Im-Politic: New Evidence that “Hamilton” is (Embarrassingly) Fake History

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"Hamilton", Alexander Hamilton, diversity, Forbes, Founding Fathers, history, Im-Politic, immigrants, Immigration, liberals, Lin-Manuel Miranda, Mike Pence, Ralph Benko, Trump

American elites’ views on immigration issues are just the gift that keeps on giving if you suspect that way too …

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(What’s Left of) Our Economy: How Trump Can Get His Trade Chops Back

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bilateral trade agreements, China, dispute resolution, free trade agreements, Government Accountability Office, Japan, managed trade, Mike Pence, multilateral trade agreements, North Korea, Robert Lighthizer, semiconductors, South Korea, tariffs, Trade, Trump, U.S. Trade Representative, U.S.-Japan semiconductor agreement, {What's Left of) Our Economy

Comments made by Vice President Pence on his Asia trip concerning America’s trade relations with Japan and South Korea show both the promise and peril of the Trump administration’s approach to international commerce and globalization. Major gains for the economy are possible from negotiating a bilateral trade agreement with Japan and revamping what Mr. Pence described as a failed deal with South Korea. But first, the president and his aides must show more awareness than to date of why accords with countries like these keep failing.

According to candidate Trump, and President Trump, the main problems with such measures have been, variously, incompetent U.S. negotiators, dominance of the policy process by offshoring and similar interests, and a mistaken preference for multilateral arrangements over bilateral deals where America’s leverage is less likely to be watered down.

The second reason for failure cited above has certainly shaped U.S. trade agreements with super low-cost countries that have been tempting locations for production and job offshoring, and that have revealingly comprised the vast majority of trade deals initiated and signed by Washington since the early 1990s. But footloose multinationals have played a much smaller role when it comes to higher income countries like Japan and South Korea. There, achieving better results for the American domestic economy has faced two leading obstacles.

The first has been widely noted: the longstanding tendency of the U.S. leaders to elevate geopolitical aims like strengthening security alliances over economic aims like removing distortions to trade flows. Here, strangely, the administration has been giving off mixed signals lately. The president is now clearly treating the security-related objective of gaining more Chinese cooperation in resolving the North Korea nuclear weapons crisis as a higher priority than combating the numerous predatory Chinese trade policies that have hurt domestic employers and their workers. But he blasted such priorities as recently as last month. And the Pence statements indicate that trade and security issues will be handled on separate tracks for Japan and South Korea.

The second obstacle has been less widely noted – although it’s been a major theme of mine: Opening markets in highly protectionist countries like those Asian powers is fiendishly difficult, at best. As I’ve written, these economies are most accurately seen as nation-wide systems of protection and mercantilism. The particular form taken by any of their trade barriers or subsidies at any given moment matters much less than the underlying intent to manage trade flows to their advantage. In addition, these protectionist systems are run by powerful bureaucracies whose secretiveness and agility makes even identifying problematic practices – much less combating them – excruciatingly difficult.

The bottom line is that trade agreements with such countries are virtually impossible to monitor and enforce effectively, and because their governments know this, the provisions are violated routinely.

By contrast, because the U.S. government is so transparent, almost of America’s trade barriers and subsidies are easy to identify and attack, and American compliance with trade agreements is easy to measure. So it’s easy to see how these agreements strongly tend to create more (and more strongly guaranteed) access to the U.S. market than vice versa. This new report from the U.S. Government Accountability Office shows how these damaging results can stem from multilateral agreements, but the Korea deal spotlighted by Spence and a long string of agreements with Japan show the similarly dismal record of bilateral arrangements.

That’s not to say that worthwhile trade deals with Japan and South Korea are impossible. But they’ll require thinking that’s much further outside the box than the administration seems to be engaged in. The best possibility would be going the managed trade route. That is, rather than accept unverifiable promises to dismantle trade barriers or end subsidies, America’s interlocutors would commit to allot specific shares of their domestic markets to specific U.S.-origin goods and services. There’s even a precedent for this practice – the 1986 semiconductor trade agreement reached between Washington and Tokyo.

Managed trade of course isn’t free trade. But little about Japanese and South Korean policies fits the definition, either. And the history of the semiconductor deal is well known by President Trump’s choice to head the U.S. Trade Representative’s office, Robert Lighthizer, because he was personally and deeply involved.

Another possibility would be to expand one of the few modestly worthwhile leafs from former President Obama’s 2012 trade agreement with South Korea. Precisely because Seoul’s predatory practices in the automobile sector specifically were so difficult to combat via the standard, legalistic procedures used in the dispute-resolution systems in most American free trade agreements (and the international counterpart run by the World Trade Organization), Mr. Obama secured South Korean acceptance of provisions that are especially appropriate in dealings with opaque bureaucracies that prevent significant evidence gathering.

Specifically, if a dispute-resolution panel convened under the agreement decides that Seoul is violating the auto provisions, and the United States restores pre-agreement tariffs on Korean products, it’s up to the Koreans to prove that they’re back in compliance with the treaty before the new tariffs are removed. Even better, however, would be to impose the burden of proof on South Korea, Japan, and similar countries as soon as a complaint is filed.

Yet there’s a strong argument that the very structure of dispute-resolution mechanisms is fatally flawed. Whether the trade agreement in question is bilateral or multilateral, these arrangements treat the United States as an equal party. But given the huge size of the U.S. economy relative to any other trade agreement signatories, and therefore given its status as the paramount prize in any such agreement, this “one country-one vote” set-up is as absurd as it is detrimental to American interests.

Rather than agree to such standard dispute-resolution systems – which invariably result in deadlocks that penalize open economies like America’s – Washington should insist that dispute-resolution votes be allotted more realistically. Basing them on the sizes of the various signatory economies is one obvious formula.

And don’t forget the ultimate America-First trade policy: Dispense with negotiations altogether, or for the most part, and start imposing tariffs on the imports of predatory trading powers, or on all imports (in order to prevent offshore exporters from switching production sites). Of course, that universalism is a big virtue of the border adjustment tax proposed by the House’s Republican leaders. In return, Mr. Trump could offer greater U.S. market access to those countries that prove (after years of good behavior according to exclusively American judgments) that they’re giving American exports a fair shake. This form of unilateralism should have special political appeal for an administration that’s increasingly in need of some big early economic wins.

President Trump (at least the pre-China currency version) has been termed a trade policy disrupter. If he wants to re-earn that label, getting the nation’s Japan and South Korea trade right after decades of frightful losses would be a great place to start.

(What’s Left of) Our Economy: Why Carrier’s Manufacturing Offshoring to Mexico Matters

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Carrier, China, currency, exchange rates, Financial Crisis, green manufacturing, Indiana, Indianapolis, Jobs, manufacturing, Mexico, Mike Pence, multinational companies, NAFTA, North American Free Trade Agreement, Obama, offshoring, peso, productivity, Trade, Trans-Pacific Partnership, United Technologies, wages, {What's Left of) Our Economy

The decision of United Technologies (UT) to move 2,100 heating equipment jobs and the related production from Indiana to Mexico is a major indictment of America’s longstanding approach to global economic challenges and opportunities on two levels – and has rightly become a presidential campaign issue.

Evidence abounds that UT and its Carrier subsidiary decided to ship this output and employment south of the border largely due to features of the post-Cold War global economy that U.S. leaders in both major parties have persistently ignored or rationalized away despite their destructive long-term effects on the domestic economy. But this latest instance of high-wage job flight also represents a failure of one of President Obama’s highest profile proposals for stemming the tide. Let’s deal with this narrower issue first.

As reported by Jillian Kay Melchior in National Review, in 2013, one of the Carrier plants heading to Mexico secured $5.1 million in federal tax credits aimed expressly at expanding production of energy efficient gas furnaces in domestic locations like Indianapolis. These tax credits came from a $2.3 billion Obama administration program designed to “create new jobs and supply more clean-energy projects in the United States and abroad with equipment made in America” in the words of Energy Secretary Ernest Moniz.

Indiana Governor Mike Pence and United Technologies blamed heavy federal regulations for the move – though the company reportedly failed when asked to identify any government mandates that tipped the balance toward offshoring. And although Indiana union officials complained about the low Mexican wages that they believe largely lured the company south, it’s not as if labor costs have been crippling United Technologies’ competitiveness in the sector.

Thanks to the two-tier wage system the company was able to impose on its Indianapolis workforce (thanks to the last recession, the slow recovery and, as will be seen, the implicit threat of offshoring), a quarter of the employees slated to lose their jobs were earning a mere $14 per hour – about $26,000 annually. That’s only about 55 percent of the current average private sector hourly wage, a slightly lower percentage of the current average manufacturing hourly wage, and just under 52 percent of the current average hourly wage in durable goods industries – the manufacturing super-sector to which the heating and cooling equipment category belongs.

The other three-fourths of the soon-to-be cashiered workers earn $26 per hour – a bit higher than the pay for the typical private sector and manufacturing worker, and a bit lower than the wage for the typical durable goods employee.

Moreover, wages in the heating and ventilation sector have been rising unusually slowly. Since the current recovery technically began, in June, 2009, they’re up in pre-inflation terms by only 10.10 percent. For the entire private sector, hourly pay has risen by 14.14 percent during this period, and in manufacturing overall, the increase has been 10.90 percent. At the same time, in durable goods – which still pays better in absolute terms than manufacturing in toto – wages are up only 9.46 percent since the last recession ended.

Of course, heating and ventilation equipment and other durable goods industries have no hope of competing with third world facilities based on wages. The key to keeping them in the United States, according to the conventional wisdom, is capitalizing on and increasing their innovation and productivity edge. But this is where one of those long-neglected aspects of the Age of Globalization comes into play.

As has been documented since the early 1990s as the debate heated up over U.S.-Mexico trade and the North American Free Trade Agreement (NAFTA), countries like Mexico offered offshoring-happy American multinational companies like UT an extraordinarily attractive combination: very low wages kept down by rapid population growth, high unemployment, and repression of unions, plus surprisingly high and rising levels of productivity.

The productivity levels weren’t high because Mexican workers were naturally smarter and more skilled than their American counterparts. They were high – and boasted major potential to rise quickly – because talent is evenly distributed around the world and American multinationals are exceptionally good at maximizing the efficiency of their employees. In fact, this is a prime feature of their fundamental business model.

And more than two decades of U.S. trade policy decisions like NAFTA – which enable firms like UT to supply the lucrative American market from very low-cost Mexico (and China and elsewhere in East Asia and Central America) – have naturally encouraged these companies to pour productivity-enhancing investment into Mexico, and often at the expense of their American operations. The result has been increasing foreign efficiency further, and therefore pushing the production costs of these facilities even lower vis-a-vis the United States.

I haven’t seen any data on productivity growth in Mexico’s heating and ventilation sector factories. But the country’s high-value manufacturing – much of it export-oriented and foreign-owned – boosted productivity by 5.8 percent annually from 1999 to 2014, according to the McKinsey & Co. consulting firm. We do have productivity data on American-based heating and ventilation manufacturing, and its performance has been much weaker. The cumulative growth between 1999 and 2014 has been only 30.7 percent.

But UT is also aware that Mexico’s cost advantages over American manufacturing are growing for another reason: Mexico’s peso has weakened in value versus the U.S. dollar by more than 26 percent over the last year. That means that producing in Mexico has become much cheaper versus producing in the United States during this period.

No one has yet accused the Mexican government of manipulating its currency’s value to gain trade advantage, along the lines of Chinese policy for so many years. But an American government that keeps failing to address exchange rates in its trade policy – as in its stance in the new Pacific Rim trade deal that includes Mexico – is inevitably going to preside over even more U.S. de-industrialization than has taken place so far.

A sliding peso could also mean that Mexico will pay more and more for the parts, components, and other imported inputs that go into its manufactures. By the same token, though, a weaker currency stands to solve the problem by luring more of that intermediate goods output to Mexico, too. But Mexico’s generally impoverished consumers are sure to face even greater obstacles to bringing bilateral trade flows into even rough balance by Buying American. And overall, current U.S. trade policies will continue creating a world in which America’s comparative advantage isn’t producing anything at all, but rather consuming the output of others on borrowed money.

I’m old enough to remember that the resulting imbalances and debt buildup helped trigger the financial crisis. Are any of America’s leaders? And how long will they continue claiming that yet more NAFTA-like trade agreements and green manufacturing subsidies can prevent a rerun?