(What’s Left of) Our Economy: Good – & Promising – News on Manufacturing Reshoring

Tags

Canada, China, Commerce Department, East Asia, Forbes.com, GDP-by-industry, Kearney, Kenneth Rapoza, manufacturing, manufacturing production, manufacturing trade deficit, Mexico, North America, Trade, Trade Deficits, {What's Left of) Our Economy

When two separate sources of information agree on a conclusion, the conclusion obviously becomes a lot more important than if it’s got only a single supporter. That’s why I’m excited to report that a major economic consulting firm has just released data showing that American domestic manufacturing has been coping just fine with all the challenges it faces from Trump tariffs aimed at achieving the crucial goal of decoupling U.S. industry and the the broader economy from China.

I’m excited because these results track with my own analysis of U.S. trade and manufacturing output data – which I’ve been able to update because of a new Commerce Department release measuring manufacturing production through the end of last year. And you should be excited, too – because the more self-reliant U.S.-based industry becomes, the better able it will be to add to the nation’s growth without boosting its indebtedness. In addition, the more secure the country will be both in terms of traditional national security and America’s ability to provide all the military equipment it needs, and in terms of health security and its ability to provide all the drugs and medical equipment it needs to fight CCP Virus-like pandemics.

The consulting firm data comes from Kearney, and I need to tip my hat to Forbes.com contributor Kenneth Rapoza for initially spotlighting it. According to the company, its seventh annual Reshoring Index reveals that last year, imports from low-cost Asian countries like China (well, none are really “like China,” but you get it) as a percentage of U.S. industry’s output hit its lowest annual level since 2014. The decrease was the first since 2011, and the yearly drop was by far the biggest in percentage terms since 2008.

What’s especially interesting is that the Kearney figures show that manufacturing imports from Asia made inroads even during much of the Great Recession. Last year, their prominence dwindled notably even though the American economy as a whole was growing solidly. And although domestic manufacturing output slowed annually last year – due partly to the inevitable short-term disruptions and uncertainties created by major policy shifts, and partly due to the safety problems of aerospace giant Boeing – the Kearney report noted, it “held its ground.”

Kearney reported even better news on the “trade shifting” front, and its findings also track with mine. One major criticism of the Trump China tariffs in particular entails the claim that they won’t aid American domestic manufacturing because they’ll simply result in the U.S. customers of tariff-ed Chinese products buying the same goods from elsewhere – especially from Asian sources.

The Kearney study refutes that claim, reporting that not only did the role of Asian imports decrease in 2019, but that due to the tariffs, this decrease was led by a China fall-off, that production reshoring rose “substantially,”and that a major import shifting beneficiary was Mexico – which is good news for Americans since it means that the globalization of industry is now doing more to help a next-door neighbor whose problems do indeed tend to spill across the border. (I’ve also found important trade shifting away from East Asia as a whole and toward North America – meaning both Canada and Mexico.) 

As for my own research, the release Monday of the Commerce Department’s latest Gross Domestic Product by Industry report, combined with the monthly trade statistics, these data also shed light on the relationship between U.S.-based manufacturing’s growth, and the economy’s purchases of manufactured goods from abroad.

The big takeaway, as shown by the table below: The relationship has continued its pattern of weakening – suggesting less import dependence – during the Trump years, although production growth did indeed slow because of that aforementioned tariff-related disruption and the Boeing mess.

The figure in the left-hand column represents U.S.-based manufacturing’s growth during the year in question (according to a gauge called “value added), the middle column represents the growth that year of the manufacturing trade deficit, and the right-hand column shows the ratio between the two growth rates (with the trade gap’s growth coming first). The higher the ratio, more closely linked manufacturing output growth is to the expansion of the manufacturing trade deficit. All figures are in pre-inflation dollars.

2011:             +3.93 percent              +8.21 percent                2.09:1

2012:             +3.19 percent              +6.27 percent               1.97:1

2013:             +3.36 percent              +0.77 percent               0.23:1

2014:             +2.93 percent            +12.39 percent               4.23:1

2015:             +3.72 percent            +13.22 percent               3.55:1

2016:              -1.19 percent              +3.07 percent                 n/a

2017:             +3.99 percent              +7.22 percent              1.81:1

2018              +6.23 percent            +10.68 percent              1.71:1

2019              +1.67 percent              +1.09 percent              0.65:1

Domestic manufacturers obviously haven’t completed their adjustments to the new Trump era trade environment, and the CCP Virus crisis clearly won’t make this task any easier. But Kearney expects that the pandemic will wind up moving more U.S.-owned or -related manufacturing out of China, and so do I. And although the Kearney authors don’t say so explicitly, it’s easy to read their report and conclude that the crisis and the resulting national health security needs will help ensure that the domestic U.S. economy will keep getting a healthy share.

Im-Politic: How Mexico’s Paying for the Border Wall After All

Tags

AMLO, Andres Manuel Lopez Obrador, asylum seekers, border security, border wall, caravans, Central America, illegal immigration, Im-Politic, immigrants, Immigration, international law, Jorge Ramos, Mexico, Migrant Protection Protocols, migrants, The New York Times, Trump

Here’s quite the spectacular new entry in the “Life is Strange” category: President Trump has turned out to be right in predicting that Mexico would pay for a border wall to curb illegal immigration. Only this victory has taken a form that neither Mr. Trump nor anyone else could have possibly expected. It didn’t even totally entail developments at the border envisioned!

It’s a major win nonetheless, and if you doubt me, then take the word of Jorge Ramos, the well known anchor for Spanish language TV network Univision, a major champion of de facto Open Borders policies, and of course no fan of the President’s. 

For as Ramos has pointed out in a New York Times op-ed piece yesterday, Mexico has created at least the functional equivalent of a wall. He’s referring to the decision (forced by a very effective – though of course widely condemned – tariffs and border-closing threat by Mr. Trump, as Ramos ruefully observed) of Mexico’s new President Andres Manuel Lopez Obrador (nicknamed “AMLO”) to use Mexican forces to prevent Central American migrants and various other supposed asylum seekers from entering the United States en masse. Nor has Ramos been the only mass immigration advocate to point out this specific Trump success.

Some of these Mexican National Guards personnel are helping the United States enforce its new policy that permits requiring many asylum seekers to stay in Mexico while their cases are judged. This Migrant Protection Protocols program replaces the obligation created by international law that until now has been interpreted to rquire Washington to admit  U.S.-bound asylum seekers’ entry even before evaluation. Although motivated by entirely understandable humanitarian concerns, this measure never anticipated the type of mass migration and related asylum fraud situation faced by the United States nowadays.

Other Mexican National Guards have been deployed to the country’s southern border with Guatemala, where they’ve been unmistakably effective in preventing huge caravans of Central American migrants from traveling through Mexico to reach the U.S.-Mexico border.

The United States has been indirectly financing a small portion of these efforts (through training programs to help for Central American officials better control their own borders). But the vast majority of spending on these efforts is coming from Mexico.

The President is entirely correct in continuing to emphasize the need for more effective physical barriers at the U.S.-Mexico border. But the essence of his famous campaign wall-building promise was to improve America’s own border security greatly, and to make Mexico pay the costs. And that’s exactly what’s now happening to a major extent. Even better – this approach is working. Illegal crossings at the U.S. border are down, and Mexico’s Lopez Obrador says that the migrants groups seeking to enter his country are shrinking.

President Trump has been supplied with abundant material for reelection campaign ads this week (notably, House Speaker Nancy Pelosi’s ripping up of her ceremonial State of the Union transcript). Jorge Ramos’ op-ed has just given him some more.

(What’s Left of) Our Economy: The New U.S. Trade Figures Validate Trump’s (Previous?) Hard Line

Tags

aircraft, Boeing, China, civilian aircraft, goods exports, goods imports, goods trade, manufacturing, merchandise exports, merchandise imports, merchandise trade, Mexico, North America, services trade, soybeans, tariffs, Trade, trade deficit, Trump, {What's Left of) Our Economy

The new U.S. monthly trade data, which bring the story up through November, are teaching President Trump and the rest of the country a crucial lesson about his total trade strategy and his approach to China trade, along with their impact on the economy as a whole. Specifically, the hard line he was pursuing with the People’s Republic before the announcement of the “Phase One” trade agreement was working like a charm.

The new numbers also make clear that many of U.S. domestic manufacturing’s troubles this year, including its mediocre trade performance, have had nothing to do with the Trump tariffs whatever – whether on Chinese products or foreign aluminum and steel. Instead, they owe to the (apparently mounting) safety woes of aircraft giant Boeing.        

The initial Phase One announcement (on October 11) revealed that the United States would hold off on an increase of tariffs from 25 percent to 30 percent on $250 billion worth of goods imports from China (largely advanced manufactures inputs) that was scheduled to go into effect on October 15. On December 13, Mr. Trump added that new levies scheduled to go into effect on December 15 on an additional $160 billion worth of merchandise imports would be canceled as well.

In return, according to the President, Beijing has agreed to “many structural changes and massive purchases of Agricultural Product, Energy, and Manufactured Goods, plus much more.” Moreover, 7.5 percent tariffs would remain on most of the rest of China’s imports along with the two governments agreeing to follow-on negotiations to address further China’s wide range of predatory trade and broader economic practices.

The new trade figures show that U.S. merchandise exports to China have indeed risen since October – by 13.69 percent month-to-month. Also up sequentially (by 21.89 percent) are total worldwide U.S. exports of soybeans – a crop whose trade performance was damaged severely by Chinese retaliatory tariffs since the latest phase of the bilateral trade war broke out.

But whether the Phase One deal and the related prospects for an enduring U.S.-China trade truce deserve much, if any, credit is open to serious doubt. For example, American goods exports to China rose sequentially four times in 2018 through September – before even the initial Phase One announcement. And two of these increases (in March and May) were bigger in percentage terms than the November improvement.

Moreover, although the November monthly shrinkage of the China’s huge bilateral goods trade surplus with the United States was substantial (15.65 percent), the surplus fell at faster rates in February and March.

Yet the cumulative success of Mr. Trump’s tariff-centric policies are clear from the new year-to-date results. On a January-through-November basis, U.S merchandise exports to China are indeed off 11.94 percent. But the much larger amount of American goods imports from China have fallen by 15.22 percent. As a result, the year-to-date merchandise trade deficit is down 16.17 percent.

Further, this progress has been made as the growth of the American global goods deficit has actually been reversed – indicating that attacking the prime source of the U.S. worldwide goods deficit is indeed helping address the global shortfall effectively.

On a year-to-date basis, the global goods deficit is down fractionally. If the trend continues for a month more, the merchandise trade gap will have narrowed on an annual basis for the first time since 2013 – a year during which the overall economy grew at a considerably slower pace (1.8 percent after inflation) than it’s been growing this year (well in excess of two percent so far in real terms).

Much of this improvement is due to America’s emergence as an oil trade surplus country (which has almost nothing to do with trade deals or other elements of trade policy, since oil trade is rarely directly affected by trade policy decisions). Yet the massive U.S. global deficits in goods other than oil have been shrinking steadily since August – from $72.75 billion that month to $63.82 billion in November, the lowest monthly total since June, 2018).

Just as important, the makeup of the remaining American merchandise deficit is becoming concentrated in North America – which benefits the United States significantly, since Mexico’s economic problems in particular often become America’s problems. And year-to-date, the total U.S. goods deficit with North America (Canada and Mexico), widened by 27.05 percent, led by a 27.64 percent rise in the Mexico gap.

Nonetheless, the merchandise deficit with Pacific Rim countries excluding China has grown by 22.47 percent year-to-date, so much more regionalization progress can clearly be made.

In other important developments revealed by today’s November trade report, the monthly U.S. combined goods and services deficit shrank sequentially by 8.31 percent to $43.09 billion from a downwardly adjusted $46.94 billion. The November figure was the lowest monthly total since October, 2016 ($42.00 billion).

November’s $63.90 billion global goods deficit (which includes oil) also represented its lowest level since October, 2016 ($62.02 billion).

Yet U.S. services trade continued to experience a weak year, as the surplus decreased sequentially in November (by 0.19 percent) and is running 4.72 below 2018’s total so far.

Total U.S. exports advanced by 0.66 percent on month in November, but are so far down fractionally on a year-to-date basis. (During the previous January-through-November period, they’d risen by 6.98 percent.)

Total U.S. imports dropped by 0.98 percent sequentially in November, and so far are down 0.14 percent year-to-date. (During the previous January-through-November period, they’d increased by 8.20 percent.)

Encouraging news came on the manufacturing trade front, too, as this sector’s enormous, longstanding deficit fell on month by 12.70 percent, to $80.93 billion. That was the lowest monthly level since March’s $76.96 billion and the biggest monthly percentage drop since February’s 20.00 percent.

U.S. manufactures exports declined by 3.81 percent on month in November, but the much greater amount of imports sank by 8.16 percent.

Year-to-date through November, the manufacturing trade deficit is up 1.69 percent – from $935.74 billion to $951.55 billion. In other words, another $1 trillion annual trade deficit is almost certainly in store for U.S. domestic manufacturing.

At the same time, this rate of increase is much slower than that from the same period in the year before: 10.98 percent.

In addition, this manufacturing progress has been recorded despite a major deterioration in U.S. civilian aircraft trade fueled undoubtedly and largely by the safety problems experienced by Boeing. 

The company – America’s only producer of wide-body civilian jetliners – has long been a major export and trade surplus champion.  But U.S. exports of civilian aircraft dropped by 5.77 percent on month in November, and have nosedived by fully 21.77 percent year-to-date.  Civilian craft imports declined at an even faster rate sequentially in November – fully 39.59 percent.  But the numbers are much smaller, and year-to-date through November, they’ve soared by 19.39 percent.

As a result, the U.S. civilian aircraft trade surplus last year through November stood at only $27.22 billion.  That’s a 33.02 percent plunge from 2018’s comparable total of  $40.64 billion.  And it means that, all else equal, if this sector’s 2019 trade performance simply equalled that of the year before, the overall manufacturing trade deficit would have barely grown at all.   

 

 

Making News: New Spectator Article on Trump’s Mexico Tariffs Threat – & More!

Tags

American Enterprise Institute, Breitbart.com, Claude Barfield, consumers, i24News, inflation, John Carney, Making News, Mexico, migrants, tariffs, The Spectator USA, Trade, Trump

I’m pleased to announce my publication of my newest magazine article.  The piece, which appears in The Spectator USA, explains why President Trump won his bet that a tariff threat would push Mexico to work harder to stop migrants traveling through its territory to the United States – and why he shouldn’t resort to this gambit again.

In addition, it was great to be quoted in John Carney’s post on Tuesday for Breitbart.com reporting that all those supposed experts who predicted raging consumer price inflation resulting from Mr. Trump’s various tariffs were dead wrong.  Here’s the link.

The video is also available of my Tuesday appearance on the American-Israeli TV network i24News.com.  Click here, and press the download button to access this interview on the Trump Mexico tariffs threat.  I also appeared (on short notice) on this subject on i24 on June 5, but unfortunately, the recording is no longer available.

Last Friday, June 7, I debated trade specialist Claude Barfield of the American Enterprise Institute at a lunchtime event at AEI.  The program was not video-ed, though.

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

Making News: Back on National Radio on the China Trade Wars…& More!

Tags

Border Crisis, border security, China, Gordon G. Chang, i24News, Immigration, Making News, Mexico, migrants, tariffs, Thaddeus McCotter, The John Batchelor Show, Trade, trade war, Trump

I’m pleased to announce that I’ll be returning to John Batchelor’s nationally syndicated radio show tonight.  I’m not yet sure about the segment’s timing, though, and the best way to find out is to follow me on Twitter (@AlanTonelson) if you don’t so do already.  I’ll be sending out that info via that platform.  The subject, not surprisingly, will be an update of the U.S.-China trade wars.

You can listen live on-line here.  And as usual, I’ll post a link to the podcast as soon as one’s available.

Speaking of podcasts, one’s on-line of my latest appearance on the program – a very short notice interview on Monday night.  Click here for the usual robust discussion involving John, co-host Gordon G. Chang, former Michigan Republican Congressman Thaddeus McCotter, and me.

Also, the video is now available of my Monday night interview on the American-Israeli TV network i24News.  To view this segment, which covered President Trump’s proposed border security-related tariffs on Mexico, click here and then press the download button.  The file will take a few moments to transfer and, at least in this case, you might have to sit through a few more moments of ads before you can open it up.

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

(What’s Left of) Our Economy: Time to Investigate China’s Enablers in the Trade War

Tags

China, customs fraud, Malaysia, Mexico, Nikkei Asian Review, Taiwan, tariffs, Trade, transshipment, Trump, v, Vietnam, {What's Left of) Our Economy

For decades (decades!), when describing how U.S. trade policy should be overhauled, I’ve emphasized that Washington’s approach needs to be not onl “tougher” or “stronger” — as per the favored terms of politicians and reporters.  It needs to be smarter and more nimble as well.

So here’s to the Japanese publication Nikkei Asian Review. It’s just shown exactly why – and why such smarts and agility are especially important for an administration more than willing to use tariffs on China and other economies to achieve its policy goals. (And thanks also to my Twitter follower “DeSaram-MAGA” for calling my attention to the piece.)

For a team of Nikkei journalists has investigated a key subject that no one in the Trump administration, the Congress, or the American media (at least to my knowledge) has bothered to look at: How much of the falling U.S. imports from China are being replaced by supplies genuinely produced in other countries (like Mexico and Vietnam), and how much are being replaced by goods from China being shipped through other countries either simply by putting them in different boxes and containers, or by slapping a coat of paint on them or making some other superficial change before sending them on to the United States?

The answers matter because if it’s mainly or significantly the former, then it becomes clear that the Trump tariffs really are hurting China by denying it sale opportunities that are being snapped up by other competitors. True, the final result per se won’t achieve the major Trump-ian goal of reducing the overall U.S. trade deficit. But China will be weakened – clearly another one of the President’s objectives – and the beneficiaries at least won’t be a huge, wealthy, powerful dictatorship acting like it wants to expand its influence in East Asia and perhaps the world over at America’s expense.

If the answer is the mainly or significantly the latter, then it becomes clear that numerous other economies – including U.S. allies – helping China evade the American levies, and that unless they halt these practices pronto, the case for worldwide tariffs on lots of products becomes a lot stronger.

The Nikkei journalists present evidence for both propositions. But given the uproar that erupted over the global Trump metals tariffs (imposed precisely to prevent assistance given to the Chinese metals producers who had glutted global markets), signs of customs fraud, transshipment, and related practices are especially important.

The Nikkei team provides some anecdotal evidence on this score. But the data-based case described is much more compelling. For example, the journalists found that although exports of five categories of goods from China to the United States – machinery and parts; electrical equipment and parts; furniture; toys; and automotive equipment and parts – declined between January and March of this year declined by 16 percent, “exports from China to developing countries and from developing countries to the U.S. [of these goods] have generally climbed. Exports via Vietnam, Taiwan and Mexico have increased particularly steeply.”

The rising Chinese exports to these countries strongly suggest that Vietnam, Taiwan, Mexico and others aren’t simply filling the China gap in the U.S. market with goods originating in their own economies. To a great degree, they’re helping Chinese origin goods fill that gap on the sly.

Even more suspicious, according to the article:

“Since the U.S. first slapped punitive tariffs on a broad range of imports from China, the six major Southeast Asian nations and Taiwan have started shipping nearly 1,600 new categories of products to the U.S. that they had never exported to America before.

“Of these new U.S.-bound exports, about 1,000 items, or over 60% of the total, are on Washington’s blacklist.”

That is, unless you believe that in a matter of months, major production capacity for this huge number of products somehow suddenly appeared where little, if any, existed before, then circumvention has to be rife.

The Nikkei findings don’t mean that the Trump administration should build all-encompassing tariff walls immediately. But they do mean that Washington needs to demand prompt answers from the economies in question. U.S. leverage, moreover, in many cases isn’t only economic. It’s grounded in national security, too. Countries like Vietnam, Taiwan, and Malaysia aren’t official U.S. treaty allies, but are all quite pleased that the American military counters China geopolitically by basing lots of assets in their neighborhood.

President Trump plainly understands that the United States needs these countries much less than vice versa both economically and security-wise. But the trade policy overhaul he’s rightly pursuing still needs to do better at guarding against foreign efforts to game the system. In this case, that requites demonstrating one of the most reliable signs of intelligence – curiosity.

Making News: Back on Israeli TV on Trump’s Mexico Tariffs – & a New Podcast!

Tags

border security, i24News, Immigration, Making News, Mexico, migrants, tariffs, Trade, Trump

I’m pleased to announce that I’m scheduled to return tonight to Israel’s i24News TV network to discuss President Trump’s threat to impose tariffs on imports from Mexico if Mexico doesn’t step up its efforts to ease the crisis on the two countries’ borders.  i24News is available by subscription only, but you can see the segment, which is slated to air at 8 PM EST, by clicking on this link and registering for a free trial subscription.

Moreover, I appeared on i24News last Friday, too, to participate in a panel discussion of the subject.  You can access the video by clicking on this link and downloading the file.

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

Im-Politic: A Better Way to Pressure Mexico on Immigration

Tags

Border Crisis, border security, Central America, Charles Grassley, illegal aliens, Im-Politic, immigrants, Immigration, Mexico, migrants, remittances, tariffs, Trade, Trump, U.S.-Mexico-Canada Agreement, USMCA

It’s not every day that I praise veteran Republican Senator Charles Grassley of Iowa. In fact, I don’t believe I’ve ever praised him in print. On trade policy he’s often especially especially clueless – his last foray into this field consisted of threatening to use his chairmanship of the Senate Finance Committee to scuttle the U.S.-Mexico-Canada Trade Agreement (USMCA) unless President Trump withdrew his tariffs on metals imports from Mexico and Canada.

(Grassley was upset because Mexico in particular had retaliated by slapping tariffs on some key American farm products exported by states like Iowa. He didn’t seem to realize that, as I’ve written here, the tariffs needed to be global in scope to be effective. Meanwhile, however serious American farmers’ woes, they began in earnest years before any Trump tariffs went into effect.)

So imagine my surprise yesterday upon learning that Grassley has proposed a response to Mexico’s foot-dragging on helping to ease the crisis on its border with the United States that’s much better than President Trump’s tariffs.

According to Grassley, the way to pressure Mexico to tighten its own curbs on the floods of Central Americans streaming through its territory toward the United States is to tax the remittances sent to their home country by Mexicans who have moved northward both legally and illegally.

Remittances consist of money sent by immigrants back to their home country – usually to relatives. They encourage immigration because they come from wages earned by newcomers to the United States that are much higher than those they can make in their countries of origin.

And we’re unmistakably talking big numbers – especially for Mexico. The country’s own central bank pegged them at almost $31.5 billion last year. That’s more money coming into the Mexican economy than it makes from oil exports, and in fact its second largest foreign exchange earner after auto parts exports.

Unlike tariffs, remittances taxes wouldn’t harm Americans who buy imports from Mexico – whether consumers or businesses. All the victims would be Mexicans in Mexico. And because so many poor Mexicans in particular rely on these funds to help maintain and improve their living standards, a smaller flow would squeeze their finances and surely increase political instability in a country that’s long suffered more than its share of turmoil. Don’t think Mexico’s leaders – who are already sounding inclined to make concessions to Mr. Trump to avoid the threatened tariffs – could brush these sanctions off.

At least as important, unlike the proposed tariffs, remittance taxes wouldn’t endanger Congressional passage of the USMCA or undermine the Trump administration’s China trade policies by reducing Mexico’s attractiveness as an alternative export platform for companies looking to move in whole or in part out of the People’s Republic.

The President has actually spoken of taking this step to raise the resources needed to finance a Border Wall, but never followed through. At the time, covert and overt Open Borders supporters charged that the move could be counterproductive, since the remittances increased the well-being of their recipients enough to encourage them to stay in Mexico.

But since these payments still represent only a fraction of the earnings of Mexicans in the United States, it makes no sense to believe that many Mexicans in Mexico seriously contemplating moving across the border would be satisfied by receiving a fraction of a loaf if they thought it was all potentially available.

It’s possible that the Trump tariff threat could suffice to produce enough of a Mexican response to satisfy him on border security and declare victory with no levies. In this vein, it’s significant that Mexico’s president has already signaled his willingness to appease Mr. Trump somehow. But a remittances threat could have accomplished the same goal with much less muss and fuss. If negotiations with Mexico can’t resolve the issue by the announced Trump deadline of June 10, switching tactics to a remittances tax a la Grassley would be an unmistakable no-brainer.

(What’s Left of) Our Economy: A New North American Trade Study’s Crucial Footnote

Tags

automotive, Canada, Center for Automotive Research, Mexico, NAFTA, North American Free Trade Agreement, regional content, rules of origin, tariffs, trade bloc, Trump, U.S. International Trade Commission, U.S.-Mexico-Canada Agreement, USITC, USMCA, {What's Left of) Our Economy

That was some footnote Commissioner Jason E. Kearns apparently insisted be inserted into the U.S. International Trade Commission’s (USITC) recent report on the economic impact of the Trump administration’s attempt to rewrite the North American Free Trade Agreement (NAFTA). In fact, it contains the key to giving this Congressionally mandated study of the U.S.-Mexico-Canada Agreement (USMCA) a passing or failing grade. And a special bonus – it indicates why all three countries should have followed my advice and turned North America into a genuine trade bloc.

The particular Kearns-related footnote I’m talking about (number 66, on p. 57) dealt with the USITC’s analysis of one of the most controversial (and in my view, most promising) provisions of the new framework for North American trade – which has been signed by the continent’s three governments but not yet ratified by any of their legislatures. It’s the agreement’s attempts to restructure automotive industry trade among the signatories. These proposed new arrangements matter greatly because trade in vehicles and parts represents such a big share of overall North American trade (more than 20 percent of America’s total goods trade with Canada and Mexico, according to this study).

In brief, at the Trump administration’s instigation, USMCA increases the share of a vehicle’s content that needs to be made somewhere inside the free trade zone in order to qualify for tariff-free treatment, and includes other measures aimed at curbing and even reversing the movement of U.S.-owned auto production and the related jobs from the United States to much lower wage and overall lower cost Mexico, along with the resulting flows of Mexican-assembled vehicles and parts into the American market.

The USITC concluded that although the new NAFTA would produce slight benefits for the American economy overall, including for domestic U.S. manufacturing, the new content measures (called “rules of origin,” or “ROO” for short) themselves would drag on overall economic performance. In fact, they would even slightly depress U.S. vehicle production, not increase it.

As always the case with such projections, these conclusions are based on numerous assumptions, and as almost always the case, at least some of these assumptions can be pretty dodgy. Two that I have special problems with: First, when it comes to auto parts, the USTIC only examines only trade and investment in engines and transmissions; and second, the Commission doesn’t take into the jobs multiplier of vehicle and parts manufacturing.

These assumptions surely skew the conclusions to the downside because, as important as engines and transmissions are, the report itself acknowledges that other parts nowadays represent about 37 percent of total domestic parts output; and because the auto industry’s multiplier effect is really high. Indeed, according to a 2015 report by the Center for Automotive Research, for each American job created in domestic auto or light truck manufacturing, seven other jobs are created in the rest of the economy. That finding is significant because the Center has claimed that the new origin rules would exact exorbitant costs, and because it gets significant funding from an auto industry that has expressed major reservations about them.

But much more fundamental issues are raised by that footnote 66, especially considering these questionable assumptions. Here it is in full:

“Commissioner Kearns notes that, as described above, the model appears to suggest that the trade restrictiveness of a ROO is inversely related to its positive impact on the U.S. economy. Carried to its logical conclusion, this would appear to suggest that the best ROO is a very weak or nonexistent ROO. In turn, this would result in other countries, which do not incur any obligations to import U.S. products, obtaining unilateral, duty-free access to the U.S. market. If, on the other hand, we were to compute an ROO that optimizes regional content while recognizing that there may be slack in the economy, we may estimate a gain to the overall economy from the automotive ROO.”

Kearns first observation not only makes perfect sense. It’s the only sensible macro-conclusion that can be drawn about rules of origin. Because their complete absence (the counter-factual the Commission seems to have ignored) would indeed permit non-North American producers to reap all the gains generated by the USMCA (mainly, unfettered access to the immense continental market) without incurring any of the obligations. That’s supposed to result in a net plus for the American economy, the predominant market prize in North America?

The second observation is even more interesting. It notes that much more stringent rules (those that would “optimize regional content”) could be expected to leave the overall economy better off than the current rules. And as I’ve observed, the low tariff penalties (2.5 percent) imposed on non-North American auto producers for ignoring the origin rules are guaranteed to minimize the gains they produce. Therefore, much higher tariff penalties – which would approximate those commonly associated with trade blocs aimed at minimizing imports – would come closest to maximizing that what the USITC calls “the gain to the economy from the automotive ROO.”

President Trump claims that an “America First” approach to trade policy distinguishes him sharply from his predecessors. Footnote 66 in the USTIC report makes as possible that a genuine “North America First” strategy would have best advanced that goal – and that in this case, anyway, there was no reward for timidity.

Making News: Back on National Radio to Update the China Trade Talks…& More!

Tags

border security, China, Gordon G. Chang, i24News, Immigration, Making News, Mexico, The John Batchelor Show, Trade, trade talks, Trump

I’m pleased to announce that I’m scheduled to appear twice tonight on the broadcast media on trade-related issues.

At 8:10 PM EST, I’m slated to be interviewed on Israel’s i24News on President Trump’s recent threat to close the U.S.-Mexico border (or at least parts of it) in response to the immigration-related emergency situation he sees there.  This TV network is available on-line only via subscription, but it does offer free trials that would enable you to watch tonight’s segment if you register on time.  Click here to sign up.

At 10 PM EST, I’ll be returning to John Batchelor’s nationally syndicated radio show to help provide an update on the (reportedly) fast-moving U.S.-China trade talks.  Click here to listen on-line to the segment, which will also feature co-host Gordon G. Chang. As usual, I’ll post a link to the podcast as soon as one’s available.

And keep checking in with RealityChek for news of upcoming media appearances and other developments!