Our So-Called Foreign Policy: What’s Really Wrong with Trump’s NATO Policies

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alliances, allies, America First, Crimea, Eastern Europe, Korea, NATO, North Atlantic treaty Organization, nuclear deterrence, Our So-Called Foreign Policy, Russia, Soviet Union, The National Interest, tripwires, Trump, Ukraine, Vladimir Putin

As this year’s summit of the leaders of the North Atlantic Treaty Organization (NATO) begins, it’s nothing less than vital for Americans to understand two points about President Trump’s approach to the Atlantic alliance:

First, the President’s globalist critics are right in pointing out that Mr. Trump is thoroughly, and even dangerously, mishandling U.S. relations with NATO.

Second, these critics completely misunderstand why the President is off-base.

The heart of the globalist case against Trump-ian NATO policies goes generally like this: Mr. Trump drastically underestimates the contribution made by the alliance to U.S. national security interests not only in Europe but around the world. Especially worrisome are his threats to reduce America’s military presence in Europe if other NATO members don’t boost their defense budgets to agreed on levels, and the chance that he could strike some kind of a deal with Russian leader Vladimir Putin at their upcoming meeting that would in some way accept Moscow’s annexation of Crimea and designs on Ukraine. The result would be the kind of appeasement that could encourage more Russian aggression against former satellites of the old Soviet Union that are NATO members today, and against the Baltic states, other new NATO members that were part of the Soviet Union proper after being taken over in 1940.  

Yet this critique fundamentally misreads the Trump NATO strategy – at least as it stands this week. Many of the latest alarm bells were set off by a Washington Post report describing a Pentagon investigation of “the cost and impact of a large-scale withdrawal or transfer of American troops stationed in Germany” – where most U.S. forces in Europe are deployed.

Although semi-denied by the Defense Department, the alleged finding seemed consistent with Mr. Trump’s suggestions that if the NATO allies don’t pick up more of the alliance’s military spending burden, America’s commitment to their defense might weaken. (Interestingly, a similar statement was made earlier this year by Defense Secretary James Mattis, who is generally considered a national security traditionalist who values America’s alliances much more than the President).

But widely overlooked in the latest trans-Atlantic tumult are Mr. Trump’s actions – which should speak louder than words. And many of them were nicely summed up in this Associated Press article:

“Notwithstanding Trump’s grumbles about America shouldering the defense burden of Europe, his administration plans to boost spending to support it.

“In the aftermath of Russia’s annexation of the Crimea region of Ukraine in 2014 and its subsequent military incursion into eastern Ukraine, the Pentagon ramped up joint exercises in eastern and central Europe and spent billions on what it calls the European Deterrence Initiative aimed at Russia. After spending $3.4 billion on that initiative last year, the Trump administration has proposed boosting it to $6.5 billion in the 2019 budget year.”

It’s bad enough that a U.S. decision to increase the American military footprint in Europe will completely kneecap the Trump administration’s efforts to push more allied military spending by convincing the allies that continued free-riding and foot-dragging will carry no cost. Far worse is the focus of this new U.S. spending on beefing up the American/NATO presence in Poland and the other new alliance members in Eastern Europe. Indeed, that article about studying cutting American forces in Germany reported that one option being considered was moving some – presumably permanently – to Poland, which borders Russia.

The Poles and the other countries once under the Soviet thumb are understandably heartened by these possible moves. Troublingly, however, this apparent Trump gambit indicates that he’s just as ignorant about the paramount reason for overhauling U.S. NATO strategy as his globalist critics: Because of the alliance’s expansion to cover so many countries so close to Russia, because Moscow has recently been responding so sharply, and because NATO legally requires the United States and all other allies to rally to the defense of any NATO member under attack, the chances have risen that America could become embroiled in a war with a nuclear-armed Russia.

And worse still, the more American units are stationed in Europe, and the more permanent these deployments (so far, they’re periodically rotated in and out), the greater the odds that such a conflict will go nuclear – because defending Russia’s neighbors with conventional forces alone will prove impossible, and because the American forces will become a tripwire whose defeat or impending defeat would generate heavy pressure on any U.S. President to respond with a nuclear strike that would risk Russian retaliation.

A resulting, and tragic, irony: The security of Germany and the countries of Western Europe have for decades been considered vital American interests, primarily because their industrial and technological strength and potential could dramatically affect the balance of global power. The security of the countries to the East have never been considered vital American interests, partly because they have never remotely possessed these capabilities or potential, and partly because geography will always make them fatally vulnerable to Soviet or Russian ambitions.

So the possibly emerging Trump position amounts to assuming greater risks (including of nuclear attack on the American homeland) for assets of much less value.

As I’ve written, the continuation of status quo American policies on the Korean Peninsula poses similar nuclear risks to protect an ally – South Korea – that’s certainly impressive economically but hardly decisive to U.S. safety or prosperity.

I’m still firmly on board with President Trump’s declared intention of replacing longtime globalist foreign policies with an America First approach. But like everything else in life, this transformation can be carried out badly and well. Without a major course change, Mr. Trump’s policies could easily wind up leaving the nation with the worst of both international strategies.

P.S. If you’re interested in seeing how I would deal with the above dilemmas, check out my new article in The National Interest – on what a genuine America First foreign policy would look like, and why it would be far better than its predecessor, or the strange hybrid the Trump administration has created to date.

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Im-Politic: Mainstream Media Again Foster NAFTA Myths and Think Tank Corruption

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Canada, donors, Google, Im-Politic, Japan, Korea, Mainstream Media, media, Mexico, NAFTA, Navistar, New America, North American Free Trade Agreement, offshoring, Peterson Institute for International Economics, Reuters, tariffs, think tanks, Trade, trucks, Trump, Washington Post, Woodrow Wilson Center

Although Donald Trump’s presidency might still turn out to be a watershed for U.S. trade policy, it already seems clear that trade policy coverage from the Mainstream Media will remain uniformly terrible, and unmistakably slanted toward the conventional approach that candidate Trump promised to disrupt. As recent articles from Reuters and the Washington Post remind, the bias takes both subtle and non-subtle forms.

Both pieces deal with the talks to renegotiate the North American Free Trade Agreement (NAFTA), which have resumed in Washington, D.C. this week. Despite its failings, Reuters correspondent Sharay Angulo’s article on the talks’ possible impact on multinational truck manufacturers contained some important information. For instance, she reported that 98 percent of the trucks exported from Mexico are sent to the United States and Canada – which oddly precedes a claim that most of these truck companies “have a similar strategy of building in Mexico to export to countries other than the United States.”

We also learn from her that more than half the “original parts” of U.S. firm Navistar’s Mexico-made trucks come from the United States and Canada (although this information comes from Navistar itself, and like other company-specific information re NAFTA, offshoring, and trade in general, so far can’t be independently verified). In addition, the article (again citing Navistar statistics) states that the firm exports fewer than half its Mexico-made vehicles to the United States – which seems to differentiate it sharply from its competitors.

Where the report veers sharply from the rational is in its unquestioning acceptance of the claim that “Higher tariffs on imports or reduced trade flows would raise the cost of production and of exporting to the United States. That would make trucks more expensive for all Navistar’s customers….”

What’s somehow missed by the author (and all the “experts” consulted by Reuters who allegedly agreed with this contention) is that this result would unfold only if Mexico retaliated against any Trump administration tariffs on its exports to the United States with new levies of its own that would hit manufacturers like Navistar. Given Mexico’s heavy dependence on parts imports to support its export-oriented truck and other industrial production, why on earth would its government take this step? Such retaliation would “raise [its] costs of production and of exporting to the United States” yet higher. Talk about cutting off one’s nose to spite one’s face.

Also missed by Angulo – how higher Mexico production costs could well achieve Mr. Trump’s revamp objectives by shifting truck manufacturing back to the United States. She’s correct in suggesting that low tariffs on Mexico exports to the United States may not suffice. But a logical (and seemingly obvious) implication is simply that higher tariffs will be needed.

The less subtle form of bias came in an October 6 Washington Post article previewing the latest NAFTA talks, and although it’s a more common variety, it was especially flagrant. One big problem is the authors’ (and their editors’) decision, with a single exception, to quote only critics of the Trump administration’s efforts.

Thus, readers are presented with the perspective of a Canadian trade lawyer, a former Mexican trade negotiator who now works for a D.C.-based consulting firm with many offshoring companies as clients, a Mexican business lobbyist who officially advises his country’s NAFTA negotiators, a former Canadian official, a former Obama administration economic aide, and four specialists from two Washington, D.C.-based think tanks.

A second big, and related problem – at a time when the intellectual integrity of such think tanks has come under a positively stygian cloud due to the uproar over New America’s firing of several researchers who ran afoul of big donor Google, the Post piece makes absolutely no mention that both of these organizations depend heavily on contributions from both companies and foreign government organizations with vital stakes in maintaining the NAFTA status quo.

For example, the latest info from the Mexico Institute of the Woodrow Wilson Center (itself a recipient of U.S. taxpayer funding), base for one of the specialists showcased in the piece, reveal that the organization receives contributions from no less than six big Mexican companies, plus Wal-Mart (a big importing business) and the main trade association of the American pharmaceutical industry – which manufactures in Mexico for export to the United States.

The Canada Institute, where the other quoted Wilson Center specialist is based, lists the Canadian government as a donor.

As for the other think tank relied on by the Post for (supposedly objective) expertise, the Peterson Institute for International Economics (PIIE), among its U.S. and foreign multinational funders that produce in Mexico for export to the United States are Toyota, GE, Caterpillar, IBM, Ford, GM, Samsung, John Deere, Procter & Gamble, and Mitsubishi.

PIIE also takes contributions from three foreign government entities that help their countries’ companies engage in export-oriented operations in Mexico: the Korea Institute for International Economic Policy, the Korea Development Institute, and the Japan Bank for International Cooperation.

In addition, in recent years, the Peterson Institute has also cashed big checks from Mexican building materials giant Cemex, and from the U.S. Chamber of Commerce – the organizational spearhead of America’s corporate offshoring lobby.

As I’ve repeatedly emphasized, the point here is neither that these think tanks’ findings and opinions lack merit, or they or their donors have no right to weigh in on important trade and other policy debates. It’s that these ostensible research groups should make clear who’s paying their rent – and that if they continue with what I’ve called deceitful idea laundering on behalf of their sponsors, the press should call them out.

The Mainstream Media, however, keeps failing to fulfill this responsibility – which can only deepen already profound suspicions that it’s abandoning its watchdog role and turning into an establishment lapdog instead.

(What’s Left of) Our Economy: A Comeback for the U.S. Trade Deficit – & Most (but not all!) of the Usual Suspects

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Canada, China, energy, exports, GDP, Germany, gross domestic product, high tech goods, imports, Korea, Made in Washington trade deficit, manufactures, Mexico, NAFTA, non-oil goods deficit, North American Free Trade Agreement, oil, recovery, Trade, trade deficit, Trump, {What's Left of) Our Economy

America’s goods and services trade deficit recorded a near-double-digit sequential increase in January to hit $48.49 billion. That monthly total was the highest since March, 2012’s $50.22 billion. Combined goods and services exports inched up sequentially to $192.04 billion – their best performance since December, 2014’s $197.46 billion. But total imports grew some four times faster, to $240.59 billion. That total also was the highest since December, 2014 ($241.21 billion).

America’s pre-inflation oil trade deficit spurred much of the total trade gap’s January rise, soaring by nearly 25 percent sequentially to $7.56 billion – the highest level since July, 2015’s $8.01 billion. An 18.37 percent surge in imports to $16.87 billion, the highest total since January, 2015’s $19.63 billion produced much of this result. But the huge, chronic U.S. manufacturing trade deficit also shot up in January – from $69.52 billion to $75.54 billion. And following a record December monthly plunge in its volatile trade balance, the shortfall in high tech goods more than doubled in January, to $8.46 billion.

The massive and longstanding American merchandise deficit with China rebounded by nearly 13 percent in January from a nine-month low to reach $31.30 billion. The main culprit – the biggest decrease in monthly goods exports to China (13.37 percent) since last January’s 18.87 percent plunge. The goods gap with NAFTA partner Canada jumped by more than 68 percent on month, to $3.62 billion. And the merchandise deficit with free trade partner Korea more than doubled, from a nearly two-year low, to $2.59 billion. Yet the U.S. merchandise deficit with Germany — whose big global surpluses have just been targeted by the Trump administration — hit its lowest level ($4.88 billion) since last February ($4.51 billion), and that with Mexico shrank by just over 10 percent, to $3.95 billion. That was its lowest level since July, 2015 ($3.71 billion).

Most troubling, however, the Made in Washington trade deficit – the gap in goods other than oil that is heavily affected by U.S. trade policy – rose by more than five percent on month to hit $61.43 billion. That total, the highest since March, 2015’s $61.90 billion, signals that the trade drag on the already sluggish current American economic recovery will increase further in the first quarter of this year.

Here are selected highlights of the latest monthly (January) trade balance figures released this morning by the Census Bureau:

>In January, the U.S. trade deficit hit $48.49 billion – its highest monthly level since March, 2012’s $50.22 billion.

>The January total represented a 9.56 percent increase over the December total, which was adjusted only fractionally downward, to $44.26 billion.

>Combined goods and services exports of $192.09 billion represented a 0.56 percent increase over the upwardly revised December figure of $191.01 billion – and the highest monthly result since December, 2014’s $197.46 billion total.

>But combined goods and services imports grew by 2.26 percent in January, from an upwardly revised December level of $225.27 billion to $240.59 billion. That total was also the highest since December, 2014 ($241.21 billion).

>Much of the January trade deficit increase resulted from a 24.72 percent monthly pop in the current-dollar U.S. oil trade deficit. The $7.56 billion total was the highest since July, 2015’s $8.01 billion.

>Pre-inflation oil exports increased by 13.68 percent on month in January, from $8.20 billion to $9.32 billion. But imports surged by 18.37 percent – from $14.26 billion to $16.87 billion. That was their highest total since January, 2015’s $19.63 billion.

>But January’s poor U.S. trade performance was also fueled by an 8.66 percent increase in the massive and chronic manufacturing trade gap, from $69.52 billion to $755.54 billion.

>Manufactures exports sank by 7.02 percent sequentially in January, from $89.36 billion to $83.09 billion. But manufactures imports dipped by only 0.16 percent, from $158.88 billion to $158.62 billion.

>Within manufacturing, the high tech goods deficit worsened dramatically in January, as the monthly shortfall rebounded from a record (71.78 percent) sequential drop in December, to $3.82 billion, to $8.46 billion – i.e., a more-than-doubling.

>U.S. high tech goods exports plummeted in January by 18.93 percent – from $32.18 billion in December to $26.06 billion. Imports, however, declined by only 4.11 percent, from $36.00 billion to $34.52 billion.

>The wider January trade deficits in manufacturing and high tech goods were no doubt linked to the 12.78 percent increase in the American merchandise trade shortfall with China – from $27.76 billion in December (the lowest such figure since last April’s $24.31 billion) to $31.30 billion.

>U.S. goods exports to China fell by 13.37 percent on month in January – from $11.63 billion to $10.07 billion. That was the biggest sequential decrease since last January’s 18.87 percent. U.S. goods imports from China hit $41.38 billion – a 5.07 percent rise from December’s $39.38 billion.

>America’s merchandise deficit with Canada skyrocketed in January by 68.37 percent, from $2.15 billion in December to $3.62 billion. U.S. goods exports to this North American Free Trade Agreement (NAFTA) partner fell 2.35 percent on month, but imports advanced by 4.17 percent.

>The goods deficit with bilateral free trade partner Korea more than doubled in January, from $1.20 billion (the lowest such total since February, 2014’s $1.08 billion) to $2.59 billion. America’s merchandise exports to Korea ticked up by 0.27 percent on month, but its merchandise imports were up 8.91 percent.

>Since the bilateral trade deal went into effect in March, 2012, the U.S. merchandise deficit with Korea has roughly quintupled on a monthly basis.

>By contrast, even though the Trump administration has recently criticized Germany’s burgeoning global trade surpluses, the American merchandise deficit with that country actually shrank on month by 8.72 percent to $4.88 billion.  That was its lowest level since February, 2014 ($4.51 billion).

>Similarly, the United States’ merchandise deficit with its other NAFTA partner, Mexico, fell by 10.13 percent, from $4.39 billion to $3.95 billion. That’s its lowest level since July, 2015 ($3.71 billion).

>At the same time, the 5.21 percent monthly rise in the January real non-oil U.S. goods deficit of $61.43 billion – the biggest such total since March, 2015’s $61.90 billion – spells trouble for American economic growth in the first quarter of this year. This Made in Washington deficit – which strips out areas like energy and services, which are only slightly impacted by American trade policies – influences the most closely followed gross domestic product figures, which are inflation-adjusted.

>Although the final fourth quarter 2016 results are not yet available, preliminary figures so far show that the strong growth of this policy-shaped trade deficit has slowed the cumulative pace of the nation’s historically weak economic recovery by fully 20.56 percent – or $434.78 billion.

(What’s Left of) Our Economy: New Trade Figures Full of (Odd) Surprises & (Mainly Dubious) Records

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Census Bureau, China, currency, exports, Germany, high tech goods, imports, inflation-adjusted growth, Japan, Korea, Made in Washington trade deficit, manufacturing, Mexico, non-oil goods trade deficit, recovery, Trade, trade deficit, Trump, {What's Left of) Our Economy

America’s goods and services trade deficit decreased 3.21 percent in nominal terms on month in December – even though inflation appears to be rising and the fourth quarter real deficit rose at its fastest rate (14.82 percent) since early 2010. In fact, in pre-inflation terms, the quarterly deficit was up only 12.95 percent sequentially. In addition, despite a slowdown in U.S. economic growth, the overall trade deficit edged up on-year by 0.38 percent, to $500.25 billion. In 2016, both combined and goods imports both recorded their first consecutive annual decreases since the current Census historical series begins (1960). In addition, both categories of exports fell in 2016 for the second straight year for the first time since 2002.

December combined goods and services exports rose to their highest level since January, 2015, but total imports hit a post-March, 2015 high. Fueling much of the December sequential improvement was a double-digit drop in the huge and chronic manufacturing trade deficit, and the biggest all-time fall in the volatile high tech goods shortfall (71.78 percent) that was generated largely by the sector’s best-ever monthly exports ($32.18 billion). The goods deficit was down 1.64 percent on year, but the long-time surplus the nation has run in services trade decreased by 5.48 percent – its first such fall since 2003.

Trade with countries possibly targeted by President Trump for new negotiations or unilateral U.S. tariffs turned in a mixed 2016 performance, as American goods deficits rose slightly with Mexico and Japan, and fell with China and Germany. But all these imbalances remained at lofty levels historically. The monthly shortfall with free trade partner Korea, however, hit its lowest level since February, 2014. Nonetheless, the December figures revealed a dramatic rise in the trade drag on America’s sluggish economic recovery.

Most troubling, as of year-end 2016, the Made in Washington deficit had reduced cumulative inflation-adjusted growth during the recovery by 20.56 percent, or $434.78 billion.

Here are selected highlights of the latest monthly (December) and full-year trade balance figures released this morning by the Census Bureau:

>A monthly 3.21 percent drop in the December goods and services trade deficit led off a series of surprises produced by the new monthly U.S. trade figures – which also presented the first full-year results for 2016.

>The December sequential decrease – to $44.26 billion from an upwardly revised $45.73 billion November level – yielded a rise in the nominal fourth quarter 2016 trade gap of 12.95 percent. That’s less than the 14.82 percent surge in the real trade deficit in that fourth quarter reported in the latest gross domestic product figures – even though inflation in the United States appears to be heating up.

>Also puzzling in the new trade figures – the annual increase of the combined goods and services shortfall (albeit by only 0.38 percent, to $500.25 billion) despite a slowing overall economy.

>The new records and multi-year highs and lows revealed in this morning’s trade figures start on the import side. Both combined imports and goods imports fell in 2016 for the second straight year. Such declines have not been seen since 1960 – when the Census Bureau’s current historical statistics series begins.

>The former reached $2.712 trillion in 2016 – the lowest such level since 2011 ($2.676 trillion). The latter reached $2.210 trillion – also the lowest such level since that year ($2.240 trillion).

>Combined exports also fell for the second straight year in 2016 – by 2.34 percent – and totaled $2.209 trillion. The last time such a back-to-back decline was experienced was in 2002. And the 2016 level was the lowest since 2011 ($2.127 trillion).

>Goods exports on an annual basis fell consecutively for the first time since 2011 as well. In 2016, they were off by 3.31 percent, and hit $1.460 trillion. That’s the lowest such level since 2011 as well ($1.499 trillion).

>Meanwhile, the slight deterioration in the annual overall 2016 trade deficit resulted largely from an unusual source – the first drop in the services trade surplus (by 5.48 percent, to $247.82 billion) since 2003.

>In 2016, services exports dipped by 0.17 percent, to $749.58 billion. But the drop was the sector’s first since 2009. Services imports, meanwhile, hit an all-time high of $501.75 billion – up 2.68 percent from 2015 levels.

>The goods deficit in 2016 fell for the first time since 2013 – by 1.64 percent, to $750.07 billion.

>Total exports increased in December on a monthly basis by 2.71 percent, from a downwardly adjusted $185.65 billion to $190.69 billion. That’s the best total since January, 2015’s $191.97 billion.

>Total imports rose more slowly – by 1.54 percent, to $234.95 billion from an upwardly adjusted $231.38 billion. But that total was the highest since March, 2015’s $238.64 billion.

>Fueling much of the December monthly improvement was the biggest monthly drop in America’s volatile high tech goods deficit on record – a 71.78 percent plunge from $13.53 billion to $3.82 billion.

>High tech goods exports shot up sequentially by 15.80 percent to a monthly all-time high of $32.18 billion. Imports were off by 12.87 billion on month, to just over $36 billion.

>The broader manufacturing sector enjoyed a good December, too. The monthly deficit fell from a record $80.75 billion in November to $69.52 billion – an improvement of 13.91 percent.

>Even better, the manufacturing trade gap shrank because imports fell on month in December by 4.71 percent and exports advanced by 3.91 percent.

>On year, however, manufacturing’s trade performance deteriorated again. The annual trade deficit rose by another 3.25 percent to $861.82 billion – its latest annual record.

>Manufacturing exports declined by 4.71 percent, to $1.051 trillion, but imports were off only 1.71 percent, to $1.913 trillion.

>U.S. trade partners who have attracted the ire of President Trump could take some solace from this morning’s trade figures.

>The longstanding and enormous U.S. goods trade deficit with China fell by 5.48 percent on year, from $367.13 billion to $347.04 billion. Both U.S. merchandise imports from and exports to the still strongly growing Chinese economy decreased on annual basis – by 4.23 percent and 0.26 percent, respectively.

>The merchandise trade shortfall with Germany – whose currency policies, like China’s, have been criticized by the Trump administration – was down as well on year, by an even greater 13.34 percent, from $74.85 billion to $64.87 billion. U.S. goods exports to Germany slipped by 1.22 percent but goods imports sank by 8.49 percent.

>>The decline in the U.S. goods trade deficit with Korea, with which a free trade agreement went into effect in 2012, was 2.29 percent, from $28.31 billion to $27.67 billion. This total was still the second highest on record. Both U.S. goods exports to and imports from Korea decreased – by 2.71 percent and 2.55 percent, respectively.

>Some of the improvement in Korea trade resulted from the nearly 50 percent monthly plummet in the December goods gap. The $1.20 billion figure was the lowest since February, 2014’s $1.08 billion.

>Yet the merchandise trade gap with Mexico rose – by 4.17 percent, from $60.66 billion to $63.19 billion. U.S. goods exports – many of which are intermediate goods that are re-imported as final products – inched down by 2.03 percent while imports were down by only 0.76 percent.

>America’s merchandise trade deficit with Japan climbed fractionally, to $68.94 billion in 2016, as goods exports advanced by 1.32 percent and the much greater volume of goods imports grew by 0.64 percent.

>Unfortunately, the new trade data showed that trade’s drag on the U.S. economy increased significantly in 2016. In particular, the inflation-adjusted increase in the Made in Washington deficit (the non-oil goods deficit) since the current recovery began in mid-2009 has cut cumulative inflation-adjusted growth during this sluggish expansion by fully 20.56 percent. That translates into $434.78 billion of real output lost because of America’s trade performance in those areas most heavily affected by trade deals and related policies.

Following Up: Why Economists & Establishment Media Should be a Little More Humble on Trade

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Adam Davidson, Donald Trump, economics, economists, Federal Reserve, Financial Crisis, Following Up, Global Imbalances, Great Recession, Janet Yellen, Korea, Peter Navarro, The New Yorker, TPP, Trade, Trans-Pacific Partnership

A fascinating and revealing coda has just been provided to my brief brush with fame last week, when The New Yorker deemed my views on trade issues not worthy of consideration.  And the source was, of all people, Fed Chair Janet Yellen.

As I wrote on October 13, in a profile of Donald Trump economic adviser Peter Navarro, New Yorker writer Adam Davidson made clear that he considered one glaring weakness of the Republican candidate’s views on trade and other economic policies to be their lack of support among professional economists. As a result, Davidson was completely unimpressed when Navarro noted that I have endorsed them in general – since I lack an economics degree. Nor was his interest piqued when I reminded him by email that my predictions about the outcomes of major trade policy initiatives, like admitting China into the World Trade Organization, were much more accurate than those of most Ph.Ds .

Enter Chair Yellen. In a speech in Boston the very next day, she focused on “some ways in which the events of the past few years [since the outbreak of the financial crisis and Great Recession] have revealed limits in economists’ understanding of the economy….” And despite her understatement, these limits look awfully important. The subjects to which they apply include how demand influences supply, the makeup of the groups of actors economists study (which these scholars’ models assume are completely homogeneous), how finance affects the real economy, and “what determines inflation.”

Indeed, Yellen’s list raises the question of where economists’ knowledge really is solid – at least in terms of ideas that affect economies’ performance in the real world. And so does the economy’s abysmal performance on net since the outbreak of a near-financial cataclysm that virtually none of its members foresaw.

Yellen did add an international question that she believes deserves much more research: how changes in American monetary policy affect the rest of the world and then feed back to the United States. But even though other aspects of the nation’s relationship with the global economy strictly speaking don’t fall under the Fed’s purview, she still might have noted that major gaps still exist in her profession’s understanding of international trade.

Even more disturbing: Although the trade-fueled global imbalances that built up during the bubble decade have been identified as bearing great responsibility for the crisis’ outbreak, as Davidson’s attitude suggests, international commerce is the one area of economics where no significant thinking has been called for at all since the disaster. Indeed, judging from the reactions to Trump’s trade proposals, the conventional wisdom is more entrenched than ever.

Of course, none of this is to say that economists know nothing useful, whether on trade or elsewhere. But with evidence that those global imbalances are once again nearing pre-crisis peaks (albeit with a somewhat different composition), and with President Obama seemingly more determined than ever to win passage of a trade agreement (the Trans-Pacific Partnership) modeled on a Korea deal that has supercharged the U.S. merchandise deficit, you’d think that both economists and journalists would react to proposals for fundamentally new approaches with at least minimal humility.

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

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

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

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

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

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

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

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

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

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

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

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

(What’s Left of) Our Economy: U.S. Trade Deficit Shrinks, but Remains Stubbornly High – and a Growth Killer

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Census Bureau, China, exports, high tech goods, imports, Korea, manufacturing, Mexico, non-oil goods deficit, oil, recovery, Trade, trade deficit, {What's Left of) Our Economy

The goods and services U.S. trade deficit fell by 11.60 percent on month in July, largely due to a fall in the non-oil goods gap (by 8.65 percent) that was even greater than the decline in the oil shortfall (6.39 percent). In June, a big overall trade deficit increase resulted mainly from the first widening of the oil trade gap since December.

America’s chronic manufacturing trade deficit in July ($74.83 billion) was its second largest of all time. Overall U.S. exports rose to their highest level ($186.33 billion) since September, while combined goods and services imports dropped for the first time since March. The huge U.S. goods deficit with China increased to its highest level ($30.33 billion) since November. The drag on U.S. growth from the cumulative increase of the trade deficit during the current economic recovery remained at nearly 20 percent, or more than $437 billion in constant dollars.

Here are selected highlights of the latest monthly (July) trade balance figures released this morning by the Census Bureau:

>The U.S. goods and services trade deficit dropped by 11.60 percent in July, from an upwardly revised $44.60 billion to $39.74 billion, mainly because the non-oil trade deficit improved much more than the oil trade deficit.

> America’s non-oil trade deficit shrank sequentially by 8.65 percent in July, from $58.90 billion to $53.79 billion. The oil trade gap narrowed, too, but only by 6.39 percent – from $5.32 billion to $4.98 billion.

>The July trade deficit pattern contrasted sharply with that of June, when an 84.19 percent surge in the oil deficit keyed an 8.68 percent monthly worsening of the total trade deficit, while the non-oil goods deficit rose by only 1.46 percent. The June numbers, in turn, broke sharply with the recent U.S. Pattern of the combined goods and services deficit and the non-oil goods deficit rising strongly while the oil shortfall plummeted.

>The total goods deficit shrank in July from a downwardly revised $65.63 billion to $60.34 billion, an 8.06 percent decrease that was the greatest since March’s 12.02 percent.

>Despite the improved non-oil goods performance, however, the longstanding and enormous U.S. manufacturing trade deficit hit its second highest total ever in July – $74.83 billion. Only last October’s $76.74 billion was higher. The June manufacturing deficit was 1.05 percent lower, at $74.05 billion.

>Partly as a result, the manufacturing-dominated U.S. goods trade deficit with China rose by 1.90 percent on month in July to reach $30.33 billion – its highest level since November ($31.29 billion). The June China merchandise deficit, $29.76 billion, was 1.93 percent lower.

>Total U.S. goods and services exports rose 1.86 percent sequentially in July, from a downwardly revised $182.92 billion to $186.33 billion – their highest total since September ($187.55 billion). The increase was the biggest since March, 2014 (2.15 percent).

>Most of this improvement took place in goods trade, where exports in July also increased to a post-September high ($124.05 billion) from June’s upwardly revised $120.61 billion. In addition, the 2.85 percent monthly improvement was the biggest for goods since March, 2014 as well (2.88 percent).

>July’s combined goods and services imports declined by 0.78 percent, to $225.80 billion from June’s downwardly revised $227.58 billion.

>Again, most of the improvement came on the goods side, where imports fell by 0.99 percent, from a downwardly revised $186.24 billion to $184.39 billion.

>The services surplus fell, however, in July, from $20.98 billion to $20.87 billion. Services exports fell and services imports rose.

>The July manufacturing trade deficit increased because exports fell faster on month (by 7.32 percent) than the much larger amount of imports (3.57 percent).

>So far this year, the manufacturing trade deficit is running 2.34 percent ahead of last year’s record $831 billion total. Exports are down 7.52 percent, and the much larger amount of imports is off last year’s January-July total by only 3.40 percent.

>U.S. merchandise exports to China increased by 3.79 percent sequentially in July, while the much greater amount of imports rose by 2.36 percent.

>The U.S. goods deficit with China is running 6.12 percent behind last year’s record total of $367.17 billion.

>In trade with other countries that have made recent headlines, the U.S. merchandise deficit with Korea, whose 2012 trade agreement with the United States is the model for President Obama’s politically unpopular Trans-Pacific Partnership (TPP) deal, fell by 5.29 percent on month in July. Both U.S. merchandise exports and imports declined.

>But the Korea deficit is running 9.30 percent ahead of last year’s January-July total, and on a monthly basis has quadrupled since the bilateral agreement went into effect with the United States in March, 2012.

>U.S.-Mexico trade tells a similar story. The U.S. merchandise deficit fell by 11.74 percent on month in July, on falling U.S. exports and imports. But this deficit, too, is running ahead of last year’s levels – by 8.88 percent.

>Volatile American trade in high tech goods saw its longstanding shortfall decrease by 8.28 percent sequentially in July, from a June level of $7.38 billion that was the year’s highest to $6.77 billion. Exports and imports were down on this front, too.

>Year-to-date, however, this shortfall is down 11.74 percent.

>The combined U.S. goods and services deficit is running behind 2015 levels, too – but by only 0.17 percent. Given that American economic growth is running at about one percent annualized in inflation-adjusted terms – less than half last year’s rate – the trade deficit’s persistence is one sign that it keeps dragging on the current recovery.

>Indeed, as of the second quarter of this year, which ended in June, the increase in the real non-oil goods deficit had sliced cumulative growth during this sluggish expansion by 19.70 percent – or $437.19 billion in constant dollars.

(What’s Left of) Our Economy: Obama’s Babble on Trade Politics

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BloombergBusinessweek, exports, free trade agreements, Korea, KORUS, Obama, politics, Populism, public opinion, TPP, Trade, Trans-Pacific Partnership, {What's Left of) Our Economy

Since his presidency began, Barack Obama has left little doubt that the substance of trade policy isn’t his strong suit. For example,

>Near the end of his first year in office, the president claimed that Asia’s generally protectionist economies actually want to buy American products, but that their imports from the United States were weak “partly because we just haven’t been as aggressive as we need to be….”

>Mr. Obama’s White House predicted that his 2012 KORUS trade deal would expand U.S. gross exports of goods to this new bilateral partner by at least $10 billion annually. But on a monthly basis, they’re down nearly 30 percent. From the first four months of 2013 (the first full calendar year during which the agreement has been in effect) to the first four months of this year, U.S. goods exports are down 6.65 percent.

>His administration routinely touts his Trans-Pacific Partnership (TPP) trade deal for creating a single market representing 40 percent of the entire world economy. But the president seems unaware that the United States makes up nearly two-thirds of this new trade zone.

Last week, in an interview with BloombergBusinessweek, the president demonstrated that his grasp of the politics of trade is no firmer. On the one hand, Mr. Obama dismissed his interlocutors’ suggestion that he has “not done a good job of selling the benefits of trade to people who feel that this is something that’s taking their jobs, taking away their future” by contending that “the majority of Americans, surveys show, still favor free trade. It’s just that those who are opposed feel it much more intensely.”

Moreover, he added, “If you talk to the younger generation here in the United States, they’re not knee-jerk anti-trade. They’re not anti-globalization. If you look at surveys, it tends to be older workers who are feeling displaced who are attracted to this notion of ‘let’s pull up the drawbridge and shut everybody off.’”

On the other hand, the president insisted that:

“if I am a CEO in a boardroom right now, I should be thinking about, how do I make sure my workers are making a decent wage? And if I’m a shareholder, that is something I should be paying attention to, too, because if you’re not, that’s when you start getting the kinds of political pushback that you’re seeing here in the United States. That’s how you start getting a Brexit campaign. Over time, you’ll strangle this goose that’s been laying you all these golden eggs. Share the eggs.”

That is, Mr. Obama is urging business leaders to wake up and head off a populist revolt that he’s supremely confident won’t take place – especially as nature keeps taking its course and transforms the American population.

There’s no doubt that a politician who has won the White House knows more than a thing or two about public opinion. But these incoherent views on trade politics also strongly suggest that Mr. Obama has been lucky in one key respect: For all the sporadic headlines they made, globalization-related concerns were still largely off voters’ screens during his presidential years.

(What’s Left of) Our Economy: Obama’s Korea Trade Disaster Keeps Weakening Case for TPP

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2016 election, Donald Trump, exports, free trade agreements, Korea, Obama, recovery, TPP, Trade, Trade Deficits, Trans-Pacific Partnership, {What's Left of) Our Economy

It’s increasingly difficult to visit a major news site – and especially its opinion section – without a flurry of claims that presumptive Republican presidential nominee Donald Trump’s trade policy proposals (what we can make of them) are dangerously misguided. As a result, it’s increasingly difficult to believe that any of these commentators have any familiarity with America’s trade performance with Korea.

This performance matters both in its own right, and because President Obama’s 2012 trade agreement with Korea was the model he used for the much broader Trans-Pacific Partnership (TPP) deal with eleven Pacific Rim countries (not yet including Korea) – which is opposed by Trump as well as by his Democratic counterpart, Hillary Clinton, and by her stubborn rival, Bernie Sanders.

As noted in my last post on the new (April) U.S. monthly trade figures, since the Korea deal went into effect in March, 2012, America’s merchandise trade deficit with Korea has jumped by nearly 485 percent. For some context, the U.S. global merchandise trade deficit has shrunk by 12.42 percent during this period.

But the Korea deal’s abject failure to promote U.S. growth and employment also becomes clear upon examining more recent trends. At the beginning of this month, folks who follow global economic and trade trends were shaken by reports that in May Korea’s global exports had just fallen in year-on-year terms for the 17^th straight month. Their concerns were reflected Korea’s status as a “canary in the coal mine” for world trade and by extension the world economy.

But Korea’s been trading much more successfully with the United States during this period. The May U.S. trade data isn’t in yet, but we have the statistics through April. They show that during the preceding 16 months, when Korea’s goods exports fell consistently on an annual basis, they rose on-year to the United States in ten of those months. But America’s goods exports to Korea rose on-year in only three of those 16 months.

Since improving trade balances spur a country’s economic expansion, and worsening balances subtract from growth, it’s clear that trade with America has been a major factor in staving off complete disaster for Korea’s export-dependent economy. The United States isn’t anywhere near as reliant on trade, yet commerce with Korea still has been holding back American growth – and surely hiring.

America’s punditocracy and everyone else are entitled to scoff at Trump’s claims that he would negotiate better trade deals than Mr. Obama – and his predecessors. (The Korea initiative was launched by George W. Bush.) But the Korea results make it hard to imagine how he could do any worse.

(What’s Left of) Our Economy: U.S. Growth Slowing but Trade Deficit Keeps Rising

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Canada, China, Eurozone, exports, high tech goods, imports, Japan, Korea, manufacturing, Mexico, oil, recovery, services trade, TPP, Trade, trade deficit, Trans-Pacific Partnership, {What's Left of) Our Economy

The U.S. total trade deficit rose to a six-month high of $47.06 billion despite mounting signs of an American economic slowdown and many of the best oil-related trade numbers in more than a decade. Combined goods and services exports and imports both improved, but their January levels were multi-year lows. February services imports of $41.80 billion hit a new monthly record.

The chronic bilateral goods deficit with China narrowed but the longstanding manufacturing shortfall widened and both are running well ahead of 2015’s record levels. Meanwhile, the case for President Obama’s Pacific Rim trade deal was weakened again by a high goods deficit with Korea – whose bilateral trade deal with the United States is the TPP’s model.

Here are selected highlights of the latest monthly (February) trade balance figures released this morning by the Census Bureau:

>Despite signs of a slowing U.S. economy and an historically low oil products trade deficit figure, the nation’s goods and services trade deficit hit a six-month high in February, rising 2.57 percent over January’s upwardly revised $45.88 billion to $47.06 billion.

>America’s oil trade shortfall sank 23.15 percent in February to $3.55 billion – its lowest level before adjusting for deflation since March, 1999. Current dollar oil-related imports dropped by 11.77 percent on month to $9.85 billion – their lowest level since September, 2002.

>Current dollar oil-related exports slipped as well – by 3.74 percent, from $6.55 billion to $6.30 billion. That total is the lowest since September, 2010.

>In another milestone, U.S. services imports in February rose by 0.63 percent from upwardly revised January levels to $41.80 billion – an all-time high.

>Overall U.S. exports inched up by 1.01 percent in February, from a downwardly adjusted $176.29 billion to $178.07 billion. The January export total was the smallest since June, 2011.

>Combined goods and services imports were up 1.33 percent on month, from an upwardly revise $222. 17 billion to $225. 13 billion. The former had been the lowest figure since April, 2011.

>The February numbers brought 2016’s goods and services trade shortfall to $92.94 billion – up 13.14 percent from 2015 levels.

>Overall 2016 exports are now down by 5.47 percent on an annual basis, but combined imports are off only 2.13 percent.

>The longstanding U.S. merchandise trade deficit with China dipped by 2.84 percent on month in February, from $28.93 billion to $28.12 billion. This shortfall has now decreased for five of the last six months, but remains by far America’s largest trade gap with an individual competitor or regional grouping.

>February’s results bring the 2016 merchandise trade deficit with China to $57.05 billion – up 11.53 percent from the comparable 2015 totals.

>America’s chronic manufacturing trade deficit ticked up by 0.70 percent in Feb – from January’s $65.44 billion to $65.89 billion.

>Manufacturing exports rose sequentially by 4.16 percent in February, but the much larger amount of manufacturing imports increased by 2.59 percent.

>Year on year, the manufacturing trade deficit is now running 14.08 percent ahead of 2015’s record levels.

>America’s trade deficit in high tech goods rose in February as well – by 3.21 percent over January levels, to $5.14 billion. U.S. high tech exports advanced by 0.40 percent on month in February, while imports increased by 0.86 percent.

>The high tech deficit is now running 24.91 percent ahead of 2015 levels.

>In developments with other important competitors, the U.S. goods deficit with South Korea – whose recent trade deal with the United States is the model for President Obama’s proposed Trans-Pacific Partnership (TPP) agreement – fell sequentially in February by 9.95 percent, to $2.45 billion.

>This monthly total, however, is more than four times the level of March, 2012, when the bilateral agreement went into effect.

>U.S. goods exports to Korea were down on month by 3.18 percent to $3.09 billion – their smallest monthly total since September, 2013.

>U.S. goods imports from Korea declined by 6.30 percent sequentially, to $5.54 billion.

>The oil-heavy U.S. goods deficit with Canada plunged by nearly 60 percent on month, to $1.02 billion, led by the lowest import total ($21.82 billion) since February, 2010.

>Yet the U.S. merchandise shortfall with its other partner in the North American Free Trade Agreement (NAFTA), Mexico, increased by 14.55 percent in February. The goods trade gaps with the Eurozone and Japan rose by 8.97 percent and 9.42 percent, respectively, on month.