(What’s Left of) Our Economy: Why the Multinationals Still Should be Ignored on China

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Bloomberg.com, China, multinational companies, multinationals, offshoring, tariffs, Trade, trade war, Trump, {What's Left of) Our Economy

Is China mainly valued by American multinational businesses as a super-cheap production site for serving U.S. customers, or as a huge and potentially huge-er consumer market? The question has mattered decisively since the beginning of the nation’s controversial and dramatic trade expansion with China because of the impact on domestic U.S. jobs and production.

So it’s important to report that a new poll of the multinationals that operate in the People’s Republic strongly supports the views of trade policy critics (like me) who have charged that the nation’s pre-Trump approach to China’s economic rise has produced America Last results for the United States, and have urged a fundamentally new strategy.

If the multinationals were using China mainly to supply the U.S. market, as the critics have long insisted, then the trade and investment patterns that have emerged with China would inevitably be undercutting America’s economy. For their investment in the People’s Republic would be mainly replacing factories and similar facilities in the United States, and even exports to China would mainly be replacing shipments between plants within the United States.

If, however, these global giants (and the economists they employ to make their case to politicians, the press, and the public) were right in claiming that their activities were mainly focused on satisfying demand in China, and especially final demand, then the U.S. domestic economy would benefit. For their new Chinese customers would be supplementing their existing American customers, and overall markets for products Made in the USA would grow. (See here and here for arguments from multinationals-funded think tanks studies purporting to document that this win-win scenario has been the case for years.)

But a survey conducted by no less than the American Chamber of Commerce in China and by its Shanghai branch makes clear the great extent to which U.S.-owned businesses operating in China are oriented towards customers back home. One of the biggest hints? More (40 percent) of the 239 firms contacted said that (in the words of a Bloomberg.com summary) “the hike of U.S. tariffs announced on May 10 would have a strong negative impact on their business” than said that they would be hurt by a retaliatory Chinese increase in its duties (33 percent). Clearly, the American levies’ increase would damage those companies because of all that they produce in China for export to the United States. And this despite the robust growth of a Chinese consuming class that is said to be the main reason for concentrating on Chinese customer.

Two other big clues: Fully 35 percent of the companies responding said that “their main strategy for dealing with the tension was to restructure so their operations were more heavily ‘in China for China.’” In other words, many of their China operations are still structured to be “in China for somewhere else.” And 53 percent of the businesses reported that they faced no non-tariff retaliatory measures from Beijing since July, 2018 – when the first Trump China tariffs were announced. Why would they if much of their focus was exporting, and thereby helping China earn valuable foreign exchange revenue?

Nonetheless, the American Chamber survey did turn up two semi-surprises. First, only one of the companies responding complained that a curb on China’s forced technology transfer practices “was the most important outcome” for President Trump to achieve in any trade agreement. For decades, reports of this practice have been too numerous to list.

Second, 42 percent of the companies stated that “a return to the status quo before the tariffs was most important for them” – even though mounting corporate complaints about harassment from and discrimination by the Chinese government and its agents in the Chinese “business” sector are mains reason for strong (stated, anyway) bipartisan American support for ramping up the pressure on China. At the same time, this result could be yet another sign of how much U.S. corporate activity in China continues using the country mainly as an export platform.

Even the most charitable interpretation of this survey would conclude that American businesses simply have no coherent idea of what they want U.S. China trade diplomacy to produce. On the one hand, many of them plainly remain unhappy with the Chinese environment in which they operate. On the other, many plainly oppose the only American measures – tariffs – with any hope of improving this environment.

All of which tells me that, although there may be many grounds for criticizing President Trump’s trade war with China, opposition from an American business community that is at best utterly clueless and at worst hopelessly conflicted on the issues isn’t one of them.

(What’s Left of) Our Economy: Mainstream U.S. Trade Policy’s Main Rationale Has Just Been Blown Up

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Bill Clinton, BRICS, China, emerging markets, EMs, Financial Times, globalization, Jim O'Neill, multinational companies, offshoring, Project-Syndicate.org, Sherrod Brown, The Race to the Bottom, Trade, trade agreements, {What's Left of) Our Economy

I’m always struck by how often in the news media or policy writing (e.g., in journals like Foreign Affairs), genuinely game-changing points are made in passing, and for folks with any interest in the trade and globalization issues raised to such prominence by President Trump. And two such instances dealing with this subject just came in the Financial Times newspaper and the website Project-Syndicate.org.

The observation they both made with mind-boggling offhandedness – economic growth in countries dubbed “emerging markets” (EMs) is slowing to rates no faster than those of the rest of the world, and thus rendering them incapable as far as the eye can see of replacing the United States as a global growth engine.

This claim matters decisively for trade policy because these EMs have dominated America’s approach in this field for more than two decades. First identified in the early 1990s, they consist of economies in the developing world that not only boasted enormous populations. But largely because communism and a heavy state role in economic policy had been so thoroughly discredited due to the end of the Cold War, they were steadily transitioning to more free market approaches, and thus were seen to have huge growth potential. China and Mexico were the leading examples, but various definitions of the main emerging markets also included India, Brazil, Russia, Turkey, South Africa, and others.

According to trade enthusiasts, this combination of characteristics was going to make the EMs so important that accessing their vast current consumer markets and even greater consuming and importing potential needed to be Washington’s top trade priority. Their significance was portrayed as all the more important given America’s status as a “maturing” economy whose growth was bound to continue slowing. (Former President Bill Clinton used exactly this term while advocating for an emerging markets push in a document that’s not on-line but that’s cited in my book on globalization, The Race to the Bottom. The document was the 1995 Report of the President of the United States on the Trade Agreements Program and it was published by the Office of the U.S. Trade Representative at the start of 1996.)    

Yet however impressive and promising they seemed, the idea was a crock from the beginning – at least in terms of its importance in driving American trade policy for the foreseeable future. EM cheerleading suffered two fatal flaws. First, despite rapid growth and immense growth potential, the emerging markets were starting from such low bases – especially in terms of their populations’ consuming power – that they wouldn’t become significant markets in absolute terms for many years at best. Second, precisely because they remained so poor and under-developed, their governments invariably realized that their own best growth opportunities came from exporting to much wealthier countries like the United States – where the needed consumption power already existed.

So why the EMs euphoria? As documented exhaustively in The Race to the Bottom, the multinational corporations that dominated American trade policy-making never saw the emerging markets as final consumption markets. They viewed them as super low-cost production bases from which they could supply the U.S. market much more profitably than possible from their domestic factories. Which is exactly why, starting with the pursuit of trade expansion with Mexico at the onset of the 1990s, American trade policy almost exclusively targeted the emerging markets and other very low-income countries (like Vietnam and the countries of Central America) for negotiating new trade deals.

Ohio Democratic Senator Sherrod Brown (a possible 2020 Democratic presidential contender) described the multinationals sales pitch to leading EM China somewhat too charitably when he said in 2015, “while walking the halls of Congress, [lobbyists for the multinationals] talked about they wanted access to 1 billion Chinese customers. What they didn’t say is they also wanted access to 1 billion potential Chinese workers.”

As The Race to the Bottom also made clear, EM touting was star-crossed from the start – even embarrassingly so. As it peaked, in the mid-1990s, many of these same countries started experiencing problems that led to major financial crises even before the decade ended. That is, their markets became evaporating, not emerging, and in numerous cases they kept afloat only by cheapening their currencies, limiting their own consumption and importing still further, and making them more powerful exporters than ever.

Yet the multinationals’ power and influence remained so decisive throughout America’s political (and media) establishment that emerging markets hucksterism continued to justify trade agreements with such countries. Hence the continued repetition of wholly misleading contentions like “95 percent of the world’s consumers live outside the United States” (which I debunked here).

So that’s why I was so interested to see the following in a Financial Times blog post – and by no less than a former senior official at the International Monetary Fund and another leading international economic institution:  

“EM growth has slowed to about 4.5 per cent at present….In the long run, according to the OECD, the potential growth rate of the Briics (Brazil, Russia, India, Indonesia, China and South Africa — accounting for most of EM GDP) is expected to slow further, converging to mature market trend growth of 2 per cent. In other words, the growth advantage of more than 4 percentage points that EMs enjoyed over mature markets in the 2000-2010 period has narrowed to about 2 percentage points and will probably disappear in the long run.”

And guess what? Unlike in the United States, in particular, even much of this EM growth will rely on maximizing exports and minimizing imports. So their importance as markets for American-made goods and services will be even less impressive than this impeccably mainstream analyst suggests.

Equally startling: This Project-Syndicate column by Jim O’Neill. O’Neill, for the unitiated, was perhaps the highest profile EM cheerleader, and coined a popular acronym for those economies that described those he believed most promising: BRICS (Brazil, Russia, India, China, South Africa).

The former Goldman Sachs banker has remained a believer in China, and has actually added some countries to his list of economies he believes will loom much larger in this century. But in the column, he also argued that, if China falters in what he (wrongly, in my view) considers its role as a global growth engine, and the American consumer gets tapped out, none of the other emerging economies “is in a position to match the growth of Chinese consumption today, or even over the course of the next decade.” And by extension, the likelihood of these countries replacing the United States is even more infinitesimal.

Former French leader Charles de Gaulle once famously said that “Brazil is the country of the future…and always will be.” The two examples above show that the same solidly grounded skepticism is also finally seeping into the ranks of globalization cheerleaders. How long will it take before the American political, business, academic, and media establishments finally start paying attention?

(What’s Left of) Our Economy: The Atlantic’s Hatchet Job on Trump’s Trade Policy and Trade Negotiator

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Chad Bown, China, globalization, James Bacchus, Matt Peterson, Merit Janow, multinational companies, Peterson Institute for International Economics, Robert Lighthizer, The Atlantic, Trade, trade war, Trump, U.S. Trade Representative, World Trade Organization, WTO, {What's Left of) Our Economy

I wish I could say that, in the process of ringing out the old year, America is ringing out incompetent or willfully ignorant journalism about U.S. trade policy. But a looooong article just published by The Atlantic on U.S. Trade Representative Robert Lighthizer makes painfully clear that that point remains as far away as ever.

The article, by Atlantic Senior Editor Matt Peterson, would deserve quick dismissal simply due to one of its major themes: that Lighthizer, President Trump’s chief trade negotiator, takes a hard line on the issue in general, and on China in particular, because he’s long been in the pocket of the domestic steel industry as one of its principal trade lawyers.

This smear is especially rich because a trade policymaker lionized by Peterson as a strong opponent of such conflicts of interest and consequent paragon of policy virtue – another American trade lawyer named Merit Janow – followed her stint as a senior magistrate at the World Trade Organization (WTO) – by accepting a position as “a charter member of the International Advisory Council of China’s sovereign wealth fund, China Investment Corporation or CIC.” That is, she jumped onto the payroll of the Chinese government.

But more fundamentally troubling about Peterson’s piece is its – sadly, standard – description of the WTO as an institution that defends and promotes the interests of the entire American economy. How so? By creating a U.S.-style court of law that would impartially mete out commercial justice but that could be used especially effectively by American diplomats highly skilled in working with such systems. One genuine contribution made by Peterson is reporting evidence that Lighthizer himself once apparently bought into this argument.

These views, however, completely ignore two related, alternative interpretations of the WTO’s creation that at deserve consideration at least because one of them is so regularly repeated by journalists and WTO supporters. That interpretation portrays the WTO as an arrangement that aimed primarily at restraining America’s ability to combat predatory foreign trade practices by enmeshing the United States in a simple majoritarian legal system in which all countries – including the vast majority of members who relied heavily on such mercantilism for their growth.

Chad Bown of the (pro-WTO) Peterson Institute for International Economics, one of the American media’s “go to” trade policy commentators made this point abundantly clear when he told The New York Times that the main foreign impetus for establishing the WTO was a determination to find ways of resisting America’s (successful) 1980s unilateral efforts to frustrate their trade predation and pry open their markets to U.S.-made goods.

Former WTO official (and U.S. Member of Congress) James Bacchus made a similar point earlier this year when he criticized Lighthizer (and other American economic nationalists) for their belief that the United States was better off under the pre-WTO world trade system.  Why?  Because it left the (democratically elected) U.S. government “free to go on the offence aggressively in trade by taking unilateral trade actions without any international legal constraint.”

The second, related alternative interpretation of the WTO’s creation focuses on the U.S. multinational corporations that dominated U.S. trade policymaking under Mr. Trump’s immediate predecessors: They strongly favored subjecting unilateral American power in trade diplomacy because their overseas operations – especially those geared toward supplying the American market – benefited immensely, often at the expense of domestic competitors, from many of the predatory foreign practices targeted by many American leaders who don’t shill for these offshoring interests. China’s longstanding beggar-its-neighbors currency policies have been only one example.

The Atlantic is rightly proud of its long history of publishing “iconic thinkers” and “covering ideas that matter.” Many more articles like Peterson’s, and it will also be known for hatchet jobs.

Im-Politic: A Left-Wing Attack on Trump Tariffs that the Offshoring Lobby Could Love

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"resistance", China, Democrats, globalism, globalization, Im-Politic, liberals, multinational companies, NAFTA, Nomi Prins, North American Free Trade Agreement, offshoring lobby, progressives, strange bedfellows, tariffs, The Nation, Trade, Trump, Trump Derangement Syndrome, Trump tariffs

Although I view it as being small-minded, short-sighted, and often over-the-top, I can’t completely fault many left-of-center American trade policy critics for failing to support (and even attacking) most of President Trump’s trade policy initiatives. Not so with Nomi Prins’ new indictment in The Nation. She’s taken this dimension of Never Trump-ism and “Resistance” to a wholly new and troublingly counterproductive level,

Mr. Trump has assaulted many of the trade deals that liberals, progressives, and many Democrats themselves long resisted (like NAFTA – the North American Free Trade Agreement – and the the Trans-Pacific Partnership – TPP). And he’s dealing decisively (so far!) with many other foreign trade policy transgressions and global trade institutions they’ve long assailed (like China’s dumping of steel and aluminum and wide array of other predatory trade practices, and the World Trade Organization, or WTO).

But many on the Left (and indeed, all over American politics) are understandably disgusted with some of the President’s rhetoric and record in immigration and gender issues and race relations, and with his family’s continuing domestic and foreign business ties (including with China), which look like conflicts of interest and at the least can look hypocritical (e.g., using immigrant workers both legal and illegal). Moreover, you don’t have to be a Never-Trumper to be upset with the ties between many Trump administration appointees and industries they’re supposed to be regulating.

Moreover, the President is attacking American trade and related globalization policies from an economic nationalist/America First standpoint. Having worked with left-of-center trade critics for nearly 30 years, I can tell you that this has never been their perspective. Though this is an overly broad generalization, they have been loathe to acknowledge that what’s best for America and what’s best for the rest of the world may not be identical – especially in the short and even medium-terms. As a result, their criticisms of many long-standing U.S. trade policies have often demonstrated at least as much concern for their impact on workers in developing countries as on their counterparts in the United States.

In fact, they tend to reject the idea that the main fault-line in the global economy has been the United States (and even the U.S.’ productive economy) versus “the rest”. In the view of these left-of-center critics, the main fault line instead is between the capital holders of the world versus the workers of the world.

The point of this post is not to insist that the nationalists have been right and the progressives et al have been wrong. It is to note that Prins’ new Nation piece disturbingly edges into Trump Derangement Syndrome territory. The main reasons: Her stated problems with the administration’s trade policies aren’t based on any of the above counter-arguments. Instead, her main anti-Trump points are almost indistinguishable from those made by the establishment supporters of the trade and globalist status quo – including not only the foreign policy “Blob” that has always backed seeking geopolitical and diplomatic gains even when they come at the expense of U.S. workers and the domestic economy, but those multinational business groups comprising the “global capitalist” interests that the trade policy progressives have always targeted!

Thus we hear from Prins both that the actual and prospective Trump tariffs have angered America’s “closest allies” in the Group of 7 industrial countries of Europe and the Far East, along with “our regional partners” in NAFTA. She’s repeated the canard that the President’s trade moves scarily resemble the Hawley Smoot tariff that “sparked the global Great Depression, opening the way for the utter devastation of World War II.” She consistently portrays the world’s other major economies as genuine paragons of free trade. (Not even China is chided.)

Even more striking, the main evidence she cites for the claim that the President “is sparking a set of trade wars that could, in the end, cost millions of American jobs” comes from Offshoring Lobby pillars like the U.S. Chamber of Commerce, the Business Roundtable, and the Brookings Institution (which, not so incidentally, takes lots of money from most of the leading foreign economies that will be hit by Trump tariffs).

It’s been noted often since the NAFTA’s negotiation in the early 1990s ushered in the offshoring-happy phase of U.S. trade policy that the resulting domestic political divisions have created some “strange bedfellows” alliances – i.e., coalitions that have had little in common other than common views on this front. Will the Prins article help usher in the strangest trade bedfellow coalition yet – between the left-wing anti-Trump resistance and the Fortune 500? Such groups are singing much the same tune on issues like immigration policy, so this prospect isn’t as far-fetched as it might seem. Further, don’t forget that voters who consider themselves Democrats and those leaning in this direction are viewing trade in general much more favorably these days than during any other recent period – at least according to polls. (Republicans and GOP leaners have shifted in the opposite direction.) And the appearance of an article containing these arguments, and evidence drawn from corporate and corporate-funded sources, has appeared in The Nation – long one of the American Left’s flagship publications – is another ominous sign.

One reason for optimism (if you agree that U.S. trade policy needs a big-time overhaul): Many left-of-center trade policy critics have (albeit grudgingly) supported the main thrust of the President’s trade policies. Even though most still retain their “globalist loyalties,” their complaints about the administration’s approach have centered on its instances of backtracking on Mr. Trump’s campaign promises, and (like me) on apparent inconsistencies. So it will be especially interesting to see if they push back strongly, or at all, versus Prins’ views. The answer could help determine the future of the politics of American trade policy – and of the policy itself.

Making News: Back on National Radio this AM – & More!

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FoxNews.com, Gordon G. Chang, Korn Ferry Institute, Making News, manufacturing, multinational companies, Paul Viollis, Simon Constable, South Korea, taxes, The Laura Ingraham Show, Trade

I’m pleased to announce that I will be appearing on Laura Ingraham’s nationally syndicated radio show this morning.  During the segment, scheduled to start at 10:15 EST, guest host Paul Viollis and I will be discussing the new tax changes and what they mean for the economy.

You can listen live on-line at this link, and as usual, I will post a podcast of the interview as soon as one is available.

In addition, this December 4 blog post on the website of the Korn Ferry Institute featured my views on the odds that manufacturing more locally is becoming a trend among multinational businesses. The Institute’s parent organization is a leading executive search and management consulting firm, and the author, Simon Constable, is a veteran business and economics journalist.

And it was great to be quoted in this November 29 FoxNews.com column by Gordon G. Chang on the future of America’s bilateral trade agreement with South Korea.

Keep checking in with RealityChek for news of upcoming media appearances and other developnents. And Season’s Greetings to all!

Making News: Podcast On-Line of Last Night’s Batchelor Interview on Trump & China – & More!

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Asia, China, Gordon G. Chang, IndustryToday, Making News, multinational companies, supply chains, The John Batchelor Show, Trade, Trump

I’m pleased to announce that the podcast of my interview last night on John Batchelor’s nationally syndicated radio show is now on-line. Click here to access a lively discussion among John, co-host Gordon G. Chang, and me, about the China phase of President Trump’s Asia visit.

Also, it was great to see IndustryToday.com this morning run my recent post about multinational companies’ hypocrisy when it comes to the likely effect of Trump-ian trade policies on their global supply chains. Here’s the link.

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

(What’s Left of) Our Economy: The World Trade Organization Unmasked

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Chad Bown, China, Foreign Affairs, Keith Bradsher, multinational companies, Peterson Institute for International Economics, Ronald Reagan, Section 301, The New York Times, Trade, trade law, Trump, World Trade Organization, WTO, {What's Left of) Our Economy

It isn’t every day that Washington’s offshoring-happy economic policy establishment reveals one of its dirtiest secrets in public (unwittingly, of course!). So anyone – and especially U.S. political leaders – with any interest at all in trade, globalization, manufacturing, employment, and related issues (e.g., the economy, getting re-elected) urgently needs to read the final paragraphs of Tuesday’s New York Times article reporting that President Trump will soon greatly ramp up trade pressure on China.

But it’s vital to read the passage intelligently, because the point is made in in the kind of Washington-speak intended to conceal its real meaning.

As Times reporter Keith Bradsher wrote, a key feature of Mr. Trump’s alleged new China strategy will be the use of a provision of America’s national trade law system called “Section 301.” It’s a provision that grants a president broad authority to respond with punitive tariffs to foreign trade practices considered to be damaging the U.S. economy in “unfair” ways, and to respond pretty quickly. (It’s still not nearly quick enough for me, but that’s a separate issue.) And as he made clear, it’s a trade law provision with a noteworthy history. In Bradsher’s words:

“The United States used Section 301 energetically against other countries during the Reagan administration and the administration of President George Bush. Mr. Lighthizer [the current chief U.S. Trade negotiator] was a deputy United States trade representative in the Reagan administration and has been an advocate of shielding the American industrial base from government-assisted foreign competitors.

“But the cases then thoroughly antagonized America’s trading partners.

“‘It was really the aggressive uses of this in the late 1980s and early 1990s that prompted the rest of the world to set up the dispute resolution system’ of the World Trade Organization [WTO], said Chad P. Bown, a senior fellow at the Peterson Institute for International Economics here.”

Bown – whose Peterson Institute home is heavily funded by the offshoring lobby – no doubt meant his statement to reinforce the standard establishment description of and rationale for the WTO-centered world trade system that’s been in existence for the last quarter century. That is, the international economy had too long operated on a law of the jungle basis that bred continual and dangerous conflict, and that in an act of enlightened self-interest, the world’s economies recognized these perils and created a global trade court that would mete out justice according to objective legal standards and thereby serve every countries’ long-term interests.

In fact, Bown wound up confirming a very different description of the WTO and the motives behind its creation that I have advanced since it was first proposed: It’s an arrangement supported by America’s trade partners in order to prevent the United States from using its matchless market power to promote and defend its legitimate international economic interests. P.S. – because U.S.-based multinational companies supply the American market from so many overseas factories, undercutting Washington’s unilateral power to restrict imports mattered crucially to them, too.

For the Reagan-era uses of Section 301 cases that Bown (and Bradsher) mention were noteworthy not mainly because they were “energetic” or “aggressive”. (Unless you view most of America’s trade partners as snowflakes or strong champions of the rule of law.) These 301 uses were noteworthy because they worked. All the evidence is contained in this article I published in Foreign Affairs in 1994. And as Bown made clear, this success was completely unacceptable to “the rest of the world” – most of which, like China, relies heavily on selling to America in order to grow and develop satisfactorily. As a result, these economies, along with the multinationals, became convinced that handcuffing the United States was essential. And official Washington dutifully went along.

Although Section 301 is still on the books, it’s been U.S. policy under Democratic and Republican presidents alike to avoid it in favor of WTO procedures (just as most foreign governments, including allies, and the multinational companies want). And legally speaking (a term I use advisedly when it comes to the WTO and international law generally), that approach seems to dovetail with WTO rules.

But the Trump administration appears to be considering the contention that the United States retains the unfettered authority to use 301 at least in certain instances. The administration further seems confident that, whether it’s right or wrong on the law, the WTO membership collectively will shrink from a frontal challenge for fear of completely destroying a dispute-resolution system that still might serve its interests well going forward – at least much of the time. 

Nevertheless, the reports of a Trump course change on China trade – which could eventually be broadened – are still just reports. All that’s certain now is that, if they’re accurate, the president will wind up showing the his own compatriots and the rest of the world what a real America-First trade policy would look like.

 

(What’s Left of) Our Economy: The Multinationals Debunk a Major Free Trade Claim

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2016 election, BAT, border adjustment tax, Congress, exports, free trade, GE, General Electric, House of Representatives, imports, Jeffrey Immelt, Kevin Brady, multinational companies, Paul Ryan, Republicans, retailers, tariffs, tax reform, Trade, Trump, value-added tax, VAT, {What's Left of) Our Economy

President Trump has been slow so far to launch the major trade policy transformation he promised during his campaign – in part because most of his trade policy team has taken so long to be confirmed by Congress, and in part because (especially in the case of Japan), he seems so far to be listening too closely to national security advisers who clearly prioritize alliance relationships over economics. But his election has already triggered major upheaval in America’s trade politics, and in the process fatally weakened one of the leading arguments advanced against curbing imports.

The trade politics earthquake has three major related sources. First, Republican Congressional leaders like House Speaker Paul Ryan and especially Ways and Means Committee Chair Kevin Brady, who have long strongly supported jobs-killing trade deals and related policies, have become major champions of a measure that would create one of the biggest trade barriers in American history – the so-called Border Adjustment Tax (BAT). Their proposal, which is part of the House Republicans’ larger tax reform package, would offset the discriminatory effects of foreign value-added taxes (VATs) by imposing levies on imports – as well as by supporting exports by exempting them from taxes.

Their change of heart in turn surely stems at least partly from the second big change in trade politics – a major shift among Republican voters on trade policy. As I’ve reported previously, whereas for decades, they tended to support freer trade, and the policies that have ostensibly sought to further liberalize global commerce, more recent polls show that the GOP base has turned against the idea. (Democrats, however, have become much more positive on trade’s impact on the American economy.) And the evidence goes far beyond polls – as made clear by Mr. Trump’s capture of the GOP presidential nomination over numerous free-trading rivals and his November triumph.

But it’s the final trade politics shift that has really floored me. Many of the big multinational manufacturing companies that have also strongly pushed for those same deficit-boosting trade deals – because they made it easier to source products from abroad and supply the U.S. market from foreign production sites – support the BAT, too. In fact, they’ve created a lobbying coalition to turn the idea into law.

And it’s their BAT stance that has weakened a longstanding pillar of free-trade thinking: the insistence that any sweeping tariff measures (like the BAT) would actually backfire on domestic U.S. manufacturers and other producers by raising the cost of imported inputs they use – like parts, components, and materials. Here’s the latest example of this claim – from a former bigwig at the World Bank and International Monetary Fund, no less.

I’ve presented the evidence revealing that this argument completely ignores the immense existing scale of American inputs manufacturing – and the huge markets, new growth, and jobs gains that would result by replacing foreign-made goods with these U.S.-made products. But at least as important is how the multinational practitioners themselves are refuting the theorists by endorsing the BAT.

Incidentally, the multinationals’ BAT position could indicate that I’ve been wrong about their trade performance and about the principal rationale for their backing of offshoring-friendly trade agreements – data I’ve seen showing that they import much more than they export. For if they were indeed big contributors to America’s trade deficits (that is, big net importers), then you’d think they’d be much more concerned about potentially more expensive imports than about any export boost possible from the BAT. The companies themselves, as I’ve repeatedly stated, know the definitive answer – at least regarding their own trade performance. But as long as they’re not required to disclose their import and export figures – as opposed to releasing cherry-picked numbers – we can’t be sure.

But this business enthusiasm for the BAT could also stem from an “if you can’t beat ’em, join ’em” mentality – as General Electric chief Jeffrey Immelt has signaled. In other words, perhaps they’ve decided that more localized production everywhere is an irresistible wave of the future – at least for the time being. Alternatively, the multinationals could believe that they themselves could enter the aforementioned new BAT-created domestic input manufacturing markets. If these businesses believe that the rest of that tax reform package along with the regulatory relief President Trump has promised will lower domestic American business costs further, domestic sourcing could become all the more attractive. Another possibility – precisely because America’s and their own export performance has been so relatively weak, they view foreign markets as an especially exciting growth opportunity that the BAT tax breaks could open wide. And the likeliest possibility? The answer for most of these companies is a mix of some or all of the above.

What is certain, however, is that we’re now hearing, “No thanks” from the companies that economists keep telling us are among the biggest beneficiaries of cheap imports furnished by wide open trade policies. Of course, the retailers – which relay so heavily for their profits on cheap consumer goods imports – are campaigning just as hard against the BAT. The plan’s verdict will speak volumes about whether Americans, and their political system, assign more value to making stuff or to buying it.

(What’s Left of) Our Economy: Why Tariffs Can Reverse Offshoring’s Damage

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China, emerging markets, export platforms, foreign investment, free trade agreements, GE, globalization, intermediate goods, Jeffrey Immelt, manufacturing, manufacturing jobs, manufacturing output, Mexico, multinational companies, offshoring, product life cycle theory, reshoring, Richard Baldwin, tariffs, The Great Convergence, The Race to the Bottom, Trade, trade law, World Trade Organization, {What's Left of) Our Economy

It’s definitely weird to be writing a post in response to a recent tweet-storm. But this was no ordinary tweeter. This was someone who’s getting attention from the Washington economic policy establishment as a new oracle on trade and globalization. That’s evidently because his work conveniently sums up many of the leading myths about the world economy and America’s approach to it that have been propagated by this group of interests. So his burst of social media activism provides a valuable opportunity to set the record straight.

The tweeter extraordinaire was Richard Baldwin. He’s not only an international economics professor at the University of Geneva in Switzerland, but the founder of the informative Voxeu.org economics research portal and president of the Centre for Economic Policy Research in London (not to be confused with the Center for Economic Policy and Research in Washington, D.C.). And he’s just come out with a book titled The Great Convergence: Information Technology and the New Globalization.

According to Baldwin, I have been guilty of a “Classic misthinking of globalisation” by supporting an overhauled U.S. trade policy featuring much more aggressive use of tariffs and other protectionist measures. But from the rest of his tweet-storm, a summary presentation he’s touting, and some other statements, it’s should be obvious that his own description of recent international economic trends and their main causes is way wide of the mark.

His fundamental mistake lies in neglecting the crucial role played in fostering today’s flows of goods, services, and capital by trade agreements and by the dramatically differing reductions in trade barriers from both a quantitative and, more important, a qualitative, standpoint. In particular, Baldwin ignores how various bilateral trade deals and decisions, and the multilateral pact that created the World Trade Organization gave multinational companies the essential condition they needed to justify the increasingly sophisticated production and job offshoring that has characterized globalization – guaranteed access to developed country, and especially the U.S. – market.

For the record, here’s the full string of tweets. (Some repeat previous tweets in the sequence.)

Classic misthinking of globalisation by @AlanTonelson

Recent globalisation driven by knowledge offshoring not freer trade

Tariffs don’t address the driving force

Could foster reshoring of some production but also more offshoring

The main problem is domestic: Protect workers, not jobs.

Jobs for U.S.-based robots

Trump tariffs raise cost of industrial import only in US (not Germany, Japan, China, Mexico, Canada)

Knowledge offshore drove 21^st century globalisation

Tariffs don’t address globalisation’s driving force

US tariffs foster some reshoring and some more offshoring

So what is the right way to deal with angry middle class?

Protect individual workers, not individual jobs.

So what is the right way to deal with angry middle class?

Are you familiar with the concept of factor substitutability ? Changing relative prices changes decisions.

But think of it this way. Offshoring, especially the kind focused on by Baldwin, to developing countries, can serve 3 main purposes. It can help companies better supply overseas markets. It can help them better supply their home country market. Or it can seek both objectives.

The great expansion of U.S. trade, primarily with developing countries, that Baldwin rightly notes began around 1990 (with the end of the Cold War and the great strengthening of free market reforms in gigantic developing countries), was justified with many and varied arguments. The paramount rationale, however, was serving the huge, ballooning populations of the world’s Chinas, Indias, Mexicos, and Brazils.

Yet as documented exhaustively in my 2002 book, The Race to the Bottom (and of course many other studies), incomes in these so-called Big Emerging Markets were simply too low to enable their final consumption to rise much – at least compared with their production and productive capacity. No one was more aware of this situation than the emerging market countries themselves – unless it was the global corporations considering pouring investment into them.

That’s why the smartest of these countries understood that they could not possibly grow and develop adequately by supplying their own populations alone, however rapid their income gains. Their only real hope for satisfactory progress was serving markets “where the money is.” America’s relatively open market and consumption-led national economic structure was their best bet by far.

And that’s why the multinationals as well were so determined for Washington to negotiate free trade agreements with these countries. – not to lower foreign trade barriers and permit American businesses their workers to reach the third world’s billions of new actual and potential consumers, but to lock in lower or eliminated barriers to the U.S. market. See the end notes to this recent study for references to just some of the scholarly evidence.

Accomplishing this aim would ensure that their plan to supply well heeled American customers from super low-cost and virtually unregulated third world supply bases would actually make money. Alternatively put, if Washington were legally able to curb or cut off access to the United States for Corporate America’s third world factories, these new facilities would lose much of their value.

Bringing the United States into the World Trade Organization (WTO) was also instrumental in this scheme. Its new rules and especially its unprecedented enforcement authority have greatly weakened America’s legal scope to use its trade law system to turn back goods (including those from the multinationals’ factories) that have been dumped, illegally subsidized, or benefited from other predatory trade policies – including currency undervaluation. In this vein, securing Chinese membership was vital, too. It secured near-invulnerability to U.S. trade law for the multinationals’ favorite export platform.

So the crucial importance of tariffs should be obvious to all. Yes, the technological advances cited by Baldwin (and so many others) have facilitated offshoring – and made the offshoring of even sophisticated production possible from the standpoint of logistics and administration and quality control and numerous similar considerations. But much and possibly most of it couldn’t pass the bottom-line test without the U.S. market access that can be made or broken by tariffs. That is, technology was a necessary condition of offshoring. But it was hardly sufficient.

Consistent with the product life cycle model, it’s unmistakably true that a growing share of multinational investment in developing countries is serving those markets. But compelling evidence abounds that the export platform strategy remains crucial – both to the countries and to the companies. Among the strongest, as I’ve recently written: the howls of protest from the corporate Offshoring Lobby and from export platform countries sparked by President-elect Trump’s talk of tariffs on the output they plan to sell to the United States. If America wasn’t such an important destination, and if so much of the offshored production was sold locally, why would they be so concerned?

Two other key items of evidence for the importance of tariffs:

a. The recent acknowledgment by GE CEO Jeffrey Immelt that trade barriers and other localization moves were mushrooming around the world, and that his company would have no choice but to say “How high” when ever more protectionist governments say “Jump!” Immelt’s statement makes clear that economies much smaller and weaker than America’s will be able to lure his company’s production and jobs either through relatively simple restrictions of access to their market, or through various performance standards imposed on inbound foreign investment that will be enforced through tariffs.

b. The prevalence of these practices and their success in influencing corporate location decisions. Indeed, the only major power that abjures these measures is the United States. Obviously, if smaller and weaker economies can wield tariffs and other trade restrictions successfully, America’s inaction stems from inadequate will, not inadequate wallet.

Yet as Baldwin’s tweet-storm shows, he is also offering three related objections to tariffs that have nothing intrinsically to do with the advent and growth of what he calls “knowledge offshoring.” He argues that tariffs would disastrously raise the cost to domestic U.S. manufacturers of all the imported inputs they use in their final products. As a result, he adds, these American manufacturers would lose competitiveness to any number of foreign rivals. Finally, he repeats the widespread argument that even if significant production was reshored with tariffs, the job impact would be minimal because of soaring, labor-saving productivity advances in manufacturing.

But Baldwin seems unaware that intermediate goods, including of course capital equipment, make up a huge share of domestic U.S. manufacturing. Because output data is too general (in particular lumping together such intermediates with finished goods in many super-categories), the exact figure is difficult to calculate. But other statistics leave no doubt as to the scale.

As I’ve previously shown, what the Census Bureau calls “industrial supplies” and “capital goods” have comprised fully 62.5 percent of America’s total merchandise exports for the first ten months of this year. And as with the output figures, these statistics leave out products such as auto parts (which are included, but not broken out, under a separate heading).

These industries are also gigantic employers. My own tally of Bureau of Labor Statistics data reveals that their workers number 5.764 million. That’s slightly over 47 percent of all manufacturing employees. Moreover, just over 28 percent of the workers in these sectors are white-collar workers – meaning in turn that many of them are in research, engineering, and other STEM fields. These numbers, moreover, indicate that even if I’m whoppingly wrong, we’re still talking about lots of valuable production and workers. 

So tariffs would create enormous new opportunities for this immense sector of manufacturing – and comparable new demand for the kinds of folks nearly everyone wants to become bigger and bigger percentages of the American labor market.

In addition, Baldwin’s case against tariffs seems to assume that they’ll be geographically circumscribed – hence his claim about the competitiveness-harming impact of barriers against these intermediate goods. But this assumption is puzzling, to say the least. Of course tariffs limited to, say, China or Mexico would open new opportunities in the U.S. market or third country markets for other manufacturing powers. Yet this is precisely why the trade proposals being floated by the administration-in-waiting increasingly include world-wide restrictions.

Finally, although labor-saving productivity gains are surely responsible for much manufacturing job loss in recent decades, the benefits of reshoring manufacturing output shouldn’t be underestimated. Industry’s very productivity performance is clearly one big reason – how can a national economy not profit from regaining many of its most productive sectors?

The importance of existing industry for fostering new industries and related economic benefits and opportunities is another big reason. This new paper from the National Bureau of Economic Research presents findings indicating just how much technological advance is generated by incumbent companies (and presumably industries) rather than through the “creative destruction” emphasized by much of the economics profession. So a focus on manufacturing output means a focus on much of the economy’s capacity to continue creating genuine wealth – and sustainable prosperity.

Further, for all of its competitiveness issues, manufacturing still dominates American export flows. If free-trade-oriented analysts are right, and main purpose of exporting is earning the income to buy imports, how can sufficient income keep getting created if domestic manufacturing production keeps stagnating or shrinking – which has clearly been the case in real terms since the last recession began?

As indicated by some of the preceding paragraphs, however, much uncertainty – in my view, way too much – is still left by the official data analysts are forced to use to study the vital Who, What, Where, When, Why, and How Much issues raised by globalization. Nor does the information reported sporadically in the business press or reported (often partially and self-servingly) by the companies themselves add more than fragments to the existing picture.

Many of these uncertainties could be cleared up if offshoring companies were required by Washington to disclose much more information than at present about how their domestic and foreign operations compare, and how these comparisons have changed over time. After all, knowing the crucial details is critical to their success. And if the disclosure mandate was universal, no individual firm would gain competitive advantage from this new flood of proprietary facts and figures.

So I hope Baldwin – and others sharing his views – will join me in demanding such disclosure. We have nothing to lose but our (relative) ignorance.

(What’s Left of) Our Economy: Progress from Progressives on Trade

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America First, developed countries, developing countries, environmental standards, Financial Crisis, GATT, General Agreement on Tariffs and Trade, George W. Bush, Global Imbalances, Global Trade Watch, globalization, Hillary Clinton, Jared Bernstein, labor standards, Lori Wallach, multinational companies, NAFTA, national treatment, non-discrimination, North American Free Trade Agreement, offshoring, progressives, Public Citizen, The American Prospect, TPP, Trade, Trans-Pacific Partnership, World Trade Organization, WTO, {What's Left of) Our Economy

Ever since the debate over NAFTA (the North American Free Trade Agreement) more than twenty years ago turned trade policy into a nationally contentious issue, the American left has provided the overwhelming share of the political money and muscle aimed at creating urgently needed course corrections. So it’s great to see important signs that progressives have finally started touting two ideas that realistically could make a significant difference.

The evidence can be found in an article coming up in The American Prospect by Jared Bernstein, former top economist to Vice President Biden, and Lori Wallach of Public Citizen’s Global Trade Watch. To be sure, the article does dwell overlong on proposals that left-of-center figures have been making for decades, and that hold little, if any, promise of turning trade agreements and related policy decisions into engines of domestic growth.

For example, there’s the usual call for truly enforceable labor and environmental standards in trade deals – even though adequately inspecting enormous third world national manufacturing complexes is a logistically impossible task. Worse, the offshoring lobby and its minions in Congress and the Executive Branch have already twice used the tactic of making cosmetic changes along these lines in trade agreements to call progressives’ bluff: during the George W. Bush administration in deals with agreements with Panama and Peru; and in President Obama’s Trans-Pacific Partnership (TPP).

Don’t think Democratic presidential candidate Hillary Clinton doesn’t recognize how successful this ploy has been in persuading fence-sitting Congressional Democrats to fall in line behind new trade deals.

Judging from the Bernstein-Wallach piece, moreover, the American left still believes that no hard choices need be made in trade and broader globalization strategy, and that with their proposed reforms, growing international commerce can become a win-win for first and third world workers alike around the world. As I’ve recently written, positive sum outcomes for developed and developing country workforces are possible – if, for instance, NAFTA was turned into a genuine western hemisphere trade bloc, as its leading founders once suggested they intended.

On a global basis, though, the surplus of developing country workers earning pauper wages (both in absolute terms and in relative terms in sectors like advanced manufacturing and high tech services) ensures that for decades the third world will remain much more important as a low-wage and low-regulation production site than as a source of new consumer demand. And as long as that situation holds, astronomical growth-, job-, and wage-killing trade deficits in the United States will be inevitable. Also inevitable will be the buildup of enormous international economic imbalances like those that set the stage for the last financial crisis.

But the most encouraging aspect of the Bernstein-Wallach article was indeed encouraging: The authors argued that not all prospective U.S. trade partners should be treated equally – because they differ in crucial respects. Ever since the current global trading system began taking shape in the immediate aftermath of World War II, one of its biggest weaknesses – and one posing special problems for a relatively open economy like America’s – has been its insistence (largely at Washington’s behest, to be sure) on the principles of non-discrimination and national treatment.

In other words, regardless of how open or closed they are, or how wealthy or impoverished, the United States needed to deal equally with all countries belonging to the old General Agreement on Tariffs and Trade (GATT) and to the newer World Trade Organization (WTO). During the early post-war decades, these requirements legally forced American leaders to open their markets as much, say, to relatively open Britain as to hermetically sealed Japan, and to treat identically in the American market businesses from wildly varying countries.

When the end of the Cold War encouraged third world population giants like China and Mexico to introduce selected free market reforms and join the global economy, the option of mass production offshoring was created for multinational companies. As a result, these GATT and then WTO principles prompted the U.S. leaders influenced by these companies to expand trade whether or not the target countries could become significant net consumers, and thus create reasonably balanced trade flows and their economic benefits.

Bernstein and Wallach don’t favor discrimination on grounds like these. (That’s not surprising, since this practice would undercut their positive-sum first-third world trade optimism.) But they do urge selecting

“trade partners based on their countries’ records of compliance with the terms of past trade agreements, international labor and environmental standards, and human rights and other criteria. [The article makes clear that records of currency manipulation would be among them.] While no country has a perfect track record, there is a well-understood continuum of compliance, and known bad actors should be barred from the negotiating table until they’ve made proven, effective efforts to begin cleaning up their acts.”

That’s a start – and a potential wedge.

It’s also heartening to see Bernstein and Wallach emphasize “rewarding those who play by the rules” by creating and enforcing meaningful rules of origin in trade deals. As they rightly note, without such provisions, countries that have not signed various trade deals can still benefit from them because multinationals and other companies will be free to import into member countries goods largely made outside the new trade zone. That’s great of course for businesses seeking the great possible sourcing flexibility. But these practices inevitably render meaningless most of the rest of the given agreement.

And most encouraging of all – although the authors don’t mention this – an American trade policy (robustly) incorporating these features would be in violation of WTO rules. Free of a straitjacket that mandates policy uniformity in a highly diverse world, Washington would be free to choose another globalization lodestar – one that makes far more sense for a country with incomparable market power, potential for self-sufficiency, and thus unilateral leverage. A lodestar like “America First.”