(What’s Left of) Our Economy: Can the U.S. Chamber Put One & One Together on Trade?

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Cheap Labor Lobby, Donald Trump, free trade agreements, General Electric, Information Technology Agreement, ITA, Jobs, multinational corporations, national security, non-tariff barriers, offshoring, Ooffshoring Lobby, protectionism, tariffs, U.S. Chamber of Commerce, {What's Left of) Our Economy

I’ve long urged trade policy critics (including Republican presidential candidate Donald Trump) to stop questioning the intelligence of globalization cheerleaders. Especially, when we’re talking about offshoring-happy multinational corporations and their hired guns in Washington, I’ve insisted, they’ve known exactly what they’ve been doing – pushing the trade and other international economic policies likeliest to reward the companies with the biggest profits in the shortest time-frame.

True, the longer-term effects have produced losses for many of them – especially since the immense imbalances resulting from these policies helped trigger the financial crisis and ensuing Great Recession, which at least initially hit earnings and stock prices. But charges of stupidity don’t seem valid even in this regard, since most of the American economic system’s incentives discourage long-term thinking.

A new U.S. Chamber of Commerce report, however, could justify a rethink. For it’s a great example of an organization ignoring evidence that’s been staring it in the face for literally decades – and that’s become especially glaring recently. Moreover, it inadvertently validates the claim made by American politicians like Trump that major numbers of manufacturing jobs could be returned to the United States if Washington only mustered the will to do so.

The Chamber, of course, has been one of the most powerful mainstays of the overlapping corporate offshoring and cheap labor lobbies, and this morning released a study bemoaning the worldwide growth of what’s often called “techno-protectionism.” That is, more and more countries have been working harder and harder to promote their own domestic information technology industries through a variety of new regulations that the Chamber rightly notes have cloaked simple beggar-thy-neighbor aims in national security rationales.

In the Chamber’s words, “some national governments, by intentionally or unintentionally defining security concerns in an overly broad manner, are applying intense pressure on the [tech] sector to localize rather than globalize.” And the group has echoed numerous charges that China is a prime culprit.

The Chamber’s long list of these practices underscores points that I and many others have been making since even before trade and offshoring became hot-button issues. The first is that such non-tariff barriers, which are excruciatingly difficult for trade agreements to deal with meaningfully, have become much more important obstacles to international commerce than more easily identifiable and therefore vulnerable tariffs and quotas. The second is that, since foreign governments with secretive bureaucracies can erect and maintain these barriers much more effectively than the more transparent United States, trade agreements with these governments usually shaft America.

Yet groups like the Chamber have typically ignored or dismissed these concerns – largely because they produce so much overseas, and care so little about whether their products are Made in America or not. Indeed, their foreign factories and other facilities actually often benefit from the host countries’ subsidies and various forms of protection.

That’s why the Chamber so enthusiastically greeted the announcement late last year that Washington had negotiated a new global agreement to free up further trade in technology products. This broadening of a 1997 pact – the Information Technology Agreement, or ITA – was hailed by the Chamber as “welcome news for American companies and the workers they employ” because it would “end tariffs on approximately $1 trillion worth of high-tech products….” Consistent with my above analysis, none of the dozens of non-tariff barriers that distorted this tech trade was even mentioned.

Less than a year later, we see the Chamber complaining that these largely hidden trade barriers have not only remained so influential, but are spreading so rapidly that they “are now threatening to slow or even reverse” the “globalization of the [tech] sector.” Translation: Despite supposed landmark achievements like the ITA (and the long string of similar deals that preceded it starting with the North American Free Trade Agreement) protectionism worldwide has both remained in place and become so widespread that it’s now handcuffing self-styled global businesses that had hitherto boasted of their power to ignore borders.

In this respect, the Chamber is echoing a recent lament of General Electric’s CEO, who complained that localization pressures have become so pervasive and intense that his giant firm has no choice but to bow before them.

As I pointed out in covering this corporate confession, the global economy features one immense exception to this spreading protectionism – the United States. And ironically, it’s America that has the world’s greatest store of the kind of leverage needed to pursue this strategy successfully. Trump-ian politicians have been saying nothing more remarkable than that this leverage should be used. Reports like the Chamber’s today can only make it that much more difficult for Trump-ian opponents to dismiss this idea as delusional.

(What’s Left of) Our Economy: Debt-Strapped America is Still the World’s Leading Growth Engine

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China, Congress, consumption, debt, export-led growth, exports, Financial Crisis, Information Technology Agreement, intermediate goods, Obama, offshoring, South Korea, TPP, Trade, trade Deals, Trade Deficits, Trans-Pacific Partnership, {What's Left of) Our Economy

Although I wasn’t planning on posting today, some data was released yesterday that underscores two major points about the nature of the world economy and the dangers it still face it that can’t be repeated often enough.is

The data seem pretty arcane – on South Korea’s exports. But that country’s trade patterns exemplify broader flows that have created a dangerously lopsided international economic system, that in fact set the stage for the last financial crisis, and that threaten to create a rerun.

The headline development is that Korea’s exports dropped sharply on a year-on-year basis in December – which in a conventional sense spells bad news for the U.S. and world economies. Korea’s, after all, is an economy heavily dependent on exporting. If its overseas sales are crumbling, that’s a strong indication that the economies of customer countries are too weak to buy much of what the Koreans sell.

But the real import of the new statistics concerns where the fall-offs have been biggest and smallest. Most important of all, virtually none of it took place in shipments to the United States. Specifically, Korea’s overall goods exports (no figures were provided on services exports) plunged by 13.80 percent from December, 2014 to this past December. But they dipped only 0.60 percent to America.

This disparity is the latest evidence that the United States is still playing its traditional contemporary role of global importer of last resort – even though its own growth is lagging. In fact, America’s overall goods imports have been growing much faster than its goods output (let alone its goods exports!) since the current economic recovery technically began back in the summer of 2009. That kind of growth can only be fueled by debt accumulation – which led to such misery in 2007 and 2008.

More broadly, because of the losses in real incomes resulting from years of the offshoring-friendly trade policies they pursued so avidly, U.S. leaders during the previous decade recognized that their ability to stay in power depended on one of two hopes materializing. First, against all odds and evidence, incomes in offshoring destination countries would rise so dramatically that Americans could increase their own earnings by supplying those new markets. Second, Washington could encourage the public to maintain its living standards by substituting borrowing for earnings. Since the first hope was dashed, the second was peddled – and like all houses of cards, ultimately collapsed.

But in addition to showing that the United States and its binge consuming remains the world’s import sponge – and thus growth engine – the Korea trade data make clear that China is not, as widely supposed, performing this function. Here’s why. China’s ostensible growth role stems from its status as the top export market for not only Korea, but most of East Asia. That, however, doesn’t mean that China is where most Korean or other Asian exports are finally consumed – which is what would be needed for China to deserve its growth leader title. After all, China’s economy is export-led itself. So what gives?

As reported in a Bloomberg article on the new trade figures, two-thirds of Korea’s goods exports to China are intermediate goods. They’re the inputs for final products – parts, components, materials, and the like, along with machinery and equipment – that are assembled in the People’s Republic. Many of the final products are sold in China, whose own growth is slowing. But many others need to be exported from China. And a large share goes to the United States.

So U.S. growth is what really pulls along economic activity throughout throughout the string of countries that largely serve as its supply chain – which includes China itself. And lagging American growth is what sends this process into reverse, including in China, even though cheap credit continues enabling U.S. imports to grow much more than they should.

It would be great to report that Washington is on the case and working to diligently to prevent worsening trade imbalances from moving the nation and world closer to another near-financial collapse – and perhaps a bigger one. But in 2012, President Obama and Republican Congressional leaders cooperated to win approval of a U.S.-Korea trade deal practically formulated to supercharge America’s bilateral deficit. And this past year, they secured trade promotion authority for the president that greatly increases the odds of Congressional passage of a Pacific Rim trade deal (the Trans-Pacific Partnership, or TPP) structured in much the same way. Moreover, a less publicized global trade deal covering high tech products, the Information Technology Agreement, is likely to have similar effects. And you thought Charlie Brown letting Lucy hold for his place kicks had a shallow learning curve?

(What’s Left of) Our Economy: Why the Latest World Trade Failure Should be Celebrated

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agriculture, Alan Greenspan, bubbles, China, Congress, developed countries, developing countries, Doha Round, Federal Reserve, Financial Crisis, George W. Bush, Global Imbalances, Information Technology Agreement, ITA, Obama, offshoring, poverty, Robert Zoellick, September 11, terrorism, TPP, Trade, trade law, Trans-Pacific Partnership, World Trade Organization, WTO, {What's Left of) Our Economy

Trade policymakers have just uncharacteristically – and perhaps unwittingly – given the world economy an important holiday gift: a virtual decision to kill the so-called Doha Development Round of world trade liberalization talks.

This outcome of the latest meeting of the World Trade Organization (WTO) in Nairobi won’t make an active contribution to solving global economic problems. But it greatly reduces the odds that additional multilateral trade expansion will keep worsening the kinds of international economic imbalances that helped trigger the last financial crisis and keep threatening to set the stage for a new meltdown.

The Doha round (named after the capitol of Qatar, where it was launched) was a product of the September 11 terror attacks, but was whoppingly misconceived both strategically and economically. Though intended to spur the prosperity needed in developing countries ostensibly needed to reduce terrorism’s appeal, its founders – notably President George W. Bush’s administration trade chief Robert Zoellick – seemed unaware that dangerous extremism had never taken hold in most world regions where poverty was most desperate, e.g., rural India and rural China. Moreover, the round’s explicit aim of channeling most of its trade liberalization benefits to developing countries completely violated the core principles of genuinely free trade.

But those mistakes and their impact paled next to the damage likely from a treaty reflecting the Doha goals – ever greater global financial instability stemming from trade flows that fostered the offshoring of production, and therefore income-earning opportunities, to countries that would still long remain too poor to consume adequately, and away from the rich-country populations (especially America’s) whose purchasing power was still crucial for adequate global growth.

By the time the Doha talks were inaugurated, in 2001, years of NAFTA-style, offshoring-centric U.S. trade liberalization decisions capped by China’s admission into the WTO had already recklessly placed the U.S. and world economies on a completely unstable course. The Bush administration and the Federal Reserve under Alan Greenspan further greased the skids for crisis with two decisive moves. The former filled the resulting American income and growth shortfall with renewed, and record, federal budget deficits. The latter even more powerfully fueled consumption with prolonged (then) record low peacetime interest rates. For half a decade, the United States experienced an unprecedented burst of debt-led, bubble-ized growth. And then the entire global economy nearly collapsed.

Success at Doha was always bound to magnify world trade imbalances further and ensure even more badly lopsided growth by requiring the United States and other developed countries to open their markets much wider and faster than low-income countries. Particularly important were measures practically certain to gut the U.S. trade laws that shielded America’s domestic economy from foreign predatory trade practices like export subsidization and dumping. In fact, the inequities were so egregious that even America’s staunchly pro-trade liberalization agricultural sector, which has long wielded outsized influence in Congress, balked; its reservations began the Doha hold-up that eventually brought its demise.

Unfortunately, another recent international trade policy decision is likely to add to dangerously distorted global growth – the new Information Technology Agreement reached under WTO auspices, which eliminates tariffs on many tech products but does nothing about the non-tariff barriers and predatory commercial practices used so heavily by so many U.S. trade rivals. New financial pressures may also be fueled if Congress passes the Trans-Pacific Partnership (TPP) trade deal pursued so avidly by President Obama. As I’ve often explained, this agreement’s text does target non-tariff barriers, but creates no mechanisms even remotely capable of actually curbing their use. Therefore, it’s all but certain to create the trade deficit-boosting, finance destabilizing effects of the previous American trade agreements on which it’s modeled.

All the same, TPP ratification this year looks doubtful, given election-year opposition by major Republicans in Congress. Doha’s death would represent a second “do no harm” decision in a single year – certainly not enough progress on the trade policy front, but considerably better than nothing.

Following Up: Obama’s Tech Trade Deal is a Success America Will Regret

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2016 election, China, currency manipulation, Donald Trump, Following Up, free trade agreements, Hillary Clinton, Information Technology Agreement, non-tariff barriers, Obama, subsidies, technology, Trade, Trade Deficits, value-added taxes, VATs

Since earlier this week I chided the Obama administration for prematurely declaring victory in reaching a global trade deal to phase out tariffs on information technology products, I’m honor-bound to report today that the final obstacles have been cleared and the agreement has been reached. Now for the bad news: This new World Trade Organization deal looks even worse for the United States as other recent agreements like President Obama’s Trans-Pacific Partnership (TPP).

Now that China has finally submitted its time-frame for eliminating duties on the 201 products covered in the Information Technology Agreement (ITA), the agreement is on track to enter into force next July. The staged tariff-cutting process could be problematic, vulnerable as it is to changing national and global economic conditions and thus to political will. But from the American standpoint, the biggest problem with the ITA mirrors some of the biggest problems with Washington’s previous trade deals: It promises to get rid of whatever trade barriers the United States still maintains, but leaves in place many of the biggest trade barriers erected by foreign governments.

As noted in a post last year, the ITA ignores non-tariff barriers (NTBs) and other forms of trade predation.  These longstanding policies and practices block a wide range of American exports and artificially boost the competitiveness of foreign products, and are much less prevalent in the United States. Recently, such measures have of course grown much more important in tech giant China in particular, as Beijing has stepped up its harassment of foreign-owned companies in order benefit the domestic champions it’s trying to build and to secure advanced knowhow.

Because foreign government bureaucracies, especially in East Asia, work so secretively, non-tariff barriers are often notoriously difficult for American companies and officials to identify with any precision, much less tackle. Therefore, even trade deal provisions that ban or curb them are never especially promising. But at least the TPP mentions them in the text and takes a stab at creating disciplines. The ITA negotiators’ apparent position? “Never heard of ’em.”

Moreover, like the TPP, the ITA leaves in place the foreign value-added taxes (VATs) that serve as hidden barriers to U.S. exports and hidden subsidies for foreign goods headed for the United States. VATs are used by nearly all significant trading countries, with the conspicuous exception of America. And like the TPP, the ITA ignores currency manipulation – a huge mistake given China’s apparent determination to weaken the yuan once again, and the fondness for exchange-rate protectionism displayed historically by many other major and emerging information technology producers ranging from Japan to Vietnam.

As a result, the only clear American winners from the ITA will be offshoring-happy U.S. technology companies whose business models have long emphasized supplying the high-income United States from countries whose production costs are super low, whose governments are enthusiastic subsidizers, or both. These firms’ profits may improve, but the U.S. economy will see even bigger trade deficits, and therefore even slower growth, even less hiring, and even weaker wage hikes.

During this campaign season, many establishment politicians have suggested that bombastic Republican presidential front-runner Donald Trump, a strong trade policy critic, is actually working for his Democratic counterpart Hillary Clinton. Trade deals this incompetent or special interest-driven make one wonder whether President Obama is actually working for Trump.

Those Stubborn Facts: No Art to This Obama WTO Tech Trade Deal

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China, Information Technology Agreement, ITA, Michael Froman, Obama, tariffs, technology, Those Stubborn Facts, Trade, U.S. Trade Representative, USTR, World Trade Organization, WTO

“Last night, we reached a breakthrough in our ongoing efforts to expand the Information Technology Agreement [ITA]. This is a WTO agreement that eliminates tariffs on high-tech products among 54 economies, including the U.S. and China….it shows that the U.S. and China work together to both advance our bilateral economic agenda, but also to support the multilateral trading system.”

–U.S. Trade Representative Michael Froman, November, 2014

“ITA’s completion is a major win for American technology exporters and a step forward for President Obama’s Middle Class Economics trade agenda.”

–Office of the U.S. Trade Representative, July, 2015

“Nearly five months after 54 WTO member economies agreed to expand the scope of duty-free products under the Information Technology Agreement (ITA), China has not pared down the number of products that it wants to keep tariffs on for an extended period of five to seven years.”

—South China Morning Post, December 11, 2015

(Sources: “What They’re Saying: Breakthrough in Negotiations of the WTO Information Technology Agreement,” Tradewinds: The Official Blog of the United States Trade Representative, Press Office, Office of the United States Trade Representative, November, 2014, https://ustr.gov/tradewinds/2014/November/What-Theyre-Saying-Breakthrough-in-Negotiations-of-WTO-Information-Technology-Agreement; “U.S. Lead WTO Partners in Clinching Landmark Expansion of Information Technology Agreement,” Press Release, Press Office, Office of the United States Trade Representative, July, 2015, https://ustr.gov/about-us/policy-offices/press-office/press-releases/2015/july/us-leads-wto-partners-clinching#; and “China ‘has not budged an inch’: Beijing urged to make changes to global tariff-cut deal on ICT products ahead of WTO meet,” by Bien Perez, South China Morning Post, December 11, 2015, http://www.scmp.com/tech/innovation/article/1889830/china-has-not-budged-inch-beijing-urged-make-changes-global-tariff)

(What’s Left of) Our Economy: China to Foreign Tech Firms: “Get Lost”

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China, comparative advantage, free trade, government procurement, Information Technology Agreement, protectionism, self-sufficiency, technology, Trade, {What's Left of) Our Economy

So much excitement (of both kinds) over the last 24 hours about President Obama’s predominantly symbolic announcement yesterday that full diplomatic relations would be restored with Cuba. And so little about a development that actually threatens America’s prosperity and national security, not to mention mountains of dollars in corporate profits: Bloomberg.com’s report that China is systematically moving to end its reliance on foreign technology products and services and replace them with domestic supplies.

No one who’s been reading RealityChek or following my previous writings will be surprised. I’ve long maintained that China’s leaders completely reject the foundational ideas of global free trade and commerce. Whereas Americans and so many others continually preach the virtues – and indeed the inescapability – of comparative advantage and specialization, Beijing therefore quite reasonably sees no need for China to rely on foreign inputs of anything that its homegrown enterprises can provide themselves.  Once this domestic capability is developed — typically by extorting technology — foreign competitors get shown the door.

Indeed, China’s reasoning is something that I’ve urged Americans to take seriously: With the world’s first or second-biggest economy (depending on how you measure it), and a huge chunk of the globe’s population, China potentially is large and diverse enough to create a critical mass of the benefits of competition within its own borders. Beijing places a heavy burden of proof on those insisting that the further advantages of buying imported goods and services outweigh the costs and risks (including the perils of using high tech hardware and software from the United States that could be bugged).

But whether the Chinese (or yours truly) are indeed right or wrong on this matters much less than their government’s determination to act on these convictions, and the Bloomberg article makes clear that Beijing’s policy of maximizing self-sufficiency is entering a new phase. The state-owned sector from which foreign technology products and services are to be barred by 2020 represents a market that reportedly was in the $180 billion neighborhood last year, and in China, the so-called private sector surely won’t be far behind. Nor is there any reason to believe that Beijing will limit its drive for self- sufficiency to information technology sectors.

The Obama administration is definitely aware of China’s techno-protectionism. Its responses? First, bring Beijing in to a global trade regime that prohibits discrimination against imports in government procurement, and second, conclude another global agreement to abolish tariffs on a wide range of high tech goods. But these approaches continue to wish away China’s long record of ignoring similar treaty obligations, and Washington’s equally long record of making only the weakest monitoring and enforcement efforts. Add to this the news that Beijing has just decided that it didn’t want to stop protecting certain key info-tech goods, thereby scuttling the new tech trade deal for the time being.

Will U.S. leaders reading the Bloomberg report recognize it as the equivalent of a two-by-four blow to Washington’s China trade delusions?  Or will they be too busy obsessing about trifles like Cuba?

(What’s Left of) Our Economy: Obama’s Fatally Flawed China Environment and High-Tech Trade Deals

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APEC, Asia, China, climate change, environment, greenhouse gases, Information Technology Agreement, non-tariff barriers, Obama, tariffs, technology, trade enforcement, Xi JInPing, {What's Left of) Our Economy

Boy, it’s been some Asia trip for President Obama so far! On the heels of a major defeat for Democrats in the midterm elections, he jets off to Beijing for meetings with Asian leaders and comes away with sweeping deals on fighting climate change and cutting tariffs on trade in high tech goods!

Trouble is, both of these agreements illustrate both that negotiating successfully with China in particular – the 800-lb gorilla on both of these issues – requires recognizing and overcoming a distinctive set of obstacles, and that, like its predecessors, the Obama administration has displayed absolutely no learning curve. The biggest losers, tragically, are bound to be the productive sectors of the American economy and their employees.

Let’s take the U.S.-China climate change agreement first, since it’s predictably dominated the news coverage. There’s no doubt that Chinese dictator Xi Jinping needs to do something to reduce the pollution choking China’s cities, and especially the massive health problems it’s causing. Or maybe it’s more accurate to say that he needs to appear to be doing something. I know it sounds cynical to dismiss his assent to the deal as an exercise in public relations for Chinese leaders. But optimists face a heavy burden of proof.

After all, this is a Chinese leadership that simply decided simply to shut down most polluting activity – like driving and manufacturing – in order to clear the air around Beijing temporarily for the APEC summit. (For good measure, reportedly, it’s blocking Chinese websites and apps that monitor pollution levels from using U.S. government data on the subject – which are regarded as much more reliable than Chinese government data.)

But it’s also a Chinese leadership presiding over a slowing economy, well aware that its hold on power depends heavily on continuing to deliver the material goods for a critical mass of the Chinese people, and surely recognizing that the price of failure could well be bad for its collective health. If you think Kentucky and West Virginia coal miners are upset about Washington policies they believe are attacking their industry and livelihoods, imagine the reactions to job losses by Chinese workers whose living standards are far more precarious, and who lack orderly, democratic outlets for their anger.

So it’s all too easy to conclude that Xi decided to react like any politician with strong interests of fostering the appearance, not the reality, of action. He inked an agreement that is long on impressively ambitious goals and woefully devoid of any teeth.  None of the targets for reducing greenhouse gas emissions are legally binding, and as a result, there are no concrete consequences China will suffer for failing to achieve them.

Moreover, even these voluntary targets don’t have to be met for at least a decade. Who knows who China’s dictator will be then? Or how seriously he (or she) will take these commitments – largely because no one can know how the Chinese economy will be performing then. It’s difficult enough to bind American politicians to long-term promises. Why would anyone assume that Chinese politicians will be any different in this respect?

As a result, as critics have begun to point out, there’s much more reason to believe that the United States will meet these targets, or at least will come closer, than China. Which means that the regulatory and therefore cost gaps between manufacturing in the United States and manufacturing in China could grow even wider. It’s true that domestic U.S. businesses can maintain or regain competitiveness by becoming more innovative and otherwise more productive (or by cutting wages even further). But manufacturers in China can keep growing more efficient as well, leaving American industry further behind the 8-ball than ever.

If anything, the new Information Technology Agreement looks even more misguided. China’s agreement to expand the number of technology products for which it will reduce tariffs to zero (though the timeframes are still completely up in the air) seems great at first glance – until you realize what everyone who knows anything about doing business in Asia has known for decades: The most important Chinese and other Asian barriers impeding trade in technology products are not tariffs, which are easy to spot and therefore cut or eliminate. They’re non-tariff barriers.

And especially because these measures and practices – which include subsidies, domestic preferences in government purchases, officially sanctioned monopolies and cartels, and discriminatory pseudo health and safety regulations – are often put into effect informally, by secretive bureaucracies in Asia particular, they tend to be excruciatingly difficult even to identify, much less combat.

Consequently, even if the world’s mercantile countries (which are found in Europe, too, complete with opaque bureaucracies) do eliminate tariffs on these technology products, all these non-tariff barriers and other predatory policies will remain in effect. And because they’re so seldom used by Washington, U.S.-based producers of these goods will find themselves more disadvantaged than ever.

President Obama seems to believe that many of these Asian and other non-tariff trade barriers will be taken care of in the Trans-Pacific Partnership (TPP) trade agreement he’s pursuing. But he’s been more interested in repeating vague slogans about mandating high economic and business standards in these talks than in explaining how the agreement will overcome the intrinsic difficulties of monitoring and enforcing these standards.

If the United States could afford to treat trade and other international economic issues as throwaways, mainly useful for scoring propaganda points or winning and keeping allies, Mr. Obama’s approach to these two deals might be defensible. But even during the Cold War, the frequent subordination of economic considerations to diplomatic goals arguably won short term victories at the expense of longer-term interests. Nowadays, there can be no question that approaches like these have become completely unaffordable, if not downright dangerous. Six years into his presidency, Barack Obama acts like he’s further from understanding this reality than ever.