(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?

Tags

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.

Our So-Called Foreign Policy: Biden’s Anti-China Coalition is Flunking an Olympian Test

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allies, Australia, Beijing Olympics, Biden, boycotts, Canada, China, European Union, Germany, Indo-Pacific, Italy, Japan, multilateralism, Our So-Called Foreign Policy, semiconductors, South Korea, Taiwan, United Kingdom, Winter Olympics

One of President Biden’s main foreign policy aims has been to create an international coalition to resist continually mounting belligerence by China, and to curb the massive, decades-long flows of foreign capital and technological knowhow that have done so much to strengthen and enrich the People’s Republic. And whatever promise is held by this anti-China strategy has become vitally important lately because of Beijing’s intensifying intimidation campaign against Taiwan, whose autonomy has become a vital U.S. interest due to its world leadership in semiconductor manufacturing processes.

That’s why it’s so discouraging to report that, as of this morning, so few of the allies on which Mr. Biden is counting have been willing even to take so limited a step as joining the U.S. diplomatic boycott of the Winter Olympics scheduled to be held in China’s capital Beijing in February.

Australia and the United Kingdom signed on this morning. And a bit later, so did Canada. But so far, that’s it. According to this Reuters article, Japan is considering not sending cabinet members to the Games but South Korea isn’t even thinking about this step. The New York Times reports that New Zealand had previously decided not to send any officials to China but cited CCP Virus-related health concerns as the reason; that the European Union’s (EU) European Parliament has passed a resolution backing a boycott barring “verifiable improvement” in China’s human rights situation, but one that’s non-binding; that the EU’s separate policymaking arm has declined to support the U.S. action; EU member France is hiding behind this EU skirt so far; fellow EU member Italy has said it’s not on board; and Olaf Scholz, the new leader of another EU member, Germany, clearly doesn’t want to be.

It’s not that joining the American initiative will produce any meaningful changes in China’s behavior. Indeed, official foreign participation in and attendance at Olympics isn’t exactly the norm.

It’s true, moreover, as The Times mentioned, that many of these countries and the EU collectively have imposed human rights sanctions on China; that some have begun thinking about how to shield their economies from Beijing’s power and influence (see, e.g., here and here); and that some have begun to increase their own defense spending in response to China’s own buildup and provocations (see, e.g., here and here), or become more active militarily in the Indo-Pacific region (see, e.g., here).

At the same time, boosting military budgets and even sending warships on port calls and other East Asian missions is a far cry from credibly pledging to come to the U.S.’ and Taiwan’s aid if China moves against the island. (It’s also important to note that an American military response, or at least a prompt one, is far from certain, either, since the United States is not yet obliged by treaty to come to Taiwan’s defense.)

And if countries are reluctant to take even a symbolic step like diplomatically boycotting the Beijing Olympics, which doesn’t even entail further sanctions, can they really be counted on to enter hostilities against China?

President Biden is fond of saying that “America is back” in its role as free world leader following an alleged Trump administration abdication. But leaders by definition need followers, and when it comes to confronting China meaningfully, it’s not clear right now that he has many that are reliable.

Our So-Called Foreign Policy: Could U.S. Protectorates in Asia Finally Become Real Allies?

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Afghanistan, alliances, allies, Asia, Asia-Pacific, AUKUS, Australia, Biden, China, credibility, Donald Trump, extended deterrence, globalism, Indo-Pacific, Japan, nuclear umbrella, Our So-Called Foreign Policy, semiconductors, South Korea, submarines, Taiwan, transactionalism, United Kingdom, vital interests

Lots of stuff going on lately in security affairs in the Asia-Pacific region (which foreign policy congoscenti have been calling the Indo-Pacific region, reflecting India’s new prominence). And I’m not just talking about the new agreement (which goes by the awkward acronym “AUKUS”) by which Australia will acquire nuclear-powered submarines provided by the United States and the United Kingdom (acing out the furious French in the process), and gain access to lots of advanced militarily-relevant American technology, like artificial intelligence and quantum computing.

I’m also talking about long overdue signs that key U.S. allies in the region are starting to take the threat they face from growing Chinese aggressiveness as seriously as the United States has been taking it. The interesting policy questions are (1) why they seem finally to be waking up and (2) what if anything the United States can or should do to convince Japan, South Korea, and Taiwan in particular to assume more of the burden of defending themselves, thereby enabling America to take a less risky, less costly role in the region.

For the time being, unfortunately, the United States is going to have to stay deeply involved in the defense of these countries, and to keep accepting a degree of nuclear risk that I’ve long described as unacceptable, and still consider unnerving. I’ve changed my mind, however, because the globalist and free trade-happy U.S. foreign policy establishment and the tech companies that write so many of its members’ paychecks boneheadedly let South Korea and especially Taiwan seize global leadership in the manufacture of the world’s most advanced and powerful semiconductors.

These devices are simply too valuable to the American economy as a whole and to its continuing military superiority to take the chance that the relevant Taiwanese and South Korean facilities and knowhow fall into Chinese hands. As for Japan, it continues to produce many of the materials and equipment on which cutting-edge semiconductor production relies, so it’s got to be kept safe from the likeliest threat it faces from China – which is some form of blackmail. (See this recent Biden administration report, and especially pp. 45 ff.)

As a result, until the United States gets its semiconductor act back together, the American nuclear umbrella needs to remain over Japan and South Korea – which means that America could well be sucked into a nuclear war with China and especially North Korea if hostilities break out. And such “extended deterrence” may need to be extended to Taiwan (which Washington is not yet as tightly committed to defend).

That’s why it’s not good that not only the Australians will be getting nuclear-powered (but not – so far – nuclear-armed) submarines. Because of their superior capabilities, these which will add quantitatively and qualitatively to the forces China would need to think about when contemplating, say, moves to increase its sway over the regional sealanes through which so much of the world’s trade flows.

It’s also good that South Korea has decided to build (so far non-nuclear) ballistic missiles that can be launched from its own submarines (in response to North Korea’s progress toward the same capabilities). Deserving of applause as well are Japanese and Taiwanese plans to boost defense spending – and acquire some impressive weapons along the way. Japanese officials are even talking seriously about what steps Tokyo can and should take to help defense Taiwan if the stuff hits the fan with China – although nothing like a clear decision had been made.

Defense spending levels in all three countries are still measly, especially considering what dangerous neighborhoods they live in. And it’s not as if time is necessarily on their side. But something new seems astir, and I’m not convinced that China’s worsened behavior is entirely responsible. Some credit undoubtedly goes to the Trump administration. Since his initial White House campaign, the campaign, the former President insistently asked why Americans should risk their own security for that of allied freeloaders, and foot so much of the bill. And throughout his presidency, he kept so much pressure on that the Asia allies clearly worried that the Uncle Sucker days were over, and that Trump’s complaints reflected much and possibly most American public opinion. (See, e.g., here.)

President Biden deserves some credit here, too – but I would argue in part in spite of himself. Mr. Biden of course is a card-carrying globalist who for the entirety of his long career in public life has agreed wholeheartedly with the need to maintain strong U.S. alliance relationships. Hence it was no surprise that during the 2020 campaign and immediately after his inauguration, he took great pains to assure U.S. allies that the United States would “be back” after years of Trump-ian neglect. And indeed, earlier this year, Mr. Biden showed every sign of coddling continued Asian defense free-riding.

But ironically, the biggest Biden spur to more Asian defense burden-sharing might be his botched withrawal from Afghanistan. In other words, whereas the Asians (and other allies) were worried mainly that Trump would cut them loose because he was unwilling to protect them if they didn’t change their deadbeat ways, it’s entirely possible that they fear Mr. Biden won’t be able to ride to their rescue – at least not in any effective way.

I know that there’s little evidence of such mistrust in official Asian rhetoric so far. And of course, one of the President’s main stated reasons for leaving Afghanistan in the first place was to free up more American energies and resources to focus on China. But some unofficial Asian voices seem less sure, and it would be surprising to see any governments pushing the panic button in almost any circumstances. And could it be a total coincidence that the aforementioned spate of Asian defense decisions came in the wake of the Afghanistan pullout?

I seriously doubt it.  And as a result, if Mr. Biden wants to turn America’s Asian protectorates into genuine allies, he should continue his own strategy of stepping up exports of advanced weapons to them (and to many of their neighbors, depending on each one’s solidarity), signaling his willingness to go even further (as with this excellent decision) and employ some of the Trump-ian “transactionalism” that’s had so many globalists clutching their pearls for so long. 

But instead of threatening American withdrawals if they don’t pony up more defense-wise, the President should promise them more hardware if they do.  Casually floating the idea of OKing the acqusition of nuclear weapons by various allies wouldn’t hurt, either.

And he should stop pretending that none of this activity is directed against China. Not only does such rhetoric signal credibility-shaking skittishness. It contradicts yet another example of transactionalism that should become part of the Biden strategy: Making clear to China that staying on its current belligerent course will be a great way to guarantee that it’s ringed with ever more neighbors that are armed to the teeth.        

Our So-Called Foreign Policy: Biden’s Just Blundered on Taiwan, Too

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ABC News, Afghanistan, alliances, allies, Article Five, Biden, China, Cold War, Congress, credibility, George Stephanopoulos, Japan, NATO, North Atlantic treaty Organization, Our So-Called Foreign Policy, Republic of China, semiconductors, South Korea, Taiwan, treaties, vital interests

Last week I tweeted that I was worried that President Biden would do something stupid and reckless to try to establish or reestablish (depending on our viewpoint) his global chops following the Afghanistan military withdrawal his administration has so disastrously conducted. As known by RealityChek regulars, American Presidents have followed this course before – notably John F. Kennedy.

And sure enough, on Wednesday he at least came uncomfortably close. No, Mr. Biden didn’t invade or threaten another country, or even move U.S. military forces into provocative positions versus, say, China or Russia or Iran or North Korea. But he did say something that should worry all Americans. In his interview with ABC News’ George Stephanopoulos, the President suggested that Taiwan now enjoys the same status in American eyes as Japan, South Korea, and the members of the North Atlantic Treaty Organization (NATO). That is, they’re allies in whose defense against external aggression the United States is treaty-bound to fight.

Specifically, when asked by Stephanopoulos if China could credibly tell the Taiwanese – who they claim run a renegade province that Beijing has vowed to bring back into its fold with force if necessary – “See? You can’t count on the Americans,” Mr. Biden’s response included:

“We have made– kept every [defense] commitment. We made a sacred commitment to Article Five that if in fact anyone were to invade or take action against our NATO allies, we would respond. Same with Japan, same with South Korea, same with– Taiwan. It’s not even comparable to talk about that.”

The President is right about NATO. In fact, that Article Five he mentioned is the keystone of the treaty that established the alliance. In 1949, the signatories agreed

“that an armed attack against one or more of them in Europe or North America shall be considered an attack against them all and consequently they agree that, if such an armed attack occurs…will assist the Party or Parties so attacked by taking forthwith, individually and in concert with the other Parties, such action as it deems necessary, including the use of armed force, to restore and maintain the security of the North Atlantic area.”

The Japan-U.S. Security Treaty of 1951 contains its own Article Five. The key section:

“Each Party recognizes that an armed attack against either Party in the territories under the administration of Japan would be dangerous to its own peace and safety and declares that it would act to meet the common danger in accordance with its constitutional provisions and processes.”

The promise to meet aggression with U.S. military force is a little looser here – and notice that the treaty creates no Japanese obligation to aid the United States with its own military if American territory comes under attack. The reasons are complicated – for example, in 1947, Japan, then under U.S. military cooperation, adopted a constitution containing a proposal from Supreme Allied Commander General Douglas MacArthur that pledged “never” to “maintain” “land, sea and air forces, as well as other war potential.” The idea, of course, was to prevent Japan from ever reemerging as the type of threat it became in the 1930s. And at that point, it wasn’t even a fully sovereign nation, much less an armed one.

Nonetheless, as the Cold War developed, and Washington’s priorities in East Asia shifted toward using any actual and potential assets available to resist communist aggression, the United States proceeded to push Japan to rearm and add to the regional forces that could fight the Soviets or the Chinese or the North Koreans. But even though Japan continuously balked, the United States’ determination to defend Japan could never be seriously doubted as long as tens of thousands of American servicemen were stationed on Japanese soil, representing a “tripwire” whose presence and possible vulnerability to the superior conventional militaries of potential regional aggressors would guarantee an armed U.S. response – poentially complete with the use of nuclear weapons – against an attack on Japan. 

A similar U.S. commitment – complete with unequal obligaions and tripwire forces – has been made to South Korea.

There’s now clearly a case for adopting the same policy toward Taiwan. From 1954 to 1979, the U.S. security relations with Taiwan were governed by a assymetrical defense treaty, too, complete wiith an Article Five American commitment. But since the United States decided to recognize the People’s Republic of China (yes, the Communists) as China’s sole legitimate government, its approach toward Taiwan’s defense has been informally called “strategic ambiguity” – which is just as fuzzy and plastic as it sounds.

Yet whereas that posture arguably made sense for most of the post-1979 period, since the People’s Republic has grown so much stronger and more important economically than Taiwan (which still calls itself the Republic of China), the island can now legitimately claim to boast an asset vital to America’s own national security and prosperity – world leadership in the manufacture of the world’s most advanced and powerful semiconductors.

At the same time, extending Article Five-type status even to a technological powerhouse like Taiwan isn’t a decision to be made on the spur of the moment. The impact on China – which has significantly closed the military gap with the United States especially in its own backyard (where Taiwan is located) – needs to be carefully considered. And more important, it’s a move that the United States can’t make by presidential fiat. Congress needs to approve.

On Thursday, a “senior Biden administration official” told reporters that American “policy with regard to Taiwan has not changed.” And the usual supposed experts and talking heads said that Mr. Biden had simply added to his long record as a “gaffe machine.” But who the heck is this senior official, anyway? Why should anyone believe him or her if they’re not willing to speak for attribution? And why should the Chinese take this walk-back seriously, or take comfort in (unofficial) assurances that the President was just Biden-ing again – especially since “strategic ambiguity” has become a lot bolder under both him and President Trump?

Moreover, if they’re not aware of it already, the Chinese should know that Presidents have used all sorts of ways short of formal treaties to tie the nation militarily to foreign countries, and even to use military force (Google “Tonkin Gulf Resolution,” or “Authorization for Use of Military Force”), and that timely, effective Congressional resistance is anything but a sure thing. That could go double for a national political establishment that today is united by a sense of humiliation due to the Afghanistan debacle – and possibly spoiling for an opportunity to regain global confidence.

Again, I’m not against a treaty commitment to Taiwan. But it needs to be made with full consideration of all the pluses and minuses, and according to clear Constitutional procedures. And it certainly shouldn’t result from an out-of-the-blue comment by a Chief Executive under heavy political fire, however richly deserved.

(What’s Left of) Our Economy: Is More Immigration Really the Key to America’s Tech Future?

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Cato Institute, China, education, entrepreneurs, Germany, H-1B visa, immigrants, Immigration, India, innovation, Israel, Japan, skills, South Korea, start-ups, Taiwan, technology, Washington Post, Worldometers.info, {What's Left of) Our Economy

One of the most compelling – and most often made – arguments in favor of higher U.S. legal immigration levels has to do with innovation. Supposedly, without encouraging ever more foreign workers to move to America, the nation will never be able to maintain its global technology leadership, and ultimately an acceptable, much less improved, degree of prosperity. (See, e.g., here and here.)

Part of the rationale for a welcoming posture, as indicated above, has to do with policies toward highly skilled and educated immigrants in particular (like those admitted under the H-1B program), and the special visa quotas allotted to them. But as the Washington Post editorial board recently made clear, there’s a more general view that immigration is especially good at providing America with “a steady supply of working-age strivers” and that “This nation’s prosperity, pluck, ambition and effervescent character are the products of more than 100 million immigrants who have sought better lives in the United States since its founding.” In other words, immigrants are far more likely than the native-born population to possess the risk-taking and general entrepreneurial traits that lead to so much technological progress.

I’ve already debunked one aspect of these claims here, but because they keep popping up, I keep thinking more about them, and have come across more data that not only casts further doubt on the technology-related need for more immigrants, but that indicate that the immigration cheerleaders are putting the cart before the horse.

For instance, it’s widely agreed that the U.S. tech sector is considerably healthier than Germany’s. In this vein, a widely followed global innovation index issued each year by a United Nations agency ranks the former third in the world and the latter ninth. Ninth isn’t so bad, but it’s at the least curious in this regard that for decades at least, Germany has admitted many more immigrants as a share of total population than has the United States.

Indeed, in 1990 (a good starting point, since current Germany came into being with the reunification that year of the former Federal Republic that comprised the nation’s western part and the former Communist run east), Germany’s immigrant inflow of 1.256 million represented 1.59 percent of the new country’s 79.054 million inhabitants. The 1.536 million green cards awarded by the United States that year accounted for only 0.60 percent of its 252.120 million people. (My official sources for German and U.S. annual immigration totals are here and here, respectively. For population, I used the reliable Worldometers.info website.)

But maybe Germany has made up some ground on the United States during this nearly three-decade period? Not according to this study last year from the Cato Institute – one of America’s foremost supporters of much more lenient U.S. immigration policies. If you look at Figure 2, you see that in 2018, Germany was lagging the United States just about as badly in the number of patents it received in the United States (still the world’s most important market for technology) as it was in 1990.

There doesn’t seem to be much evidence that its relatively large immigration inflows have given Germany much of an edge in entrepreneurship, either. As of 2019, according to this source, Germany’s business start-up rate was less than half that of the United States.

This chart, moreover, makes clear that it’s not just the U.S.-Germany comparison that mucks up the ostensible relationship between tech prowess and entrepreneurship on the one hand, and immigration levels on the other. After all, in 2019, India’s start-up rate was also much higher than Germany’s – even though India is much better known for sending folks abroad than for attracting them. Foreigners aren’t exactly flocking to live in China, either, yet its start-up rate matches Germany’s.

That Cato Institute study provides more complicating international comparisons. That Figure 2 shows that as of 2018, Israel has forged into the lead as the country receiving the largest number of U.S. patents. And its performance started taking off in the mid-1990s. Yet in 1995, when Germany and Israel were roughly on a par in their ability to receive American patents, the 76,361 immigrants Israel admitted in 1995 equalled 1.36 percent of its population of 5.619 million – not far from relatively un-innovative Germany’s figures. By the time it became the international leader, Israel’s immigration rate had fallen to 0.32 percent of its 8.972 million population – much lower than that of Germany, which had become a clear als-ran on the U.S. patent scene – and roughly the same as the recent U.S. rate which has been decried as so woefully inadequate.

And look at the other top performers in Figure 2 other than the United States and Israel. Taiwan hasn’t been anything close to an immigration magnet, either, and ditto for South Korea. As for Japan, it’s long been known as one of the most xenophobic countries in the world (as noted in that Washington Post editorial).

What do the non-U.S. “patent tigers” identified by Cato have in common? As author Jonathan M. Barnett puts it:

“Short on consumers, resources, and labor (and saddled with geographic separation from key consumer markets), the patent tigers (especially Israel and Taiwan) were compelled to specialize in innovation-intensive segments of the global supply chain in which ingenuity, rather than labor or natural resources, conferred a competitive advantage.”

As a result, as widely agreed, they’ve worked hard to create top-notch educational systems for their own populations. German education is highly regarded, too, but it’s often observed that its history and culture in particular have discouraged self-starters.

The lessons for the United States seem pretty clear here.  On the one hand, it’s got lots of the overall population, raw materials and domestic markets that the patent tigers lack.  On the other, unlike Germany, it still enjoys an entrepreneur- and innovation-friendly culture.  If Americans did a much better job of educating their own people, especially in the math, science, and technology fields, they should be able to keep its global technology edge even while controlling immigration more tightly. 

If, however, the nation continues to coddle underperforming school systems, especially at the primary and secondary levels, the argument for relying on immigration to fill the tech gap will look all the stronger.  And in a supreme irony, the ready availability of highly skilled and educated immigrants will keep reducing national incentives to get the national education act together.