(What’s Left of) Our Economy: A Deceptively Calm January for U.S. Trade?

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Advanced Technology Products, ATP, Biden, Buy American, Canada, CCP Virus, China, Donald Trump, European Union, exports, Federal Reserve, goods trade, imports, India, Inflation Reduction Act, infrastructure, Japan, Made in Washington trade flows, manufacturing, monetary policy, non-oil goods trade, semiconductors, services trade, stimulus, Taiwan, tariffs, Trade, trade deficit, Ukraine War, Zero Covid, {What's Left of) Our Economy

Pretty calm on the surface, pretty turbulent underneath. That’s a good way to look at yesterday’s official release of the U.S. trade figures for January. Many of the broadest trade balance figures moved little from their December levels, but the details revealed many multi-month and even multi-year highs, lows, and changes – along with one all-time high (the goods deficit with India).

The combined goods and services deficit most strongly conveyed the impression of relatively calm trade waters. It rose sequentially for the second straight month, but only by 1.61 percent, from a downwardly revised $67.21 billion to $68.29 billion.

The trade shortfall in goods narrowed, but by even less – 0.69 percent, from an upwardly revised $90.71 billion to $90.09 billion.

More volatility was displayed by the services trade surplus. It sank for the first time in two months, from upwardly revised $23.50 billion (its highest monthly total since December, 2019’s $24.56 billion – just before the CCP Virs’ arrival stateside) to $21.80 billion. Moreover, this shrinkage (7.26 percent) was the greatest since last May’s 11.05 percent.

Meanwhile, total U.S. exports in January expanded sequentially for the first time since August. And the the 3.41 percent rise, from a downwardly revised $249.00 billion to $257.50 billion was the biggest since April’s 3.62 percent.

Goods exports in January also registered their first monthly increase since August, with the 6.02 percent improvement (from a downwardly revised $167.69 billion to $177.79 billion) the biggest since October, 2021’s 9.09 percent.

Services exports dipped on month in January, from a downwardly revised $81.32 billion to $79.71 billion. And the 1.98 percent decrease was the biggest since last January’s 3.05 percent. But the December total was the highest on record, and the seventh straight all-time high over the preceding nine months, so January could be a mere bump in the services export recovery road.

On the import side, total U.S. purchases from abroad advanced for the second straight month in January, with the 3.03 percent increase (from a downwardly revised $316.21 billion to $325.79 billion standing as the biggest since last March’s 9.64 percent.

Goods imports were up, too – from a downwardly revised $258.40 billion to $267.88 billion. The climb was the second straight, too, and its 3.67 percent growth rate also the biggest since March (11.00 percent).

Services imports in January were up for the first time since September, but by a mere 0.17 percent, from a downwardly revised $57.81 billlion to $57.91 billion.

Also changing minimally in January – the non-oil goods deficit (which RealityChek regulars know can be considered the Made in Washington trade deficit, since non-oil goods are the trade flows most heavily influenced by U.S. trade agreements and other trade policy decision. The 0.32 percent month-to-month decline brought this trade shortfall from $91.97 billion to $91.68 billion.

Since Made in Washington trade is the closest global proxy to U.S.-China goods trade, comparing trends in the two can indicate the effectiveness of the Trump-Biden China tariffs, which cover hundreds of billions of dollars worth of Chinese products aimed at the U.S. maket.

In January, the huge, longstanding U.S. goods trade gap with China widened by 7.01 percent, from $23.51 billion to $25.16 billion. That third straight increase contrasts sharply with the small dip in the non-oil goods deficit – apparently strengthening the China tariffs critics’ case.

Yet on a January-January basis, the China deficit is down much more (30.82 percent) than its non-oil goods counterpart (14.07 percent). The discrepancy, moreover, looks too great to explain simply by citing China’s insanely over-the-top and economy-crushing Zero Covid policies. So the tariffs look to be significantly curbing U.S. China goods trade, too.

U.S. goods exports to China fell for the third straight month in January – by 5.05 percent, from $13.79 billion to $13.09 billion.

America’s goods imports from China increased in January for the second straight month – by 2.55 percent, from $37.30 billion to $38.25 billion.

Revealingly, however, on that longer-term January-to-January basis, these purchases are off by 20.50 percent (from $47.85 billion). The non-oil goods import figure has actually inched up by just 0.71 percent – which also strengthens the China tariffs case.

The even larger, and also longstanding, manufacturing trade deficit resumed worsened in January, rising for the first time in three months. The 2.83 percent sequential increase brought the figure from $113.61 billion – the lowest figure, though, since last February’s $106.49 billion.

Manufacturing exports declined by 3.01 percent, from $105.71 billion to $102.52 billion – the weakest such performance since last February’s $94.55 billion.

The much greater value of manufacturing imports rose fractionally, from $219.31 billlion to $219.36 billion – also near the lows of the past year.

In advanced technology products (ATP), the trade gap narrowed by 11.36 percent in January, from $18.45 billion to $16.35 billion. The contraction was the third in a row, and pushed this deficit down to its lowest level since last February’s $13.42 billion.

ATP exports were down 8.78 percent, from $35.16 billion to $32.07 billion – their lowest level since last May’s $31.25 billion. And ATP imports sank by 9.68 percent, from $53.60 billion to a $48.42 billion total that was the smallest since last February’s $42.44 billion.

Big January moves took place in U.S. goods trade with major foreign economies, though much of this commerce often varies wildly from month to month.

The goods deficit with Canada, America’s biggest trade partner, jumped by 39.02 percent on month in January, from $5.09 billion to $7.07 billion. The increase was the second straight, the new total the highest since last July’s $8.47 billion, and the growth rate the fastest since last March’s 47.61 percent.

But the goods shortfall with the European Union decreased by 10.83 percent, from $18.36 billion to $16.37 billion. The drop was the third straight, the new total the lowet since last September’s $14.44 billion, and the shrinkage the fastest since last July’s 19.97 percent.

For volatility, it’s tough to beat U.S. goods trade with Switzerland. In January, the deficit plummeted 42.07 percent, from $2.28 billion to $1.32 billion. But that nosedive followed a 77.84 percent surge in December and one of nearly 1,200 percent in November (from a $99.9 million level that was the lowest since May, 2014’s $45.3 million).

Also dramatically up and down have been the goods trade shortfalls with Japan and Taiwan. For the former, the deficit plunged by 30.33 percent in January – from $7.09 billion to $4.94 billion. But that drop followed a 20.58 percent increase in December to the highest level since April, 2019’s $7.35 billion.

The Taiwan goods deficit soared by 52.44 percent in January, from $2.80 billion to $3.68 billion. But this rise followed a 33.65 percent December drop that was the biggest since the 43.18 percent of February, 2020 – when the CCP Virus was shutting down the economy of China, a key link of the supply chains of many of the island’s export-oriented manufacturers.

Finally, the goods deficit with India skyrocketed by 106.55 percent in January, from $2.41 billion to that record $4.99 billion. That total surpassed the $4.44 billion shortfall the United States ran up with India last May, but the more-than-doubling was far from a record growth rate. That was achieved with a 146.76 percent burst in July, 2019.

Since the widely forecast upcoming U.S. recession seems likely to arrive later this year (assuming it arrives at all) than originally forecast, the trade deficit seems likely to continue increasing, too. But that outcome isn’t inevitable, as shown by the deficit’s shrinkage in the second half of last year, when America’s economic growth rebounded from a shallow recession.

The number of major wildcards out there remains sobering, too, ranging from the path of U.S. inflation and consequent Federal Reserve efforts to fight it by cooling off the economy, to levels of net government spending increases (including at state and local levels), to the strength or weakness of the U.S. dollar, to the pace of China’s economic reopening, to the course of the Ukraine War. 

On balance, though, I’ll stick with my deficit-increasing forecast, since (1) I’m still convinced that the approach of the next presidential election cycle will prevent any major Washington actors from taking any steps remotely likely to curb Americans’ borrowing and spending power significantly for very long; and (2) I’m skeptical that even the strong-sounding Buy American measures  instituted by the Biden administration (mainly in recently approved infrastructure programs and semiconductor industry revival plans, and in the green energy subsidies in the Inflation Reduction Act) will enable much more substitution of domestic manufactures for imports – least in the foreseeable future.          

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(What’s Left of) Our Economy: 2022 Saw More U.S. Trade Deficits but More Secure Supply Chains

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Advanced Technology Products, ATP, Biden adminstration, Canada, Central America, Dominican Republic, European Union, friendshoring, Germany, Immigration, Japan, manufacturing, Mexico, offshoring, South Korea, supply chains, Taiwan, Trade, Trade Deficits, U.S.-Mexico-Canada Agreement, USMCA, Vietnam, {What's Left of) Our Economy

Sometimes the best-laid plans of mice and men etc etc. So this second look by RealityChek at the final (for now) year-end 2022 official U.S. trade figures is coming out today, rather than yesterday, as I expected.

The big takeaways: First, record deficits were set practically everywhere the eye can see – and on top of sizable increases – when it comes to trade flows in manufacturing, advanced technology products (ATP), and with nearly all of America’s major trade partners (except China, which was covered Friday).

Second, and more encouragingly, regionalization of U.S. trade within the Western Hemisphere kept growing, which is (a) surely making supply chains more secure; and (b) creating more economic opportunity in countries that have long sent the United States large numbers of migrants. In other words, the Biden administration goal of “friendshoring” keeps becoming a thing. 

The biggest absolute numbers were turned in by U.S. manufacturing, which saw its huge, chronic deficit rise by 13.46 percent, from $1.32544 trillion to a twelfth straight record $1.50379 trillion. (Unless otherwise specified, all figures in this post will be in pre-inflation dollars, which are the trade data most closely followed by students of the economy.)

And in context, these figures look just as bad. Although full-year, 2022 results won’t be available until late March, when the pre-inflation manufacturing output numbers come out, as of the third quarter, the manufacturing shortfall stood at 53.09 percent of its value-added production (a measure that avoids significant double counting for complex goods made up of lots of parts and components). That marks the first time this number has topped fifty percent.

Moreover, it could well climb further, since in inflation-adjusted terms, manufacturing output has weakened significantly in the fourth quarter.

The only remotely optimistic development: The growth rate of the manufacturing trade deficit last year slowed from 2021’s 18.84 percent.

The trade gap in advanced technology products widened even faster last year – by 24.58 percent, from $195.95 billion to a sixth consecutive all-time high $244.11 billion.

An even stronger goods trade deficit increase was registered by America’s partners in the United States-Mexico-Canada Agreement (USMCA) – the successor to the North American Free Trade Agreement (NAFTA). This shortfall worsened by 34.12 percent, from $158.19 billion to a second straight record .$212.17 billion.

The most dramatic USMCA deficit change came in U.S-Canada goods trade. Here, the gap soared by 63.14 percent, from $50.03 billion to $81.62 billion. That new record deficit was the highest since 2005’s $78.49 billion..

The goods trade deficit with Mexico surged more slowly – by 20.73 percent. But 2022’s $130.55 billion total was a new all-time high as well, surpassing 2020’s $112.08 billion.

American trade with the European Union (EU) was an exception to the 2022 pattern. The goods shortfall fell by 6.78 percent, from $218.74 billion to $203.91 billion, largely reflecting supercharged American exports of natural gas to the continent to make up for reduced post-Ukraine war Russian supplies.

But the goods deficit with the EU’s largest economy, Germany, increased by 5.44 percent, from $69.88 billion to $73.69 billion.

Turning to U.S. goods trade with Asia, the deficit with Japan grew by 12.80 percent on year, from $60.30 billion to $68.01 billion.

The gap with South Korea jumped by 51.39 percent, from $28.98 billion to a third straight record $43.87 billion.

In swelling by 19.65 percent, from $40.23 billion to $48.13 billion, the goods shortfall with Taiwan set recorded its fourth consecutive all-time high.

And consistent with its growing role as an alternative to offshoring export-oriented production to China, the U.S. goods deficit with Vietnam ballooned by 27.77 percent, setting a thirteenth straight record in the process.

At the same time, these geographic trade statistics show that despite the emergence of Asia altenatives to China, U.S. goods trade is becoming increasingly concentrated within the Western Hemisphere.

Between 2021 and 2022, two-way U.S. goods trade with Canada and Mexico combined as a share of total U.S. goods trade rose from 28.76 percent to 29.33 percent. And in 2019, the last full-year before the pandemic’s arrival state-side, this share was just 25.71 percent.

The numbers for Dominican Republic and Central America are much smaller but the trends more dramatic. Between 2021 and 2022, their share of total U.S. goods trade improved from 5.25 percent to 5.34 percent, but since 2019, it’s way up from 1.23 percent.   

 

Our So-Called Foreign Policy: China’s Not Getting Biden’s (Vague) Message

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Asia-Pacific, Biden, Biden administration, China, Indo-Pacific, Japan, national interests, Our So-Called Foreign Policy, Russia, Taiwan, Taiwan Strait, Vladimir Putin, Xi JInPing

Everyone old enough to read this post is way more than old enough to remember all the optimism that emanated from the last summit between President Biden and Chinese dictator Xi Jinping – because it took place just under two months ago.

In particular, as the White House stated, Mr. Biden

“reiterated that [the bilateral] competition should not veer into conflict and underscored that the United States and China must manage the competition responsibly and maintain open lines of communication. The two leaders discussed the importance of developing principles that would advance these goals and tasked their teams to discuss them further. “

In other words, Xi said that he bought in to this idea of a responsibly managed Great Power competition. And this conclusion quickly became the conventiona wisdom about the summit. As The New York Times argued, despite

“the deeply divergent views behind their disagreements, including over the future of Taiwan, military rivalry, technology restrictions and China’s mass detentions of its citizens….with the stakes so high, both Mr. Biden’s and Mr. Xi’s language represented a choice not to gamble on unrestricted conflict but to bet that personal diplomacy and more than a decade of contacts could stave off worsening disputes.”

And the U.S. Institute of Peace, a Congressionally-sponsored “independent” think tank, closely paraphased the President’s main claim: “Despite the differences between both countries, there appears to be a growing openness to the use of diplomacy to manage the relationship.”

Yet it’s already clear – from China – that these contentions aren’t aging so welll. Just consider what’s happened in the last month alone:

>In mid-December, China began stepping up naval and air drills near a chain of southern Japanese islands, including sending a carrier battle group that simulated an attack on this Japanese territory.

>Several days later, the Chinese teamed up with Russia’s Pacific fleet for a week of joint exercises that Moscow said [quoting Reuters here] “included practising how to capture an enemy submarine with depth charges and firing artillery at a warship.”

>On December 21, a Chinese fighter jet flew within 20 feet of a U.S. Air Force reconnaisance plane flying over the South China Sea.

>On Christmas Day, 47 Chinese military aircraft flew across the median line over the Taiwan Strait and into air space claimed by the island. Reportedly, the incursion was the largest in months.

>And on December 30, Xi and his Russian counterpart, Vladimir Putin, held a videoconference in which Xi promised “in the face of a difficult and far from straightforward international situation,” Beijing was ready “to increase strategic cooperation with Russia, provide each other with development opportunities, be global partners for the benefit of the peoples of our countries and in the interests of stability around the world.”

China predictably blamed U.S. provocations and Japan’s recently announced and dramatic military buildup for this dangerous sequence of events, but the more important point by far is this: The Biden administration continues its long-time habit (see, e.g., here) of speaking in terms of processes and procedures that can only reenforce the impression of America defining its interests in the Asia-Pacific region in dangerously vague ways, and China obviously keeps thinking of its objectives in much more specific, concrete ways. In other words, it’s time for much straighter talk from the United States.   

Our So-Called Foreign Policy: Is Biden Learning the Limits of Multilateralism?

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Afghanistan, alliances, allies, America First, ASML, Biden, Biden administration, Blob, China, Chips Act, Europe, export controls, Japan, multilateralism, NATO, North Atlantic treaty Organization, oil, oil price, OPEC, Our So-Called Foreign Policy, Saudi Arabia, semiconductors, South Korea, Taiwan, Ukraine War

Remember the buzz worldwide and among the bipartisan globalist U.S. foreign policy Blob that Donald Trump’s defeat in the 2020 presidential election heralded the start of a new golden age of America’s relations with its longstanding security allies?

Remember how President Biden himself pushed this line with his claim that “America is back” and that Washington would end the supposed Trump practice of denigrating and even rupturing these relationships, and resume its post-World War II strategy of capitalizing on these countries’ strengths and fundamental agreement with vital American interests to advance mutually beneficial goals?

Fast forward to the present, and it’s stunning how thoroughly these American globalist hopes – and the assumptions behind them – have been dashed.

The latest example has been Saudi Arabia’s rejection of Mr. Biden’s request to delay an increase in oil prices announced by Riyadh and other members of the OPEC-Plus petroleum producers cartel. It’s true that few Americans currently view the Saudis as ideal allies. Continuing human rights abuses and especially evidence that its leaders ordered the assassination of a dissident Saudi-American journalist – and coming on top of revelations of Saudi support for the September 11 terrorists and Islamic extremism more broadly – will do that. Indeed, candidate Biden had even promised to make Saudi Arabia as a “pariah.”

But follow-through? Forget it – largely for fear of antagonizing the Saudis precisely because of their huge oil production and reserves, and because the President evidently still viewed them as a key to countering Iran’s hegemonic ambitions in the energy-rich region.

As for Saudi Arabia, it and much closer allies (including in Europe) were far from enthralled with how Mr. Biden pulled U.S. forces out of Afghanistan – which they charge took them by surprise and seemed pretty America First-y.

Under President Biden, the United States appears to have performed better in mustering allied support for helping Ukraine beat back Russia’s invasion. But look beneath the surface, and the European contribution has been unimpressive at best, especially considering that Ukraine is located much closer to the European members of the North Atlantic Treaty Organization (NATO) than is the United States.

In particular, according to Germany’s Kiel Institute for the World Economy, which has been tracking these developments since the war began, to date,

 “The U.S. is now committing nearly twice as much as all EU countries and institutions combined. This is a meagre showing for the bigger European countries, especially since many of their pledges are arriving in Ukraine with long delays. The low volume of new commitments in the summer now appears to be continuing systematically.”

In fact, European foot-dragging has reached the point at which even Mr. Biden’s Treasury Secretary, Janet Yellen, has just told them (in diplospeak of course) to get on the stick.

Apparently, America’s allies in Asia as well as Europe have hesitated to get behind another key initiative as well: Slowing China’s growing technological progress in order to limit its potential militar power.

In a September 16 speech, White House national security advisor Jake Sullivan confirmed that the United States had officially doubled down on this objective:

“On export controls, we have to revisit the longstanding premise of maintaining “relative” advantages over competitors in certain key technologies.  We previously maintained a “sliding scale” approach that said we need to stay only a couple of generations ahead. 

“That is not the strategic environment we are in today. 

“Given the foundational nature of certain technologies, such as advanced logic and memory chips, we must maintain as large of a lead as possible.”

And on October 7, the United States followed up by announcing the stiffest controls to date on doing business with Chinese tech entities – controls that will apply not only to U.S.-owned companies, but to other countries’ companies that use U.S.-owned firms technology in high tech products they sell and high tech services they provide to China.

Including these foreign-owned businesses in the U.S. sanctions regime – as well as in parallel efforts to rebuild American domestic capacity and marginalize China’s role in these sectors – is unavoidable for the time being, since the domestic economy long ago lost its monopoly and in some cases even its presence in the numerous products vital to semiconductor manufacturing in particular.

But as the Financial Times reported last month, a year after Washington drew up plans to create a “Chip 4” initiative to work with Taiwan, Japan, and South Korea to achieve these goals, “the four countries have yet to finalise plans even for a preliminary meeting.”

The prime foot-dragger has been South Korea, which fears Chinese retaliation that could jeopardize its massive and lucrative trade with the People’s Republic. But the same article makes clear that Japan harbors similar concerns.

Also unenthusiastic about the U.S. campaign is the Dutch manufacturer of semiconductor production equipment ASM Lithography (ASML). ASML’s cooperation is crucial to America’s anti-China ambitions because it’s the sole global supplier of machines essential for making the world’s most advanced microchips.

So far it’s been playing along. But similar complants about possibly losing business opportunities in China – which may account for nearly half of the world’s output of electronics products along with much of its production of less advanced semiconductors – have already persuaded the Biden administration to give some South Korean and Taiwanese microchip manufacturers a one-year exemption from the new export curbs. Could ASML try to win similar leniency?

In fairness, the Biden administration hasn’t wound up placing all its foreign policy bets on alliances and securing multilateral cooperation. Indeed, its new National Security Strategy re-states the importance of rebuilding American economic strength as a foundation of foreign policy success; the legislation it successfully sponsored to bolster the United States’ semiconductor and other high tech capabilities put considerable money behind that approach; and to its credit, it announced the new China tech curbs even after it couldn’t initially secure adequate allied cooperation – assuming, correctly, that an act of U.S. leadership could bring start bringing them in line.

Hopefully, a combination of these rifts with allies and its recognition of the importance of maintaining and augmenting national power mean that President Biden at least is learning a crucial lesson: that supporting multilateralism and alliances can’t be ends of a sensible U.S. foreign policy in and of themselves. They can only be means to ends. And although they can obviously be valuable in many instances, the best ultimate guarantor of the nation’s security, independence, and prosperity are its own devices.       

(What’s Left of) Our Economy: The U.S. Trade Deficit Falls Again — For the Wrong Reasons

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Advanced Technology Products, ATP, Canada, CCP Virus, China, coronavirus, currency, euro, Eurozone, exchange rates, exports, goods trade, imports, Japan, lockdowns, Made in Washington trade deficit, manufacturing, non-oil goods trade deficit, services trade, trade deficit, Vietnam, yen, zero covid policy, {What's Left of) Our Economy

As of this morning’s official data, May makes two straight months during which the total U.S. trade deficit has fallen. The last time that’s happened? The second half of 2019, and then, the shortfall dropped sequentially six consecutive times – between June and November.

Normally such declines would be good news. But of course, these times still aren’t normal thanks to the lingering effects of the CCP Virus and more recently to the Ukraine War. And indeed, back in 2019, this trade gap narrowing took place as economic growth was slowing moderately, but the post-financial crisis expansion was nonetheless continuing. The more recent improvement is likely coming, as often happens, while the economy likely has slipped into recession.

The new Census Bureau release shows that right after it tumbled sequentially in April by a whopping 19.47 percent (a little more than first reported), the combined goods and services trade deficit shrank by another 1.32 percent in May, from $86.69 billion to $85.55 billion. For good measure, this shortfall was the lowest since December’s $78.87 billion.

The gap narrowed because exports advanced respectably and imports rose more sluggishly – a bit of encouraging news, especially considering the dollar’s recent strength (which by itself boosts the prices of U.S. goods and services both at home and abroad versus the foreign competition), and the many weak and/or weakening economies overseas (which increases the pressure they feel to grow by exporting to stronger and/or more open economies).

Even so, combined goods and services exports climbed by 1.20 percent on month in May, from an upwardly revised $252.85 billion to $255.89 billion – their fourth straight monthly record.

Overall imports, however, grew by just 0.56 percent – from a downwardly revised $339.54 billion to $341.44 billion.

The goods trade deficit sank by 2.65 percent sequentially in May, from an upwardly revised $107.82 billion to $104.96 billion – which, as with the overall trade gap was the best monthly level since December ($100.52 billion).

Unfortunately, in May the big services trade surplus that the United States has run for so long dropped sequentially for the first time in three months – and by 8.52 percent, from an upwardly revised $21.13 billion to $19.41 billion.

Goods exports were up 1.71 percent month to month in May, from a downwardly revised $176.02 billion to fourth straight all-time high of $179.03 billion.

Services exports rose, too, and to their second straight all-time high. But the increase was only 0.05 percent, from an upwardly revised $76.52 billion to $76.83 billion.

Goods imports also increased on month in May by just 0.05 percent, from $283.84 billion to $283.99 billion.

But services imports in May grew much faster – by 3.15 percent, from a downwardly revised $55.70 billion to a fourth straight monthly record of $57.46 billion.

The non-oil goods trade deficit is known to RealityChek regulars as the Made in Washington trade deficit, because by stripping out figures for oil (which trade diplomacy usually ignores) and services (where liberalization efforts have barely begun), it stems from those U.S. trade flows that have been heavily influenced by trade policy decisions.

In May, this shortfall was down 3.43 percent sequentially, from an upwardly revised $108.47 billion to $104.68 billion. That’s the lowest monthly total since February’s $103.29 billion.

No such luck with America’s enormous and persistent manufacturing trade deficit. It rose month to month in May by 6.58 percent, from $124.41 billion to a $132.60 billion level that was the second worst of all-time after March’s $142.22 billion.

U.S. exports of manufactures increased sequentially in May by 2.55 percent. And the new $112.15 billion in such sales was their second best ever, after March’s $113.96 billion.

But the much greater amount of manufacturing imports jumped by 4.82 percent, to $244.75 billion – another second best ever (after March’s $256.18 billion).

On a year-to-date basis, the manufacturing deficit is running 24.07 percent ahead of last year’s total, ($504.94 billion to $626.48 billion) which almost guarantees that this shortfall will hit its eleventh straight all-time high, in the process topping last year’s $1.3298 trillion.

Manufactures exports year-to-date have risen by 15.87 percent, but imports have surged by 20.01 percent.

The trade deficit in Advanced Technology Products (ATP) worsened in May as well, advancing 11.94 percent on month to $20.48 billion. ATP exports dipped by 0.71 percent, but imports were up by 3.94 percent.

Given the prominence of both manufactures and Advanced Technology Products in U.S.-China trade, it’s no surprise that as their global trade gaps widened in May, so did the U.S. goods deficit with the People’s Republic. Also at work on all these fronts: the partial easing of the Zero Covid policy-induced lockdowns that halted so much economic activity in China this spring.

The China goods shortfall rose by 3.18 percent, from $30.57 billion to $31.54 billion. And in a continuing departure from a recent pattern, this growth contrasted with the aforementioned 3.43 percent drop in the non-oil goods deficit that’s its closest global proxy.

For most of the time since the Trump tariffs on China started being imposed in 2018, the goods deficit with the People’s Republic actually had been falling while that Made in Washington gap kept growing, suggesting that the former President’s ongoing trade curbs had been achieving a major stated goal. On a year-to-date basis, the China deficit is still up slightly less (26.23 percent) than the Made in Washington deficit (27.56 percent). But clearly the difference between the two is shrinking.

One entirely possible reason is that China has devalued its controlled currency versus the dollar by 5.45 percent since the end of last year – which of course cheapens the price of Made in China products for reasons having nothing to do with free trade or market forces, and which suggests that rather than thinking about cutting or eliminating tariffs on these products, President Biden should be mulling some increases.

For May, U.S. goods exports to China improved sequentially by 9.99 percent, from $11.20 billion to $12.32 billion, while imports grew by 5.01 percent, from $41.77 billion to $43.86 billion.

In other May developments with major U.S. trade partners:

>The U.S. goods deficit with Canada soared by 35.84 percent on month, from $7.25 billion to $9.84 billion. That total was the second biggest ever after the $9.88 billion recorded back in July, 2008;

>A new record was set by the goods gap with Vietnam, and in fact, May’s $10.66 billion figure was the third new all-time high in the last three months and the fourth this year. These results largely reflect Vietnam’s mounting attractiveness versus China as a destination for export-focused foreign investment – in part due to the Trump tariffs and in part due to all the worsening difficulties of doing business in China;

>The goods deficit with the eurozone was up 8.08 percent, and worse is likely to come as the single currency keeps weakening versus the dollar and Europe, too, seems heading into or is already mired in a new recession;

>But despite the continuing weakening of the yen, the goods deficit with Japan fell by 6.86 percent. The ongoing global semiconductor shortage still plaguing the auto industry in particular looks like a big culprit here.

(What’s Left of) Our Economy: A Terrible March for U.S. Trade – With Worse Likely to Come

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Advanced Technology Products, Canada, China, currency, dollar, European Union, exchange rates, exports, Federal Reserve, goods trade, imports, inflation, Japan, Made in Washington trade deficit, manufacturing, Mexico, oil, services trade, Trade, trade deficit, {What's Left of) Our Economy

So many records (mainly the wrong kind) were revealed in the latest official monthly U.S. trade figures (for March) that it’s hard to know where to begin. Some important points need to be made before delving into them, though.

First, don’t blame oil. Sure, this trade report broke new ground in containing a full month’s worth of Ukraine war-period data. But despite the disruption in global energy markets triggered by the conflict, on a monthly basis, the U.S. petroleum balance actually improved sequentially, from a $2.94 billion deficit to a $1.58 billion surplus on a pre-inflation basis (the trade flow gauges from these monthly government releases that are most widely followed)

And even on an inflation-adjusted basis, February’s $8.73 billion oil deficit shrank to $5.15 billion in March.

Second, don’t blame inflation much at all. The Census Bureau doesn’t report after-inflation service trade results on a monthly basis, but it does provide this information for goods (which comprise the great majority of U.S. trade flows). And the March figures show that before factoring in inflation, the goods trade deficit worsened by 18.89 percent from $107.78 billon in February to a new record $128.14 billlion, whereas when inflation is counted, this gap widened on month by 18.86 percent, from $115.96 billion in February to $137.83 billion in March. (Major trade wonks will note that these goods and services data are presented according to two different counting methods, but trust me: the difference in results is negligible.)

Third, don’t blame China. The March pre-inflation goods deficit with the People’s Republic was up sequentially from $42.26 billion to $47.37 billion (12.10 percent). But neither that absolute level nor the rate of increase was anything out of the ordinary, much less a record. In fact, the monthly percentage increase was just half the rate of that of the shortfall for total non-oil goods (a close worldwide proxy for China goods trade) – which hit 24.06 percent. One big takeaway here: the Trump China tariffs are still exerting a major effect, along of course with the supply chain knots Beijing has created with its over-the-top Zero Covid policy.

But regardless of where the blame lies, (and it looks like major culprits are continued strong U.S. spending on both consumer goods and capital equipment, combined with an improvement of the supply chain situation outside China), all-time highs and worsts abounded in the March trade report, include worsenings at record paces.

The combined goods and services trade deficit jumped on-month by 22.28 percent, to $109.80 billion. That total was the third straight record for a single month and the increase the fastest since the 43.71 percent explosion in March, 2015 – a month during which much of the country was recovering from severe winter weather.

As mentioned above, the $128.14 billion goods trade gap was the highest ever, too, topping its predecessor (January’s $108.60 billion) by 17.99 percent. As for the 18.89 percent monthly increase, that was also the biggest since March, 2015 (25.18 percent).

Even a seeming trade balance bright spot turns out to be pretty dim. The headline number shows the service trade surplus improving by 1.96 percent – from $17.98 billion to $18.34 billion. Unfortunately, nearly all of this increase stemmed from a big downward revision in the initially reported February surplus, from $18.29 billion.

As known by RealityChek regulars, the aforementioned non-oil goods trade deficit can also be called the Made in Washington trade deficit – because by stripping out figures for oil (which trade diplomacy usually ignores) and services (where liberalization efforts have barely begun), it stems from those U.S. trade flows that have been heavily influenced by trade policy decisions.

And not only was the March Made in Washington deficit’s monthly increase of 24.06 percent the second fastest ever (after March, 2015’s 31.24 percent). The March, 2022 level of $128.70 billion was the biggest ever.

The story of the non-oil goods trade gap’s growth was overwhelmingly a manufacturing story. The sector’s huge and chronic trade shortfall shot back up from $106.49 billion in February (which was a nice retreat from January’s $121.03 billion) to a new record $142.22 billion. And the monthly percentage jump of 33.55 percent was the biggest since the 37.62 percent during weather-affected March, 2015.

Manufactures exports advanced sequentially by a strong 20.53 percent this past March. That topped the previous all-time monthly high of $105.37 billion (set back in October, 2014), by 8.15 percent. But the much greater volume of imports skyrocketed by 27.43 percent. And their $256.18 billion total smashed the old record of $222.79 billion (from last December) by 14.98 percent.

Within manufacturing, U.S. trade in advanced technology products (ATP) took a notable beating in March, too. The $23.31 billion trade gap was an all-time high, and its 73.65 percent monthly growth the worst since the shortfall slightly more than doubled on month in March, 2020 – as the Chinese economy and its huge electronics and infotech hardware manufacturing bases reopened after the People’s Republic’s initial pandemic wave.

Yet as noted above, despite these extaordinary manufacturing and ATP trade numbers, the latest March numbers for manufacturing-heavy U.S. China trade were anything but extraordinary. U.S. goods exports to the People’s Republic increased on-month by 15.36 percent – slower than the rate for manufactures exports globally, but the fastest rate since the 52.47 percent rocket ride they took  last October.

Goods imports from China, however, rose much more slowly from February to March than manufactures imports overall – by just 12.10 percent, from $42.26 billion to $47.37 billion.

When it comes to other major U.S. trade partners, the March American goods deficit with Canada of $8.03 billion was the highest such total since July, 2008 ($9.88 billion). It was led by a 30.81 percent advance in imports reflecting the mid-February reopening of bridges between the two countries that had been closed due to CCP Virus restrictions-related protests.

The goods deficit with Mexico worsened even faster – by 35.11 percent, to $11.92 billion. That total was its highest since August, 2020’s $12.77 billion.

Another major monthly increase (31.59 percent) was registered by the U.S. goods shortfall with the European Union, but its March level ($16.87 billion) was subdued relative to recent results.

Anything but subdued was the Japan goods shortfall, which shot up sequentially in March by 49 percent. The $6.77 billion total also was the biggest since November, 2020’s $6.78 billion, and the monthly jump the greatest since the 84.37 percent burst in July, 2020, during the rapid recovery from the sharp U.S. economic downturn induced by the first wave of the CCP Virus and related economic and behavior curbs.

The Europe and Japan trade figures stem significantly from a development that’s bound to turn into an increasingly formidable headwind for the U.S. trade balance for the foreseeable future – the dollar’s rise versus other leading currencies to levels not seen in 20 years. And unless it’s reversed substantially soon, China’s latest currency devaluation, which began in mid-April, will weaken the effects of both the Trump tariffs and the Zero Covid policy. So even if the Federal Reserve’s (so far modest) inflation-fighting efforts do slow the American economy significantly, it’s likely that, as astronomical as the March trade deficits were, we ain’t seen nothin’ yet.

Our So-Called Foreign Policy: Will a Russian Victory Really Bring On a World at War?

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Antony J. Blinken, Biden, China, Council on Foreign Relations, East China Sea, globalism, Japan, Kim Jong Un, national interests, North Korea, Our So-Called Foreign Policy, Russia, South China Sea, South Korea, Taiwan, The Wall Street Journal, Ukraine, Ukraine-Russia war, Vladimir Putin, war, Xi JInPing

Not only do American leaders seem pretty united on the need for the nation to do much more to help Ukraine defend itself from Russian invaders. They and the (overwhelmingly globalist) American political and chattering classes seem largely in agreement on one of the main consequences either of permitting Russia to win, or permitting him to win without inflicting major, lasting damage on Russia’s economy – a return to a world in which aggressive dictators like Russia’s Vladimir Putin will feel much freer than they have for decades to attack their neighbors.

That fear definitely has a troubling ring of reasonableness – and all the more so since, unlike previous historical eras in which such attacks and invasions were much more common, some of the actors possess nuclear weapons.

But there’s something these warnings are overlooking. However vivid such dangers are in principle, it’s hard to identify actual places around the world where potential conquerors have been bidng their time until receiving just the kind of signal that a Russian success in Ukraine allegedly would send.

If you doubt the prominence of this argument for greater U.S. involvement in the conflict, you haven’t been paying attention. For example, in his first public remarks after the invasion, President Biden claimed that “Putin’s actions betray his sinister vision for the future of our world — one where nations take what they want by force.”

In a speech a month earlier, his Secretary of State, Antony J. Blinken, asserted that one of the post-World War II global order’s guiding principles was a rejection of

“the right of one country to change the borders of another by force; to dictate to another the policies it pursues or the choices it makes, including with whom to associate; or to exert a sphere of influence that would subjugate sovereign neighbors to its will.

“To allow Russia to violate those principles with impunity would…send a message to others around the world that these principles are expendable, and that, too, would have catastrophic results.”

The conservatives on the Wall Street Journal editorial board, who don’t agree with the Biden administration on much of anything, similarly contended that “Whether the West admits it or not, the invasion is setting a precedent for what the world will tolerate in the 21st century.”

But check out this assessment of worldwide hot spots from the Council on Foreign Relations, often called the seat of America’s globalist foreign policy establishment. Where exactly are the Putins of tomorrow whose will to international power would be even be sharpened by a Russian victory in Ukraine?

Certainly not on the Korean peninsula or in the East China Sea. North Korea no doubt has designs on neighboring South Korea, but they’ve existed for decades. Ditto for China and Taiwan. It’s true that Kim Jong Un and Xi Jinping might be emboldened by an inadequate U.S. and international response to Putin’s war. But not from any relief that global norms of behavior that had been holding them back had weakened, or that a Russian victory had set some a kind of precedent – with binding power? Because they take the idea of rule of law more seriously in their treatment of foreigners than they do in their treatment of their own people? Please.

Other than these Asian conflicts – which also include China’s expansionism in the South China Sea, but which also long predate the Ukraine war – where are the aggressors-in-waiting who may feel freer to attack their neighbors? Should we include the other East China Sea dispute, where China is involved, too – even though U.S. allies Japan and South Korea are also contesting each other’s claims to some miniscule islands?

More important, where are the global hot spots where current or potential territorial rivalries could explode into conflict that would imperil global peace and security – including America’s? Nagorno-Karabakh (on the border of Armenia and Azerbaijan, unless you’ve been following this tiff closely)? As Mr. Biden would say, “Come on, man.”

I’m sure that there are flashpoints in sub-Saharan Africa that could eventually embroil entire regions in warfare. But it’s as cold-blooded as it is true that these are regions so chronically dysfunctional (and therefore largely disconnected from the wider world) that even complete chaos has no potential to spread much further – or inspire conqueror wannabees in regions of greater concern.

Closer to home for the United States, according to the Congressionally founded U.S. Institute of Peace, some small countries in Latin America have been quarreling with neighbors over territory since 1990, and if they did ignite conflict, refugees would of course come streaming to U.S. borders. But only once – in 1995 – did one of these feuds result in war (between Ecuador and Peru). And I’m glad I don’t have to make the argument that revanchists in either country are chomping at the bit to get a symbolic green light from a Russian victory in Ukraine.

The big takeaways here clearly are (1) that the world isn’t a tinderbox likely to burst into a series of truly dangerous international conflicts depending on the outcome of Russia’s war on Ukraine; and (2) that the potential conflicts that can affect the United States consequentially are and have long been driven by their own dynamics (including current and longstanding American approaches to these situations).

So as has been the case since Russian policy toward its neighbors became more belligerent, what should be driving the U.S. response should be examinations concerning the nature of concrete, specific U.S. interests that are or are not at stake. Claims that Ukraine’s continued independence and full sovereignty are all that stand between today’s relative calm among countries (if not in terms of civil conflicts) and an entire globe engulfed in war deserve the same fate as previous alarmist concotions like the domino theory – getting tossed onto what former President Reagan memorably called the “ash heap of history.”

Our So-Called Foreign Policy: Biden’s Foreign Policy Pillar is Looking Hollow at Best

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alliances, allies, Beijing Olympics, Biden, China, Emmanuel Macron, European Union, France, Fumio Kishida, Germany, Japan, multilateralism, NATO, Nordstream 2, North Atlantic treaty Organization, Olympic boycott, Our So-Called Foreign Policy, Putin, Russia, sanctions, Southeast Asia, Taiwan, Ukraine, United Kingdom, Winter Olympics

What’s worse than “terrible”? It’s an important question because if that’s a term that accurately describes President Biden’s last week or so in office, then something even stronger is clearly needed for the setbacks suffered recently by multilateralism – the foundation of his foreign policy. And most troublingly, the idea that U.S. foreign policy success requires the cooperation of major allies has been failing most conspicuously when it comes to dealing with America’s two biggest global rivals – Russia and China.

Let’s deal with Russia first, but not because I view it as the biggest threat to the United States – or even much of a threat at all. In fact, I’ve long and repeatedly written that the fate of Ukraine has no importance for America’s national security, and that Washington should accept some form of the kind of spheres of influence-type deal in Eastern Europe that Russian leader Vladimir Putin has proposed.

But the Ukraine crisis is making the most headlines right now, the subject dominated his long press conference last Wednesday, and Mr. Biden is nowhere near taking my advice. Indeed, that presser added powerfully to the evidence that the United States and its allies are deeply divided over how to respond to actual and possible Russian moves against Ukraine.

As the President made clear, “[I]t’s very important that we keep everyone in NATO on the same page.  And that’s what I’m spending a lot of time doing.  And there are differences.  There are differences in NATO as to what countries are willing to do depending on what happens — the degree to which they’re able to go.”

Indeed, that very day, France’s President Emmanuel Macron proposed that the European Union seek separate from U.S. efforts a new security agreement with Russia. Macron did state that “It is good that Europeans and the United States coordinate” but added “it is necessary that Europeans conduct their own dialogue, We must put together a joint proposal, a joint vision, a new security and stability order for Europe.”

Since Europe is a lot closer to Russia and Ukraine that the United States, and will be much more dramatically affected by events in that region, this French position seems entirely legitimate to me. At the same time, it’s tough to believe that Macron would place such importance on a Europe-only effort if he was completely happy with what he knows of American diplomacy so far.

Germany’s views seem even farther from Washington’s. Its new government has not only refused to join some other European countries (notably, the United Kingdom) in supplying defensive weapons to Ukraine. It’s blocked at least one NATO country – Estonia – from sending its own Made in Germany arms to bolster Kiev’s military.

Moreover, trade-dependent Germany, whose trade with Russia in energy and other goods is substantial, doesn’t even seem very keen on deterring or punishing Moscow for invading Ukraine with the kinds of sanctions that are widely viewed as the strongest – cutting Russia off from the global network used by almost all the world’s financial institutions to send money across borders for all the reasons that money is sent across borders. At least Berlin is sounding more open to halting final approval of the Nordstream 2 natural gas pipeline if Ukraine is invaded.    

Asian countries seem more prepared to resist aggression from China, especially the military kind (as opposed to Beijing’s economic efforts at intimidation). Since this post last September reporting on steps they’ve taken to transition from U.S. protectorates to countries more closely resembling genuine allies, some have made even more encouraging moves.

For example, Indonesia reportedly “is preparing itself militarily” to deal with Chinese moves against islands located in its territorial waters and major straits through which much of its (and the world’s commercial shipping) travels. The Philippines – another Southeast Asian country embroiled in maritimes disputes with China, has just bought cruise missiles from India, and reportedly some of its neighbors are interested in these devices, too.

At the same time, despite a virtual summit between President Biden and Japanese Prime Minister Fumio Kishida, Japan’s policy on using its forces to help any U.S. attempt to defend Taiwan from a Chinese attack remains ambivalent at best. South Korea looks more hesistant still.

Nor is Japan backing the United States to the hilt on sanctioning Russia economically following a Ukraine attack, or even close. After the Biden-Kishida session, an anonymous U.S. official said (in a briefing posted on the White House website) that although the Japanese leader “made it clear his country would be ‘fully behind’” Washington on the issue, his response concerning economic responses Tokyo would support was “We did not get into the specifics about possible steps that would be taken in the event that we see these [potential Russian] actions transpire.”

The refusal of so many U.S. allies and others to join the Biden administration’s diplomatic boycott versus the upcoming Winter Olympics in Beijing also casts major doubts on the President’s emphasis on multilateralism. Can any countries declining even to keep their officials alone out of China for the games (as opposed to their athletes) be counted on to push back more concretely and powerfully against future provocations from China?

Athletes and sports fans know well the expression “Change a losing game.”  For all you others, it means that if a strategy or approach is failing, switch to an alternative.  But for the future of American foreign policy, the most important part of it remains unspoken, and the one that the President needs most urgently to heed:  “Change it before you’ve lost.”   

 

(What’s Left of) Our Economy: November Was an Awfully Cruel Month for U.S. Trade

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Advanced Technology Products, Canada, CCP Virus, Census Bureau, China, coronavirus, COVID 19, European Union, exports, Federal Reserve, goods trade, imports, inflation, Japan, manufacturing, non-oil goods trade deficit, Omicron variant, services trade, stimulus, supply chains, Trade, trade deficit, Wuhan virus, {What's Left of) Our Economy

So maybe the global and especially U.S. supply chain snags of the last year are finally unraveling? That could well be a message being sent by this morning’s official release on American trade figures for November – which was dominated by huge increases in the nation’s goods imports, often to record levels.

Interestingly, though, little of this surge in goods from abroad came from China – probably reflecting some combination of the continuing effects of the Trump (and now Biden) tariffs, the ongoing semiconductor shortage that creates outsized problems for a country so reliant on electronics exports, and widespread power outages stemming from tight coal supplies.

Today’s report from the Census Bureau showed that the overall U.S. trade deficit swelled sequentially from $67.16 billion in October (the smallest since April’s $66.15 billion) to $80.17 billion. That total was the second largest ever (after September’s $81.44 billion). In addition, the 19.38 percent monthly increase was the most since July, 2020’s 19.87 percent. (The worst all-time relative month-to-month increase was 44.12 percent way back in December, 1996, when U.S. trade flows were much smaller, and therefore percentage increases much easier to generate.)

The November goods deficit of $98.99 billion was a record (topping the previous $97.83 billion all-time high of September), and the18.04 percent increase over October’s $83.86 level was the second greatest ever (after the 25.18 percent spurt of March, 2015 that resulted largely from a recovery after the previous month’s harsh winter weather).

Although November’s petroleum trade deficit more than quadrupled on month (to a still-modest $1.07 billion), the month’s shortfall in non-oil goods – the trade flows most influenced by U.S. trade policy decisions – soared by 17.06 percent, to $96.97 biillion. That total is a new record (eclipsing September’s $93.67 billion), and the increase was the biggest since the record 31.24 percent also set in March, 2015.

The roughly $13 billion absolute monthly rise in the November overall trade deficit resulted entirely (and then some) from combined goods and services imports, which were up $13.44 billion. The month’s $304.89 billion total was a second straight record (besting October’s $291.04 billion), and the 4.60 percent increase the biggest since March’s 7.18 percent. (The record relative total monthy import incease was July, 2020’s 10.58 percent.)

The story was similar in goods imports. They, too, set a second straight record, with the $254.93 billion level 5.05 percent higher than October’s previous all-time high of $242.67 billion, and the rate of increase the fastest since March’s 7.73 percent. (This record, too, was set in July 2020 – at 11.93 percent).

Continuing November’s string of consecutive all-time highs was the non-oil goods category of imports. At $232.30 billion, these purchases broke October’s previous record of $221.82 billion by 4.73 percent, a relative rise that was the fastest since March (7.12 percent). Their fastest increase came in July, 2020, too (11.88 percent). 

As indicated earlier, though, goods trade with China departed from this pattern. These imports advanced as well – but by just 0.73 percent. Their $48.39 billion level was the year’s highest, but only slightly above October’s $48.03 billion. Moreover, though elevated, these inflows fell short of the record $52.08 billion in October, 2018 – when U.S. companies were “front-running” their China purchases to bring them into the country before steep tariffs kicked in.

Moreover, the $32.32 billion goods deficit with China was far from the high for the year (September’s $36.50 billion), much less anywhere close to the monthly record ($42.89 billion, which also came in October, 2018).

So geographically speaking, where did U.S. goods deficits go up the most month-to-month in November? Among the nation’s biggest trade partners, Canada was the biggest culprit percentage-wise. America’s $6.12 billion of goods purchases from its northern neighbor were the most of 2021 and the biggest such total since September, 2008’s $7.36 billion. And the sequential leap of 60.67 percent (which, to be fair, followed a big October decline of 26.09 percent) was the fastest since January, 2021’s 74.04 percent surge.

The goods deficit with the European Union was up 28.59 percent sequentially in November to a record $20.85 billion. The increase, moreover, was the greatest since the 73.82 percent rate of March, 2020, as Europe was climbing out of its first CCP Virus wave.

And the goods gap was up by 17.74 percent with Japan to $4.16 billion. The total was the year’s second lowest (after February’s $4.02 billion) but the increase was the fastest since July’s 27.43 percent (though it followed a 23.21 percent plunge in October).

Turning to specific products, more new trade records came in the manufacturing sector. The November trade deficit for industry hit a new all-time high of $124.06 billion – a total that broke the old mark (September’s $118.75 billion) by 8.06 percent. Manufacturing exports sank sequentially in November by 4.15 percent, from $102.752 billion to $98.488 billion, and the 2.29 percent increase in manufacturing exports brought them to their second straight monthly worst – $222.553 billion.

With one month left in data year 2021, the manufacturing trade deficit stands at $1.209 trillion, and is running 11.63 percent ahead of 2020’s record rate.

Not that the records stop with manufactures. In Advanced Technology Products, imports of $52.52 billion set their third staight all-time high, and the November deficit of $21.76 billion trailed only November, 2020’s $21.90 billion in this data series’ 33-year history.

One positive all-time trade high was set in November: At $224.22 billion, total exports established their second record monthly total. But the monthly improvement was a measly 0.16 percent.

November’s $155.94 billion worth of goods exports were the second highest monthly total on record – but the level was down 1.81 percent sequentially.

The pandemic-beleaguered services sector delivered some good trade news, too. Its longstanding trade surplus remains low by historic standards, but did climb by 12.68 percent, to $18.82 billion. The increase was the fastest since the 28.08 percent recorded in September, 2004 (when services trade flows were much smaller than today’s), and the total was the best since June’s $20.33 billion.

Services exports enjoyed a strong November, too. They hit $68.27 billion, for their highest mark since the $69.12 billion reached in February, 2020 – just before the pandemic arrived in the United States and began seriously distorting its trade flows and entire economy. Further, the 4.97 percent improvement was the best since January, 2002’s 5.56 percent.

Will November prove to be the cruelest month – at least for the time being – for U.S. trade? A further removal of supply chain bottlenecks and the huge savings still amassed by American consumers say “No.” But the opposite conclusion could easily be reached by pointing to a reduction in the Federal Reserve’s economic stimulus programs, the unlikelihood of Congress approving big spending bills during this midterm election year, and still lofty inflation rates – which at some point will produce a consumer pullback.

The impact of the CCP Virus, it’s highly infectious Omicron variant, and possible future strains? Those are the $64,000 questions that trade and economic policy analysis may well find excruciatingly difficult to answer.

Our So-Called Foreign Policy: Time for a Nuclear-Armed Taiwan?

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alliances, allies, Asia, China, East Asia, geopolitics, Indo-Pacific, Japan, national interests, national security, nuclear proliferation, nuclear weapons, Our So-Called Foreign Policy, Porcupine Theory, semiconductors, South Korea, Taiwan, vital interests

Since early in the nuclear age, students of international relations scholar from time to time have advanced a dramatically heretical idea: that a world in which more than a few countries possessed nuclear weapons would be safer than a world in which such arms were limited to those countries that already had them. The  reasoning: Attacking nuclear-armed countries is a lot riskier for the aggressor than attacking non-nuclear countries, so the risk of wars breaking out would fall. If you think about the success of the little mammal with big quills, you can see why this notion has become known as the “Porcupine Theory”.

I bring up the subject because I increasingly find myself wondering whether encouraging Taiwan to build a nuclear arsenal would be the best way for the United States to safeguard interests in the island’s independence that have become vital recently because Taiwan has become the world leader in manufacturing advanced semiconductors – which are so crucial to the national security and prosperity of every country, including the now lagging United States.

There can’t be any doubt that the burgeoning importance of Taiwan’s independence and the apparently burgeoning determination of China to reestablish control over what it views as a renegade province, have produced a situation that’s increasingly dangerous for the United States. China, after all, is a power whose conventional military forces may now be strong enough to defeat America’s if it decides to help Taiwan fight off a Beijing attack.

In principle, Washington could resolve to turn the tide by using its own weapons of mass destruction in a battle for Taiwan. But China’s own arsenal is now so powerful that the result could be a full-scale nuclear exchange that brings disaster to the U.S. homeland. In other words, as I’ve written for years, America arguably has lost escalation dominance in Asia, and may have no choice but to acquiesce in China’s takeover of the island and its world class tech capabilities.

Nonetheless, this dire threat so far hasn’t deterred U.S. leaders from moving closer to declaring their intent to defend Taiwan militarily (notably, e.g., as reported here), and ending the posture of “strategic ambiguity” that has so far helped keep the peace in the region. So no one can responsibly rule out push coming to shove in this intensifying crisis.

To date, the United States has opposed countries like Taiwan from crossing the nuclear weapons threshhold mainly because Washington has rejected the Porcupine Theory. In addition, however, this anti-proliferation stance, especially toward allies and quasi-allies like Taiwan, has stemmed from the nuclear weapons parity that the United States enjoyed vis-a-vis the old Soviet Union and today toward Russia, and the overwhelming superiority of its nuclear forces versus those of China and North Korea in Asia. Unfortunately, as mentioned above, the Asian nuclear balance has deteriorated from the U.S. standpoint.

The United States has also always viewed its security alliances with Germany and Japan in particular to be essential to preventing their reversion to the disastrously militaristic ways of the 1930s and 1940s. Nuclear weapons controlled by these two countries were therefore completely out of the question. (Interestingly, a revealing difference of opinion between then President Barack Obama and then presidential candidate Donald Trump was sparked by these issues in 2016.)    

Reliability concerns, however, have also dominated Washington’s position on nuclear weapons spread outside the U.S. alliance network. Specifically, American leaders have always worried about these devices being acquired by unstable governments (which supposedly are less capable of securing them against terrorists and other extremists) and so-called rogue states (which supposedly would be more likely to use them or threaten their use).

A nuclear-armed Taiwan could resolve the prime dilemma for the United States by letting it off the hook for the island’s defense. After all, if China hasn’t yet pulled the trigger on a Taiwan without nukes, it makes sense to believe that it would be much less likely to attack the island if a conflict could bring Taiwanese nuclear warheads falling on Chinese soil.

It’s true that, as I’ve heard various observers argue, that the semiconductor problem may be exaggerated – because, for example, the United States could keep the relevant technology out of Chinese hands by bombing the factories and labs. In theory, the Taiwanese may have plans to blow up these facilities themselves. But it’s also true that these speculations could be way too optimistic – especially since the most crucial knowhow resides in the heads of Taiwanese scientists and engineers, who would need to be protected somehow against a Chinese roundup.

An American endorsement of a nuclear Taiwan could also bring benefits throughout Asia, signaling to Beijing that continuing its bellicose behavior could convince the United States to give a nuclear green light to Japan and South Korea.

Moreover, the longstanding main U.S. anti-proliferation rationales look a lot weaker today. Taiwan is clearly neither a rogue state nor a country with an unstable government. Ditto for Japan and South Korea, for that matter. Besides, precisely because of the weakening U.S. military position in East Asia, and consequently growing worries about Washington’s willingness to make good on its nuclear commitments, many observers believe that all three countries are already latent nuclear powers. (See, e.g., here.) That is, they could build nuclear weapons quickly whenever they wished.

Yet encouraging Taiwan to go nuclear would hardly be risk-free. If and when openly announced, it could spur the Chinese to attack – to enable them to capture the island before its nuclear-ization was completed. A nuclear Taiwan would also be less deferential to American wishes. In fact, its semiconductor superiority has already enabled it to resist some U.S. demands related to plans for increasing microchip production and supply chain security cooperation between the two countries. (The same has held for South Korea, as reported in the linked article immediately above.)

More broadly, nuclear weapons acquisition by Japan and South Korea would certainly undermine America’s post-World War II status as kingpin of East Asia, and all the benefits it ostensibly creates for Americans in one of the world’s most economically important regions.

But even if those benefits were nearly as great as widely believed (and continuing U.S. difficulty opening Asian markets to American exports makes clear that they haven’t been), a nuclear-armed Taiwan would create much bigger benefits: dramatically reducing the odds that China acquires some of the world’s most important technology, and that the risk of a Chinese nuclear attack on the United States if Beijing resulting from a conflict over Taiwan.

The key, as suggested above, would be supporting nuclearization without provoking all-out Chinese aggression – suggesting that this goal deserves more attention in Washington than it’s receiving these days.