(What’s Left of) Our Economy: Why Trump was Still Right to Nix Obama’s TPP Trade Deal

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Asia, Barack Obama, bilateral trade agreements, China, export-led growth, mercantilism, multilateral trade agreements, non-tariff barriers, rules of origin, subsidies, tariffs, tech transfer, TPP, trade surpluses, Trans-Pacific Partnership, Trump, {What's Left of) Our Economy

At first I was irritated with President Trump for his expressions of interest this year in reviving U.S. efforts to join the Trans-Pacific Partnership (TPP) – the Pacific Rim-wide trade agreement that former President Barack Obama couldn’t persuade Congress to ratify, and that Mr. Trump removed from America’s policy agenda during his first week in office.

I still wish the President had kept the TPP consigned to the proverbial ash heap of history. But I do see one silver lining in his apparent about-face: the new opportunity it creates to remind how awful the Obama TPP was, and in particular how cynical the case that it represented a masterful ploy to contain the rise of Chinese power regionally and globally, and even shape it to serve America’s goals of sustaining an open world trading system.

In fact, it’s entirely possible that Mr. Trump’s apparent new openness to TPP results at least partly from widespread claims from mainstream politicians and analysts that its multilateral nature endowed the deal with much more potential to curb China’s trade predation than the unilateral tariffs he’s announced.

Yet this contention is the one that’s most easily refuted. First, the version of the treaty signed by Obama contained a wide open back door for many Chinese exports by allowing goods that contained high levels of content produced outside the TPP zone to be traded freely within the zone. Given how central China is to Asia-wide production chains, these loose rules of origin were bound to enable China to enjoy crucial benefits created by the TPP without incurring any of the obligations.

Second, until the eve of its departure from office, neither the Obama administration nor any TPP supporters in Congress or the mainstream media or the think tank world lifted anything more than the occasional pinky even to protest perhaps the principal source of China’s rising economic and military power – the massive transfer of cutting edge knowhow, along with capital, from U.S. tech companies to Chinese business partners or other institutions, either voluntarily (including through shortsighted training programs and investments in Chinese entities) or involuntarily (due to Beijing’s widespread practice of linking access to the China market to the handover of critical technology).

The sudden transformation of these corporate panda-huggers and their hired American guns into China skeptics and even hawks has demonstrated nothing more than that national security is the last refuge of a trade policy scoundrel – especially since by all accounts, U.S. technology and investment continue pouring into China – including defense-related tech. (See here and here for some evidence.)

Third, there’s no reason to believe that most of the other key TPP members have any interest in turning China into a free-trading economy. Quite the contrary. Whether it’s Japan or Singapore or Vietnam or Malaysia, most of the treaty’s most important countries have followed China-style economic development models (except when they’ve borrowed from Japan’s somewhat different but of course much earlier blueprint). And economic openness emphatically isn’t in the recipe. What’s central to these strategies is amassing trade surpluses with the United States and the rest of the world to help generate adequate levels of growth and employment.

The bottom line: Most TPP countries knew that effective disciplines on the trade predation largely responsible for China’s surpluses could be used against their own subsidies and non-tariff barriers. Conversely, it’s surely the reason that these economies accepted the paper curbs on mercantilism that are mandated by TPP. They’re rightly confident that thanks to the secretive bureaucracies that keep their economies effectively closed – and their barriers difficult for outsiders even to identify, much less litigate – none of these curbs is remotely enforceable.

Even better for TPP’s mercantile majority, the treaty’s dispute-resolution system ensured that the United States would be repeatedly outvoted when it sought to advance or defend its interests.

That’s why the TPP was so likely to supercharge America’s already enormous and economically damaging trade deficits. The TPP mercantilists’ liberalization promises would do nothing substantial to open their markets and increase U.S. export opportunities. But America’s TPP commitments, carried out by a government characterized by transparency, would be very effective guarantees that the American market would remain wide open to the TPP majority’s products.

President Trump has demonstrated that he recognizes many of these fatal flaws in the Obama TPP. His stated preference for bilateral over multilateral trade deals suggests an understanding that the former give the United States much more legal authority in dispute resolution. Moreover, he has explicitly tweeted that he’d only back rejoining the TPP if major fixes were made.

Precisely because he’s the only American President in recent memory to show any interest in changing the nation’s ill-considered trade status quo, and any awareness that the United States retains ample leverage to achieve its trade objectives unilaterally, I can’t rule out the possibility that Mr. Trump might turn TPP into a winner for the U.S. domestic economy (as opposed to the importing and offshoring lobbies).

But the main lesson that should be taken from decades of American trade diplomacy with Asia is that economies structured to promote exports and limit imports are going to stay substantially closed no matter what promises they make. Therefore the best course for the United States to make is to expend its energy and resources on reducing its economic engagement with Asia, rather than trying to remake the region in anything like its own image.

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(What’s Left of) Our Economy: The Establishment’s Case for Free Trade Keeps Weakening

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Center for Global Development, currency manipulation, Dani Rodrik, free trade, Joseph E. Gagnon, Lawrence Summers, non-tariff barriers, Paul Krugman, Peterson Institute for International Economics, protectionism, sovereignty, Trade, trade agreements, trade barriers, transparency, {What's Left of) Our Economy

Although they’ve long enjoyed benefits ranging from lavish financial support to nearly uncritical mainstream media adulation, I felt a twinge of pity this morning for establishment backers of current trade and globalization policies.

As made clear from a new report from one of their leading think tanks and a recent speech from one of their leading individual lights, they’re doubling down on the claims that there’s nothing fundamentally wrong with the trade liberalization priorities long held by the U.S. government, and that the trade barriers supported by populists and other critics will only backfire on the American and global economies. And as also made clear by the report and speech, they keep fighting a losing intellectual battle.

The report comes from the Peterson Institute for International Economics, and addresses the question “Do Governments Drive Global Trade Imbalances?” As emphasized by author Joseph E. Gagnon, the stakes of finding the right answer are towering:

“At current levels, these imbalances will push the net debt of deficit countries gradually toward unprecedented and unsustainable levels….Moreover, the domestic political consequences of persistent trade deficits are already evident in both the United States and the United Kingdom, having contributed importantly to the election of Donald Trump and the outcome of the Brexit referendum….”

In other words, if global trade flows continue getting more lopsided, they could set the stage for a repeat of the kind of global financial crisis they helped foster during the previous decade. And failing to calm populist political waters in the west could tempt key trading powers even more strongly to dabble in economically disastrous protectionism.

So Gagnon makes the case for a feel-good story: These major trade powers, especially the United States,

“have the necessary tools to achieve their stated goal of narrowing current account imbalances. President Trump and some members of his administration have proposed using trade barriers to narrow the US current account (trade) deficit. The data show that trade barriers have very little effect on a country’s trade balance. Fiscal policy and net official flows are the policies that matter for trade balances.”

One problem right at the outset: There’s nothing in the study whatever that explicitly measures the impact of (conventional) trade barriers. But even accepting this unusual methodology, it’s surely significant that he does conclude that “foreign exchange intervention” – i.e., currency manipulation – has an “important” affect on trade balances. That sounds like a trade barrier to me, at least in many instances.

And although fiscal (and related spending) policies aren’t normally considered examples of trade policies, they’ve clearly been used by numerous countries, especially Germany and throughout East Asia, to keep savings rates high, and therefore consumption (and imports) low. Why does Gagnon leave these out?

It’s absolutely true that fiscal and budget policies reflect the choices made by national societies, and therefore economies, and that as such, the presumption should be that they’re entirely legitimate. But at the same time, the nature of such choices can reveal whether these priorities can produce reasonably balanced trade with an economy like America’s – whose priorities on these fronts are substantially different but presumably just as legitimate.

As a result, trade policies that emphasize expanding commerce with countries regardless of their domestic priorities ipso facto can’t help but boost the trade deficit of the freer spending and/or more economically open country. And that description fits decades worth of American trade policies to a tee.

Lawrence Summers, President Obama’s former top White House economic adviser (among many other major government jobs), last month advanced an argument that’s somewhat more sophisticated than Gagnon’s, but no more convincing or useful to policymakers. In a speech to the Center for Global Development, Summers made the standard nod to the “compelling and persuasive case for free trade” and to the follow on view that “erecting tariff or quota barriers to trade between countries is usually a bad idea.”

But then, Summers’ line of argument actually became interesting. He sought to draw a distinction between the (unassailable) idea of free trade on the one hand, and the focus of many recent trade agreements – which he claimed “may be good or they may be bad, but they are not self-evidently and clearly good in the way that free trade is clearly good.” These concerns centered around goals like “securing intellectual property protection for global companies in a wider range of countries” and “achieving access for service companies to a wider range of countries” and “harmonizing rules in areas like safety standards or financial reporting standards.”

Supporters of such measures, he contended, have too often been arrogating

“the prestige of free trade…in support of a rather different agenda of better, more harmonized commercial rules” and expressed support for the view that “the participants in the debate about what constitute better, more harmonized commercial rules are mostly the kinds of people who appear in Davos rather than the kinds of people who work in the companies that are run by the people who appear in Davos.”

It’s hardly new for trade advocates to note critically that recent trade deals have dealt largely with non-trade issues, and more disturbingly, issues that the theory’s originators couldn’t imagine. Many left-of-center opponents of the Trans-Pacific Partnership (TPP) agreement nixed (at least for the United States) by President Trump made this very point, and Summers peers such as Dani Rodrik of Harvard University and Nobelist Paul Krugman have echoed these views as well.

But Summers’ indictment of this shift in the trade agenda seems unusually strong, so it’s a great opportunity to pose three major questions that these critiques keep avoiding. First, with standard trade barriers like tariffs whittled down to near-insignificance in most cases, and such non-tariff barriers (NTBs) becoming more popular, how can genuinely free trade be sustained without somehow grappling with the latter?

Second, since the United States maintains relatively few NTBs, since these barriers are easy to identify because they’re typically line items in a completely transparent federal budget, or regulations in other, equally transparent federal documents, and since the world’s NTB champs are known for opaque governing systems that generally hide their barriers effectively, how can the United States adequately safeguard its legitimate interests without threatening to put up or actually erecting its own barriers?

So without the possibility or reality of unilaterally closing off its own market in response, how can the United States avoid being disadvantaged by legalistic systems of harmonization that (understandably but unrealistically) depend on producing evidence for winning redress?

Third, and similarly, there’s no global consensus on what kinds of health and safety regulations are genuine and valid measures to protect the commonweal, and what kinds are designed primarily as trade barriers. Therefore, how – unless again through using the threat or reality of unilateral tariffs – can countries that play it straight (like the United States) adequately safeguard their interests versus the clandestine protectionists?

The only plausible answers to these questions are, “It can’t.” And the sooner globalization’s cheerleaders acknowledge these hard truths and the commonsense measures that logically flow from them, the sooner they’ll start winning back the trust of a public that’s rightly ignoring them.

(What’s Left of) Our Economy: The Latest Bogus Case for TPP Revival

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Barack Obama, Canada, China, exports, George W. Bush, Mexico, non-tariff barriers, The Wall Street Journal, TPP, Trade, trade deficit, trade enforcement, trade laws, Trans-Pacific Partnership, Trump, {What's Left of) Our Economy

The case for the Trans-Pacific Partnership (TPP) trade deal pushed by former Presidents George W. Bush and Barack Obama, but killed by President Trump, was never serious. For example, America’s economy represented nearly two-thirds of the vaunted new free trade zone the Pacific rim deal would have represented. Many of its largest economies (notably Canada, Mexico, and Australia) were already connected with the United States by trade liberalization agreements. These and most other TPP members have depended heavily on amassing trade surpluses to generate growth, casting major doubt as to how widely they’d open their own domestic markets. And despite being widely touted as a counter to China’s growing economic and military influence in the region, the deal contained an immense back door for Chinese products in the form of sloppy rules of origin.

Now the Wall Street Journal editorial board has taken the bogus pro-TPP case another fact-free step further. It’s claiming to have unearthed evidence that Mr. Trump’s decision is already hurting American exporters. Except the only “evidence” presented is from a single Japanese study. And its findings consist not of developments that have already taken place, but of projections of what it thinks might take place.

Everyone is of course entitled to an opinion – or a projection. And maybe Tokyo’s National Graduate Institute for Policy Studies knows something about such forecasts that has completed eluded the U.S. Government – which has a terrible record predicting the results of trade deals. But everyone is also entitled to ask why the Wall Street Journal didn’t look at what is already known about export flows between the United States and its would be TPP partners since the Trump decision.

According to the U.S. International Trade Commission’s Trade Dataweb, year-to-date 2016-2017, America’s goods sales to these countries have grown by 5.36 percent. That’s somewhat less than the 6.38 percent increase in total, global American merchandise exports during that period. But not a lot less.

Moreover, this small discrepancy is anything but unheard of. Since the current U.S. economic recovery began (a period during which the TPP was being considered in Washington and all the other capitals that sought the agreement), America’s global goods exports have topped their TPP counterparts in two years, and the reverse has been seen in three years. In two other years, merchandise exports to both groups fell – both times by greater percentages for TPP exports. Moreover, the differences in none of the seven full years for which data exist is substantial.

In other words, the numbers so far support the observations that many of the biggest TPP member economies comprising the smallish non-U.S. TPP trade area (along with smaller economies like Singapore, Chile, and Peru) already have reached trade agreements with the United States – and that optimism regarding a needle-moving U.S. export boost has never been justified.

Moreover, neither the Journal editorialists or any other TPP revivalists has grappled seriously with any of the other reasons for exports skepticism. These range from the prevalence in the non-U.S. TPP economies of the kinds of non-tariff trade barriers that American trade diplomacy has never eliminated or even significantly reduced, to the related likelihood that most of the TPP provisions concerning these barriers are unenforceable.

Nor have pro-TPP voices explained why other agreement provisions – such as a yet another dispute-resolution system that would override American trade laws, plus that back door for China and other non-TPP countries – wouldn’t have supercharged U.S. imports and further swelled an already bloated, trade deficit.

The Journal‘s editorial ends with the hope that “If the 11 remaining members hold out for a U.S. return, it’s possible that rational American self-interest will prevail over protectionist bluster.” But its fact-free missive makes clear that it’s the remaining TPP supporters in the United States that urgently need to display a learning curve.

(What’s Left of) Our Economy: Why Trump’s China Trade Deal is Fatally Flawed

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2018 elections, 2020 elections, biotechnology, China, exports, financial services, GMO products, imports, mercantilism, non-tariff barriers, protectionism, tariffs, Trade, Trump, Wilbur Ross, {What's Left of) Our Economy

If you (like me) haven’t been happy with America’s China trade policy for the last few decades, here’s the sunniest spin you can put on President Trump’s new trade deal with the People’s Republic: Most of the 100 days set by Washington and Beijing for reaching an agreement to resolve major bilateral issues still haven’t passed. So the two governments – and especially the American demandeur – still have ample time in theory to meet their own proclaimed standard for success.

At the same time, there’s evidence that, despite having won the White House in part on promises to stop China’s “rape” of the U.S. economy and its workers, Mr. Trump is ready to give the Chinese a lot more time to produce genuinely boast-worthy results. Principally, Commerce Secretary Wilbur Ross, the American point man for implementing the 100-day plan, told Fox Business News yesterday:

“The strategy here was to get a few quick kills; a few tangible, deliverable items that could be done quickly—make sure that there was actual performance on them … assuming that those are delivered, then we’ll go into a one-year program of negotiations. If that produces more deliverables, we’ll go into a longer-term period of negotiations.”

More indications from Ross that the agreement dealt with only the tip of the iceberg of U.S.-China trade issues: “[T]his addresses 10 items. There are probably 500 items that you could potentially discuss; maybe more than 500.”

And don’t forget the quid pro quo created by President Trump with China between trade and North Korea-related issues. As I’ve written, his decision to promise China a “far better” trade deal with the United States “if they solve the North Korean problem” could let Beijing string the United States along on trade for months with fake promises of imminent progress with Pyongyang.

The specifics of the new agreement have been analyzed in detail, so there’s no point duplicating these exercises. Ditto for the lack of penalties for non-compliance, or even enforcement mechanisms. But it is worth noting how many of the provisions are “soft” – i.e., leaving China literally square miles of wiggle room to keep blocking American exports with no reason to fear any consequences.

For instance, in biotechnology (including genetically modified grains and other crops), Beijing is merely obliged to conduct “science-based evaluations” of U.S. products seeking entry into the Chinese market, and from now on operate its safety certification system more expeditiously and more.

China has agreed to “allow wholly foreign-owned financial services firms” provide credit-rating services in the People’s Republic by July 16, but they will still need to satisfy a “licensing process for credit investigation” whose standards apparently need to meet no specific criteria whatever.

All that was won by electronic payment services was a Chinese commitment to “issue any necessary further guidelines” – again, unspecified – by July 16 and to permit U.S. firms to “begin the licensing process.” The stated aim is to provide these finance companies with “full and prompt” market access, but the agreement contains no means of judging how success will be judged.

More fundamentally, however, the Trump administration’s China agreement suffers exactly the same fatal flaw as those reached by its predecessors: It rests on the assumption that the markets of determinedly mercantile countries can be genuinely opened with skillfully enough worded documents. Sadly, nothing in the history of American trade diplomacy can justify such optimism about conventional trade diplomacy.

After all, these economies understandably view their protectionist approaches as successes and see no need for significant change. The most important trade barriers they maintain are non-tariff barriers that are developed and put into effect by powerful, highly secretive bureaucracies that make identifying these practices – much less litigating against them – excruciatingly difficult. Largely as a result, protectionist systems have grown quite adept at agreeing to dismantle various barriers while generating the same results with new mercantile practices.

Think of it this way: Any economy that, as Ross indicated, could still be presenting more than 500 market access problems to foreign competitors after decades of market-opening promises is clearly an economy that’s been thoroughly exposed to the case for much freer trade – and that has emphatically rejected it.

As Adam Smith recognized, a country can hope to penetrate such rivals by threatening to impose its own barriers to the protectionist country’s exports or actually erecting them. And Mr. Trump has repeatedly expressed his willingness to head down this road both as candidate and as president. Perhaps he believes that the Chinese have taken these statements to heart, and that the 100-day exercise – and whatever other talks might be necessary – will simply iron out the details.

But if so, genuine negotiations – in the sense of give and take – shouldn’t even be necessary to begin with. China should have been informed that it’s time to explain how it’s going to import more American goods and services, how many more it will buy, and by when. Team Trump should have also let the Chinese know that it will be judge, jury, and court of appeals in terms of disputes and verification, and that stiff, escalating tariffs on Chinese products will be applied until deadlines are met and targets are reached – for an extended period of time. The same approach should be used for other predatory Chinese practices that disadvantage U.S.-based producers.

For assuming Mr. Trump wants to keep control of Congress, and avoid lame-duck status, he faces some China and trade-related deadlines of his own that are approaching faster than he may realize. They’re called the 2018 and 2020 elections.

(What’s Left of) Our Economy: Why ‘Less Can be More’ in Trade with Germany – & Others

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Angela Merkel, currency manipulation, euro, Eurozone, Germany, mercantilism, non-tariff barriers, public investment, Trade, trade barriers, Trump, wages, {What's Left of) Our Economy

This week’s first meeting – in Washington, D.C. – between German Chancellor Angela Merkel and President Trump is being billed as a confrontation between polar opposites due to apparently clashing positions on immigration, trade, alliances and international organizations, and contrasting personalities. Actually, notwithstanding the penchant of the mainstream media and bipartisan policy establishment for Trump hysteria-mongering, one of the divides between Mr. Trump and Ms. Merkel may actually be more fundamental than recognized. Growing trade tensions might be signaling that the two economies simply aren’t structured to trade with each other in mutually beneficial ways – at least not at current levels.

So far, the mounting trade row – which could already be the most serious since American ire at an allegedly undervalued deutschemark during the Nixon era – has produced a now-predictable policy debate. The Trump administration is accusing Germany’s powerful economy of unfairly benefiting from a euro that’s kept weak because of the economic problems of its partners in the eurozone. As a result, goes the American complaint, its goods enjoy major price advantages over their U.S. competition all over the world for reasons that have little to do with market forces.

Germany and its sympathizers counter that the country simply makes terrific products, especially advanced manufactures, and that its trade barriers are actually on the low side. Another argument raised in Germany’s defense – in part because of a strong inflation-phobia created by the disastrous experience of the 1920s and by the population’s natural frugality, Germans tend to be low spenders and high savers.

All of the pro-German positions have merit. And the Trump administration case is further complicated by Germany’s consistent calls for eurozone economic policies that would tend to strengthen the common currency.

Yet Germany’s free trade record is at the least open to dispute. Although its tariff levels are generally low, like most other U.S. trade partners, it uses a value-added tax that effectively raises the prices of foreign goods headed for its market and reduces the prices of its exports via the rebates they receive. Moreover, even before President Trump took office, the U.S. government repeatedly reported that non-tariff barriers maintained by Berlin “can be a difficult hurdle for companies wishing to enter the market and require close attention by U.S. exporters.” The country’s government procurement market appears to pose special problems. According to the American Commerce Department under former President Obama:

“Selling to German government entities is not an easy process. German government procurement is formally non-discriminatory and compliant with the GATT Agreement on Government Procurement and the European Community’s procurement directives. That said, it is a major challenge to compete head-to-head with major German or other EU suppliers who have established long-term ties with purchasing entities.”

Nonetheless, the more closely the German economy is examined, the less amenable to standard trade policy remedies it looks. For Germany has long decided to create a national economic and business model that seeks both to maximize net exports and depress consumption at home. Two examples should suffice to make the case.

First, although Germany’s is, as frequently noted, a high-cost, high-regulation country, upon adopting the euro, its government put into effect a series of policies that put its labor costs on a much slower growth path than those of the rest of the eurozone and the high income world as a whole (including the United States). As many critics of Germany have charged, the resulting wage repression has overpowered the euro-dollar exchange rate and in fact amounted to an “internal devaluation” that produced the same effects as currency manipulation.

Second, Germany has also limited its consumption levels in part through very low expenses on infrastructure and other public investments. Moreover, according to one former European Central Bank official, the country’s external orientation has been so pronounced that “private investment in Germany’s aging capital stock has been weakened by many German companies’ desire to invest abroad.”

Revealingly, some of the harshest attacks on these and similar German policies have come from the eurozone itself. In particular, members like Greece and other southerly countries have accused Berlin of conducting a mercantilist campaign to grow at their expense by flooding them with exports and denying them comparable opportunities to supply the German market.

Without taking sides in this dispute, it’s clear that because the eurozone is a currency union, its success arguably depends on members conducting both their domestic and foreign economic policies in mutually compatible ways. So in principle, Germany’s eurozone fellows have grounds for complaining about the totality of the German national model. (The reverse holds as well in principle.)

The United States also should be perfectly free to ask Germany to change its priorities. Unlike eurozone members, however, it has no legitimate claims to influence over this vital aspect of German sovereignty. Germans apparently have decided that their choices work for them, and are absolutely correct to insist that aside from the rules of the World Trade Organization or other international legal arrangements, they have no obligations to accede to foreign demands for reform. Berlin, moreover, has a point when it notes that the United States should look to domestic practices of its own that might be hampering its global competitiveness, rather than placing the burden of change on others.

This German argument, however, is not dispositive. After all, if America’s national business and economic model emphasizes consumption and domestic-led growth rather than promoting net exports, that’s a choice that its own political system has been entitled to make. Moreover, it’s a choice that makes considerable sense for a big, continent-sized economy with great potential for more national self-sufficiency in a wide variety of goods and services. Germany has no more right to dictate U.S. preferences than vice versa.

The decisive difference between the two countries is that Germany has been happy with the pre-Trump status quo, and the United States has not. Washington of course has the right to press complaints about possible German violations of world trade law and other trade agreements. But it also needs to recognize that such conventional approaches are dwarfed by the breadth and depth of Germany’s approach to economics. Promoting German reform isn’t likely to work, either – given the above sovereignty concerns, and given the sheer difficulty facing even so powerful a country as the United States in urging domestic reform on another powerful country – especially one that views itself as a success.

So what to do?

First, in general terms, understand that, however legitimate Germany’s sovereign decisions, they create problems to which the United States is equally entitled to respond

Second, without continuing to hector or nag Germany, figure out the most effective response and act accordingly.

Third, depending on Germany’s counter-moves, decide what combination of unilateral carrots, sticks, and negotiations, might achieve progress (including some acceptable compromise), while preserving approximately current levels of trade.

But fourth, recognize along the way that Germany’s legitimate sovereign economic decisions simply may not permit bilateral trade to continue at those levels with acceptable results for the United States. If need be, then, revert to whatever unilateral strategy can preserve or enhance interests America has identified as its own priorities.

The new status quo would put the ball in Germany’s court, and grant it full scope to accommodate the United States if it’s dissatisfied, or make whatever other changes are needed to achieve whatever new objectives it chooses.

In other words, Washington should deal with Germany through an ongoing process of give and take, employing a variety of tactics and tools in flexible, agile ways. The aim would be to capitalize on its considerable leverage but also understand where it can and can’t hope to succeed at acceptable cost and risk. This approach clearly has a less impressive upside than efforts to produce grand bargains, or than more extensive international economic integration schemes — both of which can in theory maximize bilateral commerce. But its very modesty means that it’s less likely to risk angry misunderstandings and consequent major blow-ups, and more likely to result in trade and investment that’s sustainable not only economically, but politically, socially, and culturally.

President Trump can think of this new policy framework as the Less is More Strategy. And he should realize that its usefulness extends far beyond Germany.

(What’s Left of) Our Economy: Why Trade’s Best Champions Really Need to Raise Their Game

Tags

Brad Setser, China, Council on Foreign Relations, Financial Times, George W. Bush, Global Imbalances, manufacturing, Martin Wolf, non-tariff barriers, offshoring, offshoring lobby, tariffs, Trade, Trump, World Trade Organization, WTO, {What's Left of) Our Economy

When you’ve been in the trade policy trenches as long as I have, it’s important these days to look up from time to time and pinch or otherwise remind yourself how dramatically Donald Trump’s election a president has changed the policy landscape. And I’m of course someone who broadly supports his stated objectives in this field.

Weirdly, however, folks who oppose Mr. Trump’s views keep showing that their need to wake up is even greater, and this goes double for backers of the general trade status quo intellectually honest enough to acknowledge many of its serious problems. The biggest adjustment they need to make? Demonstrating that they can develop approaches to solving these problems that are realistic alternatives to the tariff-centered measures that the president is apparently contemplating. Recent offerings from the Financial Times‘ Martin Wolf and the Council on Foreign Relations’ Brad Setser reveal how much more progress is needed.

In Wolf’s latest column, he heaps scorn on the Trump-ian claim that expanding trade with China (or with any country) has played a “significant” role in causing any of U.S. manufacturing’s problems. And he declares that “Nothing [President Trump] does will reinstate manufacturing to its lost role as the dominant provider of “good jobs”.

But Wolf continues to see a different – and arguably more important – danger stemming from preserving the global trade status quo:

“[H]uge current account surpluses in some countries forced deficit countries into financial excesses as an (ultimately unsustainable) way to maintain demand in line with potential output. The [2007-08 financial] crisis vindicated the concern of John Maynard Keynes about the potentially malign role of surplus countries in the global economy.”

So logically, Wolf is telling readers that if better balance doesn’t come to global trade, Financial Crisis 2.0 could easily result – echoing a warning made both by me and by many eminent economists.

What does he recommend to stave off such a catastrophe? A “proactive, not defensive” approach that includes a drive to “open global markets” (as if this hasn’t been tried before?) and – most interesting in light of his opposition to U.S. trade barriers – “forcing” chronic trade surplus countries like China “to rely more on domestic and less on external demand.” It’s somewhat encouraging that Wolf recognizes that the surplus countries (read “protectionists”) won’t take these steps voluntarily. But what could he possibly mean by “forcing” if no “defensive,” or even punitive, measures like tariffs are permissable? Maybe he’ll tell us in his next column?

The gap between diagnosis and prognosis is at least as wide in Setser’s January 18 post on “China’s WTO Entry, 15 Years On.” The essay is worth reading in its entirety, for it decimates the arguments made by the entire bipartisan U.S. globalization cheerleading policy establishment (not to mention the corporate Offshoring Lobby) about the unprecedented benefits that would flow from admitting China into the global trade rule-making and enforcement body – and thereby shielding it legally from most American unilateral economic power and leverage. Here, though, are a few key examples:

>”It now seems clear that the magnitude of the post-WTO China shock to manufacturing was significantly larger than was expected at the time of China’s entry into the WTO. China already had ‘most-favored-nation” (MFN)/“normal trade’ access to the U.S. Market….But China’s pre-WTO access to the U.S. came with an annual Congressional review, and the resulting uncertainty seems to have deterred some firms from moving production to China.”

>”Moving final assembly of electronic goods to Asia created pressures for the full supply chain [i.e., the much more valuable and innovative production of parts and components, as well as the research and development and engineering work] to move to Asia….Even if the currency issue is taken off the table, I suspect that the trade gains—or really the export gains— from integrating China into the WTO’s “rules” were overestimated.”

>“It is now clear that WTO accession was not enough to make China into an easy market for foreign firms to supply from outside China.

“Here is a point that I think should get a bit more emphasis. China’s imports of manufactures, net of its imports of imported components, peaked as a share of Chinese GDP in 2003—and have fallen steadily since then. There is no ‘WTO’ effect on China’s imports of manufactures, properly measured (i.e. leaving out imports for re-export).”

>”Some firms have succeeded in China, but generally by producing in China for the Chinese market, not by selling to China. Successful challenges to some specific Chinese practices in the WTO have yet to alter this pattern….The WTO rules aren’t all that constraining in a country like China—thanks to state control of commanding heights enterprises and banks, and institutions, such as the National Development and Reform Commission (NRDC), that assure party control of major state firms and large investment projects.”

>Many WTO-legal remedies that might have worked were not used “because U.S. and European firms benefited from making use of Chinese production to meet global demand” – and because George W. Bush’s administration danced to their tune.

But Setser’s policy recommendations seem no more realistic than Wolf’s, especially if significant, unilateral tariffs are ruled out:

“The correct fight right now is against the domestic policies that keep China’s savings so high, against a surge in capital outflows that leads to a yuan depreciation that then becomes entrenched (if China’s currency goes down, I worry it won’t go back up), and against Chinese import-substituting industrial policies that aim to displace major exports to China.”

In the pre-Trump period, the diagnosis-prognosis gap unaddressed by intellectually honest supporters of the trade status quo didn’t matter much, since American presidents were so determined to preserve that status quo. But this time, it seems to be different.  And if these trade advocates hope to prevent what they tend to describe as a counterproductive – and maybe worse – shift in American policy, they’ll need to do a much better job of showing that no major course change is needed at all.

(What’s Left of) Our Economy: Can the U.S. Chamber Put One & One Together on Trade?

Tags

Cheap Labor Lobby, Donald Trump, free trade agreements, General Electric, Information Technology Agreement, ITA, Jobs, multinational corporations, national security, non-tariff barriers, offshoring, Ooffshoring Lobby, protectionism, tariffs, U.S. Chamber of Commerce, {What's Left of) Our Economy

I’ve long urged trade policy critics (including Republican presidential candidate Donald Trump) to stop questioning the intelligence of globalization cheerleaders. Especially, when we’re talking about offshoring-happy multinational corporations and their hired guns in Washington, I’ve insisted, they’ve known exactly what they’ve been doing – pushing the trade and other international economic policies likeliest to reward the companies with the biggest profits in the shortest time-frame.

True, the longer-term effects have produced losses for many of them – especially since the immense imbalances resulting from these policies helped trigger the financial crisis and ensuing Great Recession, which at least initially hit earnings and stock prices. But charges of stupidity don’t seem valid even in this regard, since most of the American economic system’s incentives discourage long-term thinking.

A new U.S. Chamber of Commerce report, however, could justify a rethink. For it’s a great example of an organization ignoring evidence that’s been staring it in the face for literally decades – and that’s become especially glaring recently. Moreover, it inadvertently validates the claim made by American politicians like Trump that major numbers of manufacturing jobs could be returned to the United States if Washington only mustered the will to do so.

The Chamber, of course, has been one of the most powerful mainstays of the overlapping corporate offshoring and cheap labor lobbies, and this morning released a study bemoaning the worldwide growth of what’s often called “techno-protectionism.” That is, more and more countries have been working harder and harder to promote their own domestic information technology industries through a variety of new regulations that the Chamber rightly notes have cloaked simple beggar-thy-neighbor aims in national security rationales.

In the Chamber’s words, “some national governments, by intentionally or unintentionally defining security concerns in an overly broad manner, are applying intense pressure on the [tech] sector to localize rather than globalize.” And the group has echoed numerous charges that China is a prime culprit.

The Chamber’s long list of these practices underscores points that I and many others have been making since even before trade and offshoring became hot-button issues. The first is that such non-tariff barriers, which are excruciatingly difficult for trade agreements to deal with meaningfully, have become much more important obstacles to international commerce than more easily identifiable and therefore vulnerable tariffs and quotas. The second is that, since foreign governments with secretive bureaucracies can erect and maintain these barriers much more effectively than the more transparent United States, trade agreements with these governments usually shaft America.

Yet groups like the Chamber have typically ignored or dismissed these concerns – largely because they produce so much overseas, and care so little about whether their products are Made in America or not. Indeed, their foreign factories and other facilities actually often benefit from the host countries’ subsidies and various forms of protection.

That’s why the Chamber so enthusiastically greeted the announcement late last year that Washington had negotiated a new global agreement to free up further trade in technology products. This broadening of a 1997 pact – the Information Technology Agreement, or ITA – was hailed by the Chamber as “welcome news for American companies and the workers they employ” because it would “end tariffs on approximately $1 trillion worth of high-tech products….” Consistent with my above analysis, none of the dozens of non-tariff barriers that distorted this tech trade was even mentioned.

Less than a year later, we see the Chamber complaining that these largely hidden trade barriers have not only remained so influential, but are spreading so rapidly that they “are now threatening to slow or even reverse” the “globalization of the [tech] sector.” Translation: Despite supposed landmark achievements like the ITA (and the long string of similar deals that preceded it starting with the North American Free Trade Agreement) protectionism worldwide has both remained in place and become so widespread that it’s now handcuffing self-styled global businesses that had hitherto boasted of their power to ignore borders.

In this respect, the Chamber is echoing a recent lament of General Electric’s CEO, who complained that localization pressures have become so pervasive and intense that his giant firm has no choice but to bow before them.

As I pointed out in covering this corporate confession, the global economy features one immense exception to this spreading protectionism – the United States. And ironically, it’s America that has the world’s greatest store of the kind of leverage needed to pursue this strategy successfully. Trump-ian politicians have been saying nothing more remarkable than that this leverage should be used. Reports like the Chamber’s today can only make it that much more difficult for Trump-ian opponents to dismiss this idea as delusional.

Our So-Called Foreign Policy: A Pitiful Media Defense of America’s Asia Strategy

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alliances, allies, Asia, Chung Min Lee, defense spending, deterrence, Donald Trump, Japan, Mainstream Media, non-tariff barriers, North Korea, nuclear weapons, Obama, Our So-Called Foreign Policy, protectionism, South Korea, Trade, Washington Post, Yoichi Funabashi

It’s of course OK for the Washington Post op-ed page to run articles with which I disagree. It’s also OK – for a different reason – for the Post op-ed page to run mainly articles with which its editors or the paper’s owner agree. No media outlet is under any legal or moral obligation to serve as a completely open forum. (Although it would be nice if those with an obvious slant at least dropped the pretense.)

What’s much less OK is for the Post or any other paper to run op-ed articles that completely ignore major evidence and arguments that undermine their own conclusions, or that contain big internal contradictions. These articles may technically not amount to intentionally misleading readers. But as made clear by an offering in yesterday’s paper on America’s Asia policy, they come uncomfortably close.

The article, by a veteran Japanese journalist-turned-think tanker and a Korean academic Chung Min Lee, charges that Republican presidential candidate Donald Trump appears dangerously likely to support “a U.S. withdrawal or fundamentally reduced U.S. military presence in Asia [that] would not only undermine regional security; it would also ultimately weaken the United States at home and abroad.”

Among the leading points:

>Contrary to the insinuations of Trump and other Americans, Japan and Korea are not defense free riders;

>Both countries are committed to free trade, just like the United States; and

>Trump’s positions would represent a complete turnaround from the policies of President Obama, who has “demonstrated that credibility need not be purchased through force; it can come from articulating clear strategies that give other nations confidence the United States will follow through.”

Anyone remotely familiar with U.S.-Asia relations in recent decades will find these claims downright laughable. But for layfolks, here’s what authors Yoichi Funabashi and Chung Min Lee didn’t tell you – and what Washington Post op-ed editors allowed them to leave out:

>The best measure of whether an ally is a free rider is not, as Funabashi and Lee contend, whether it picks up some or even most of the expenses of hosting American forces on its soil. After all, these payments aren’t acts of foreign charity. Those U.S. military units are present first and foremost to defend those very countries. It’s true that American leaders have determined that this posture serves American interests, too. But its the allies themselves that unquestionably have the greatest stake in preserving their own security. Why aren’t they paying all the expenses of hosting the U.S. military. Isn’t it enough that American taxpayers have footed the entire bill for fielding and arming these forces in the first place?

Instead, the best measure of free rider status is whether allies’ defense spending is proportionate to the threats they face. According to the World Bank, for South Korea – which is located right next door to wildly belligerent North Korea, and only a little farther away from two huge neighbors with which it’s had a troubled history – the military budget amounted to 2.6 percent of its economy last year. And this figure had been falling for decades, even though the North Korean threat was obviously worsening. For Japan, defense spending as a share of the economy has been rising – largely out of concern of growing belligerence from both North Korea and China. But it still only represented one percent last year. Do these statistics really paint a picture of countries that have stepped up?

>Contrary to this Post op-ed, there’s little evidence that Japan and Korea deserve to be removed from the list of countries ranking as the world’s most protectionist. But don’t take my word for it – look at what President Obama’s Office of the U.S. Trade Representative has reported. Its latest survey on protectionist practices around the world devotes more pages to listing trade barriers in Japan and Korea than to nearly any other single country (as opposed to agglomerations that include big countries, like the European Union).

Worse, it’s clear that tariffs and non-tariff barriers remain high in Korea even though a U.S.-Korea free trade agreement promising to open the latter’s market significantly went into effect more than four years ago. As with Japan, with which Washington has negotiated dozens of purported market-opening agreements over a span of decades, the reason couldn’t be clearer to any informed trade policy student: The pervasive non-tariff trade barriers they maintain have provided the most effective protections and subsidies for their domestic producers. And because they’re developed and administered by powerful and highly secretive bureaucracies, they’re painfully difficult for outsiders even to identify, much less combat.

>Finally, it’s nothing less than astonishing for the Post to have published a piece lauding President Obama’s success in preserving America’s credibility with its security allies. For the paper has published the most detailed reporting on an idea conspicuously being mulled by the president that could pose the greatest threat to these relationships since their creation: his interest in declaring that the United States will never be the first participant in a military conflict to use nuclear weapons.

As is surely known by Funabashi and Lee – and by anyone on the Post op-ed staff that reads the paper – the threat of using nuclear weapons has been central to America’s alliance strategy in both Europe and Asia for decades. The idea has been and still is that these arms would be the free world’s great equalizer versus Soviet, Russian, Chinese, and North Korean adversaries that have fielded conventional military forces that Washington and its allies have decided would be too expensive to match, much less exceed.

Why should they know this so well? At the least because Post columnist Josh Rogin laid it all out in a piece all of four days before the op-ed by Funabashi and Lee. Further, Rogin reported that “Diplomats from allied countries argued that if the United States takes a nuclear first strike off the table, the risk of a conventional conflict with countries such as North Korea, China and Russia could increase. Regimes that might refrain from a conventional attack in fear of nuclear retaliation would calculate the risks of such an attack differently.”

It’s possible that Rogin’s reporting was completely off base, and that the allies are all on board with an impending U.S. “no first use” policy. It’s also possible that even if Rogin’s coverage is on target, the allies are wrong, as insisted by some American arms control advocates quoted by Rogin. (Although if this is true, that logically wouldn’t mean that the allies are thrilled with Obama or still believers in American defense guarantees.) But why on earth didn’t the Post op-ed staff ask Funabashi and Lee to at least address the issue?

The Mainstream Media have been under such fire lately that its members have been spending more and more time contending that its record, resources, and devotion to quality mean that alternative media can’t be remotely adequate substitutes. The more slipshod, tendentious, pro-status quo columns like Funabashi’s and Lee’s that these news organizations serve up, the weaker these increasingly controversial claims become.

Making News: New Op-Ed Says U.S. Trade Strategy Flawed from the Get-Go

Tags

enforcement, environmental standards, free trade deals, labor standards, Lifezette.com, Making News, non-tariff barriers, tariffs, TPP, Trade, Trans-Pacific Partnership, unilateralism

I’m pleased to report that my latest op-ed article has just been posted this morning on Lifezette.com – which analyzes a new U.S. government report on the likely economic impact of President Obama’s Pacific Rim trade deal. The piece explains that this study makes clear not only the dangers posed by this Trans-Pacific Partnership (TPP) to America’s growth and employment performance, but why the nation’s standard goal of negotiating terms of trade with more protectionist economic powers is completely misguided.

I hope that this piece spurs major debate both on the TPP and on the potential – and indeed the superiority – of unilateralism as a new basis for America’s global trade strategy. What do you folks think?

Following Up: Obama’s Tech Trade Deal is a Success America Will Regret

Tags

2016 election, China, currency manipulation, Donald Trump, Following Up, free trade agreements, Hillary Clinton, Information Technology Agreement, non-tariff barriers, Obama, subsidies, technology, Trade, Trade Deficits, value-added taxes, VATs

Since earlier this week I chided the Obama administration for prematurely declaring victory in reaching a global trade deal to phase out tariffs on information technology products, I’m honor-bound to report today that the final obstacles have been cleared and the agreement has been reached. Now for the bad news: This new World Trade Organization deal looks even worse for the United States as other recent agreements like President Obama’s Trans-Pacific Partnership (TPP).

Now that China has finally submitted its time-frame for eliminating duties on the 201 products covered in the Information Technology Agreement (ITA), the agreement is on track to enter into force next July. The staged tariff-cutting process could be problematic, vulnerable as it is to changing national and global economic conditions and thus to political will. But from the American standpoint, the biggest problem with the ITA mirrors some of the biggest problems with Washington’s previous trade deals: It promises to get rid of whatever trade barriers the United States still maintains, but leaves in place many of the biggest trade barriers erected by foreign governments.

As noted in a post last year, the ITA ignores non-tariff barriers (NTBs) and other forms of trade predation.  These longstanding policies and practices block a wide range of American exports and artificially boost the competitiveness of foreign products, and are much less prevalent in the United States. Recently, such measures have of course grown much more important in tech giant China in particular, as Beijing has stepped up its harassment of foreign-owned companies in order benefit the domestic champions it’s trying to build and to secure advanced knowhow.

Because foreign government bureaucracies, especially in East Asia, work so secretively, non-tariff barriers are often notoriously difficult for American companies and officials to identify with any precision, much less tackle. Therefore, even trade deal provisions that ban or curb them are never especially promising. But at least the TPP mentions them in the text and takes a stab at creating disciplines. The ITA negotiators’ apparent position? “Never heard of ’em.”

Moreover, like the TPP, the ITA leaves in place the foreign value-added taxes (VATs) that serve as hidden barriers to U.S. exports and hidden subsidies for foreign goods headed for the United States. VATs are used by nearly all significant trading countries, with the conspicuous exception of America. And like the TPP, the ITA ignores currency manipulation – a huge mistake given China’s apparent determination to weaken the yuan once again, and the fondness for exchange-rate protectionism displayed historically by many other major and emerging information technology producers ranging from Japan to Vietnam.

As a result, the only clear American winners from the ITA will be offshoring-happy U.S. technology companies whose business models have long emphasized supplying the high-income United States from countries whose production costs are super low, whose governments are enthusiastic subsidizers, or both. These firms’ profits may improve, but the U.S. economy will see even bigger trade deficits, and therefore even slower growth, even less hiring, and even weaker wage hikes.

During this campaign season, many establishment politicians have suggested that bombastic Republican presidential front-runner Donald Trump, a strong trade policy critic, is actually working for his Democratic counterpart Hillary Clinton. Trade deals this incompetent or special interest-driven make one wonder whether President Obama is actually working for Trump.