more inroads into its economy than are absolutely necessary.  (See here for the latest – and an unsually explicit – official Chinese designation of “complete” economic self-reliance as a goal.)  

All of which brings us to the second contrarian take on China that’s been expressed recently – and by the Communist Party. It’s a finding from the Deputy Director of a party-run research institute that the country’s “Consumption has already past the phase of rapid increase and will only rise slowly in the future.” And his opinion deserves big-time credibility because he clearly believed that he could express such a downbeat view without getting his head chopped off, or being sent for a few decades to a reeducation camp, or risking punishment for any immediate family and relatives.

In addition, however, Xu cited two specific, interlocking reasons for this judgement: an aging population and a shrinking workforce.  And although he seemingly didn’t mention this, if China will need to temper its plans to generate more economic growth through its own domestic consumption, it will need not only to rely more on the kinds of infrastructure investment he did cite.  It will also need to keep relying heavily on exports – which should ensure that the United States will retain plenty of leverage over the People’s Republic with its tariffs as long as the Biden administration decides to leave them in place. 

None of this means that former President Trump was right in claiming that trade wars are “easy to win,” or that maintaining satisfactory technological superiority will be a piece of cake, either, or that generally the United States can stop worrying so much about China threats on these scores.  But it does mean that if American leaders have the will to prevail – and to advance and safeguard U.S. interests adequately – they’ll have plenty of wallet to use.                                    

 

Following Up: The CCP Virus is Making the Case for Free Trade Look Ever Sicker

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CBO, CCP Virus, China, Commerce Department, Congressional Budget Office, coronavirus, COVID 19, Financial Times, Following Up, free trade, GDP, Goldman Sachs, gross domestic product, Guggenheim, IMF, inflation-adjusted growth, International Monetary Fund, Morningstar, output gap, real GDP, Trade, Wuhan virus

A month ago, I put up a post claiming that the gargantuan economic losses stemming from the CCP Virus outbreak were shredding the standard economics case for free trade. Essentially, most economists have long insisted that the gains from trade always exceeded the losses that might be suffered by individual parts of the economy and their workers. (I purposely excluded the debate over whether more trade has exacted excessive non-economic costs, like eroded national security or more pollution.) Even better, the freest possible international trade flows would create enough additional wealth to permit generous compensation for these losers.

But I then documented that the virus-related hit to American economic output – which will clearly had stemmed from decades of freeing up trade and broader commerce with China – had already dwarfed the trade gains claimed even by cheerleaders for doing ever more business with the People’s Republic.

One month later, the China trade bonanza estimates haven’t gotten any better. But the projections of damage to the U.S. economy have greatly worsened.

My April 6 post cited two leading private sector forecasts of U.S. output losses for this year, measured in terms of gross domestic product (GDP) adjusted for inflation – Morningstar’s figure of $954 billion, and Goldman Sachs’ judgment of nearly $725 billion.

Since then, some official figures have been released, and most are bigger. For example, on April 29, the U.S. Commerce Department came out with its first read on real GDP for the first quarter of this year. Even though most of that January through March period preceded the onset of various shutdown orders across the nation, the Commerce statisticians still found that the economy shrank by 4.87 percent at an annual rate in price-adjusted terms. This means that if output kept falling at that rate for all of 2020, by year-end the economy would be $928.86 billion smaller than on New Year’s Day.

That’s still a smaller production plunge than estimated by Morningstar, but Commerce (as usual) never actually predicted that the drop-off would remain constant. Its annualized figures are simply notional.

A few days before, the Congressional Budget Office did engage in some prediction. Its expectation of constant-dollar GDP decline in 2020 was $1.27789 trillion. The International Monetary Fund’s (IMF) expectation for the U.S. economy was pretty similar – a $1.1253 trillion slump in inflation-adjusted U.S. GDP.   

As also noted in last month’s post, though, virtually everyone agrees that CCP Virus-induced damage will continue beyond 2020, and the way most economists try to quantify such losses is by calculating what they call an output gap. It’s an effort to specify how much lower output will be over a period of time as a result of a shock like the virus compared with how an economy would have performed had the shock never taken place.

The last time a major output gap-estimating exercise took place was in the aftermath of the Great Recession – caused by a shock resulting from the bursting of closely related credit and housing bubbles. As shown by the chart below (originally published in the Financial Times), a team at Guggenheim investments at least consider the gap to have started in 2010 (the first year after the recovery is generally thought to have started) at about $750 billion (according to my eyeballs). Thankfully, it proceeded to shrunk steadily thereafter. But the bad news is that it shrunk so slowly that the lost growth wasn’t made up for until 2018 – eight years later.

Nevertheless, if the Guggenheim economists are right, that output gap literally was nothing compared with the one that CCP Virus’ outbreak will open up. It starts this year at about $2.7 trillion (again, as my eyeballs see it) after factoring in price changes, and it closes at a rate no faster than that seen during the last economic recovery – which was historically sluggish. In other words, the decision to free up trade with China could cost the United States economy trillions of dollars of lost growth year after year for the foreseeable future.   

Maybe during this period, someone or some organization will come up with a study of the gains to America from freer trade with China that will claim purely economic benefits orders of magnitude greater than previously judged. In order to preserve a serious case that such trade expansion has turned out satisfactorily for the United States, they’ll have to.

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

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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 )

 

(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.

(What’s Left of) Our Economy: Some Surprising New Data on Manufacturing and Trade

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China, IMF, International Monetary Fund, manufacturing, manufacturing jobs, Nicholas Lardy, Peterson Institute for International Economics, Trade, Trade Deficits, trade surpluses, World Bank, World Economic Outlook, {What's Left of) Our Economy

That was some chart in this week’s newest International Monetary Fund (IMF) update on the world economy on how different countries (including the United States) have fared when it comes to increasing or maintaining their manufacturing employment and their manufacturing output. (The detail in the below reproduction is tough to see, but for the original, see p. 5 in the third chapter of the Fund’s April World Economic Outlook.) 

 

Looking at performance for 20 high-income countries and 20 low-income countries, it makes clear that, contrary to the conventional wisdom, there’s nothing unusual about national economies boosting manufacturing jobs as a share of total jobs, and manufacturing output as a share of total output, at the same time. So it’s a powerful retort to claims from American globalization cheerleaders that all over the world, in rich and poor countries alike, both manufacturing indicators are bound to fall in relative terms as economies inevitably evolve in more services-oriented directions.

And at the very least, it calls into question the notion that trade balances in manufacturing have little or nothing to do job loss in the sector in particular. For example, according to the chart, 22 of the 40 countries examined have boosted manufacturing as a share of their employment and their real value-added (a measure of output) from 1960 through 2015. And 11 of these were high-income countries, where the conventional wisdom says manufacturing’s economic importance is likeliest to shrink over any significant time frame.

Of these 22 countries, 17 ran surpluses in their combined goods and services trade in 2015. And nine were high-income countries.

Not that trade surpluses are automatic indicators of economic success: This group does include economically stagnant Italy as well as economically collapsing Venezuela. Spain, which experienced a terrible stretch during the last recession, is on this list, too – although it’s been a strong grower more recently. And there’s one country whose failure to qualify sure surprised me: Germany. Nonetheless, the countries that have excelled at manufacturing during this period also include major success stories like Chile, the Netherlands, Sweden, Ireland, Singapore, South Korea, Malaysia, and of course China (along with Japan, which is currently in the midst of its best growth stretch in nearly three decades).

Of course, the 1960-2015 time frame is still problematic at best, especially for China – since in 1960 it was still being run by leaders enamored with ideas like making steel in peasants’ backyard furnaces. But more recent comparisons between China and the United States look much more instructive – and supportive of the idea that a strong manufacturing trade performance is a great way to maintain robust manufacturing employment and production – and of its converse.

Let’s examine the post-2002 period – with the baseline chosen because that’s the year China actually joined the World Trade Organization, and began receiving WTO-style protection for its predatory, surplus-building trade practices. And for manufacturing output, let’s use pre-inflation value-added, since I wasn’t able to find inflation-adjusted data for China.

According to World Bank figures, manufacturing by this measure dipped from 31.06 percent of China’s economy in 2002 to 29.38 percent – a 5.72 percent decline. For the United States, between 2002 and 2015 manufacturing value-added as a share of gross domestic product (GDP) fell from 13.74 percent to 12.27 percent. That 10.70 drop-off was nearly twice that of China.

As for employment, Sinologist Nicholas Lardy of the Peterson Institute for International Economics (and no hardliner on China) has compiled Chinese statistics dating from 2003, and covering employment in the country’s cities. They show that manufacturing jobs as a share of this China total rose from 15 percent that year to 20 percent in 2014. In the United States during those years, manufacturing employment as a share of total non-farm jobs (the U.S. Bureau of Labor Statistics’ American jobs universe), dropped from 11.91 percent to 8.76 percent.

And nowhere have the manufacturing differences between the two economies been greater than in trade flows. For the first year of its WTO membership, China’s goods and services trade surplus (which was mainly in manufacturing) was $30.35 billion. By 2014, it was ballooned to $382 billion. During this period, the American manufacturing trade deficit shot up by just under 74 percent – from $362.64 billion to $629.53 billion.

So the new IMF chart (and related data) by no means ends the debate over whether trade balances impact national manufacturing employment and output. But if I was a globalization cheerleader, I’d sure hope they didn’t attract too much attention.

Our So-Called Foreign Policy: More Childish Attacks on Trump

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alliances, allies, Council on Foreign Relations, foreign policy establishment, George H.W. Bush, Greece, IMF, International Monetary Fund, international organizations, internationalism, Iran deal, JCPOA, Joint Comprehensive Plan of Action, journalists, Mainstream Media, media, military bases, NAFTA, New Zealand, North American Free Trade Agreement, Our So-Called Foreign Policy, Paris climate accord, Philippines, Richard N. Haass, Ronald Reagan, TPP, Trans-Pacific Partnership, Trump, UN, UNESCO, United Nations, Withdrawal Doctrine, World Bank, World Trade Organization, WTO

I’m getting to think that in an important way it’s good that establishment journalists and foreign policy think tank hacks still dominate America’s debate on world affairs. It means that for the foreseeable future, we’ll never run out of evidence of how hidebound, juvenile, and astonishingly ignorant these worshipers of the status quo tend to be. Just consider the latest fad in their ranks: the narrative that the only theme conferring any coherence on President Trump’s foreign policy is his impulse to pull the United States out of alliances and international organizations, or at least rewrite them substantially.

This meme was apparently brewed up at the heart of the country’s foreign policy establishment – the Council on Foreign Relations. Its president, former aide to Republican presidents Richard N. Haass, tweeted on October 12, “Trump foreign policy has found its theme: The Withdrawal Doctrine. US has left/threatening to leave TPP, Paris accord, Unesco, NAFTA, JCPOA.” [He’s referring here to the Trans-Pacific Partnership trade deal that aimed to link the U.S. economy more tightly to East Asian and Western Hemisphere countries bordering the world’s largest ocean; the global deal to slow down climate change; the United Nations Educational, Scientific and Cultural Organization; the North American Free Trade Agreement, and the Joint Comprehensive Plan of Action – the official name of the agreement seeking to deny Iran nuclear weapons.]

In a classic instance of group-think, this one little 140-character sentence was all it took to spur the claim’s propagation by The Washington Post, The Atlantic, Marketwatch.com, Vice.com, The Los Angeles Times, and Britain’s Financial Times (which publishes a widely read U.S. edition).  For good measure, the idea showed up in The New Republic, too – albeit without mentioning Haass.

You’d have to read far into (only some of) these reports to see any mention that American presidents taking similar decisions is anything but unprecedented. Indeed, none of them reminded readers of one of the most striking examples of alliance disruption from the White House: former President Ronald Reagan’s decision to withdraw American defense guarantees to New Zealand because of a nuclear weapons policy dispute. Moreover, the administrations of Reagan and George H.W. Bush engaged in long, testy negotiations with long-time allies the Philippines and Greece on renewing basing agreements that involved major U.S. cash payments.

Just as important, you could spend hours on Google without finding any sense in these reports that President Trump has decided to remain in America’s major security alliances in Europe and Asia, as well as in the United Nations, the International Monetary Fund, the World Bank, and the World Trade Organization (along with a series of multilateral regional development banks).

More important, you’d also fail to find on Google to find any indication that any of the arrangements opposed by Mr. Trump might have less than a roaring success. The apparent feeling in establishment ranks is that it’s not legitimate for American leaders to decide that some international arrangements serve U.S. interests well, some need to be recast, and some are such failures or are so unpromising that they need to be ditched or avoided in the first place.

And the reason that such discrimination is so doggedly opposed is that, the internationalist world affairs strategy pursued for decades by Presidents and Congresses across the political spectrum (until, possibly, now) is far from a pragmatic formula for dealing with a highly variegated, dynamic world. Instead, it’s the kind of rigid dogma that’s most often (and correctly) associated with know-it-all adolescents and equally callow academics. What else but an utterly utopian ideology could move a writer from a venerable pillar of opinion journalism (the aforementioned Atlantic) to traffick in such otherworldly drivel as

“A foreign-policy doctrine of withdrawal also casts profound doubt on America’s commitment to the intricate international system that the United States helped create and nurture after World War II so that countries could collaborate on issues that transcend any one nation.”

Without putting too fine a point on it, does that sound like the planet you live on?

I have no idea whether whatever changes President Trump is mulling in foreign policy will prove effective or disastrous, or turn out to be much ado about very little. I do feel confident in believing that the mere fact of rethinking some foreign policy fundamentals makes his approach infinitely more promising than one that views international alliances and other arrangements in all-or-nothing terms; that evidently can’t distinguish the means chosen to advance U.S. objectives from the objectives themselves; and that seems oblivious to the reality that the international sphere lacks the characteristic that makes prioritizing institution’s creation and maintenance not only possible in the domestic sphere, but indispensable – a strong consensus on defining acceptable and unacceptable behavior.

One of the most widely (and deservedly) quoted adages about international relations is the observation, attributed to a 19^th century British foreign minister, that his nation had “no eternal allies, and we have no perpetual enemies. Our interests are eternal and perpetual, and those interests it is our duty to follow.” Until America’s foreign policy establishment and its media mouthpieces recognize that this advice applies to international institutions, too, and start understanding the implications, they’ll keep losing influence among their compatriots. And rightly so.

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

Tags

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

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

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

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

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

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

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

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

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

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

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