(What’s Left of) Our Economy: You Call This a China Trade Deal?

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agriculture, China, dispute resolution, enforcement, NAFTA, offshoring lobby, Phase One, tariffs, Trade, trade deal, Trump, U.S. Trade Representative, USMCA, USTR, WTO, {What's Left of) Our Economy

OK, let’s assume that something deserving the name “U.S.-China trade deal” has been reached – even one dubbed “Phase One” or “preliminary.” Deep doubts would remain justified about whether it can possibly serve American interests.

For example, where’s even an English-language version? There’s nothing new about such agreements coming out in both English and Chinese, raising thorny questions about ensuring that key terms in both languages are commonly understood – on top of all the towering issues raised by China’s long record of flouting official commitments it’s made. But if something worth announcing officially on both sides has actually been produced, why is the most detailed description so far this statement from the U.S. Trade Representative’s (USTR) office?

Why does this statement contain plenty of specifics about U.S. tariff reductions (except for the actual dates by which American levies on imports from China will be cut) but no specifics about China’s own pledges? In that vein, no useful accounts have been released of what China will actually buy from the United States (though it’s interesting that President Trump has included manufactures on the list – not simply agricultural products and other commodities), and by when the Chinese will buy these goods. Special bonus – shortly after noon, the President said he “thinks” China will hit $50 billion in U.S. agriculture imports. Over what time period? Heaven only knows.

Don’t forget – such import increases will be the most easily described and verifiable aspects of any agreement. So maybe since these terms are still being left so vague, it shouldn’t be surprising that there’s absolutely nothing from the administration so far about “structural reforms and other changes to China’s economic and trade regime in the areas of intellectual property, technology transfer, agriculture, financial services, and currency and foreign exchange.”

Even the Trump administration has viewed these issues – which lie at the heart of the intertwined U.S.-China technology and national security rivalries, as well as of the purely economic rivalry – as so challenging to address diplomatically that rapid progress can’t be made. Why else would Mr. Trump have settled for now for seeking a shorter term, interim agreement?

If genuine breakthroughs have been made that will strengthen and safeguard and enrich Americans, terrific. But if so, what’s the point of couching them in generalities? And if not, what’s the point in claiming major progress?

Also completely, and crucially, omitted are any indications of what’s actually meant by “a strong dispute resolution system that ensures prompt implementation and enforcement.” In particular, if the United States doesn’t insist on the last word in judging Chinese compliance and meting out punishment when agreement terms are broken, then this deal will work no better on behalf of U.S.-based producers (employers and employees alike) than previous arrangements under the World Trade Organization (WTO) and the old North American Free Trade Agreement (NAFTA) that pleased only the corporate Offshoring Lobby, its hired guns in Washington, D.C., and the Mainstream Media journalists who have long parroted its talking points.

So if the United States is not recognized as sole judge, jury, and court of appeals when dealing with Chinese compliance, history teaches that will be the case that the agreement literally will be worthless.

The politics of this U.S. announcement are puzzling in the extreme as well. China’s economy obviously has taken a much greater trade war hit than America’s – of course mainly because it’s so much more trade-dependent. Beijing’s dictators are struggling to contain unrest in Hong Kong. The new U.S.-Mexico-Canada Agreement (USMCA), which will replace NAFTA, will offset some of the China-related losses suffered by the agriculture-heavy states so critical to Mr. Trump’s reelection hopes. The polls show unmistakably that the President is winning the impeachment battle in the court of public opinion. And even before the Congressional Democrats’ efforts to remove him from office began bogging down, their party’s slate of presidential candidates had started looking so weak to so many in Democratic ranks that a gaggle of newcomers jumped into the primary campaign on stunningly short notice. 

In short, this is no time for Mr. Trump to reach any deal with China – whatever Phase it’s called. In fact, it’s the time for the President to keep the pressure on (because whatever weakens the Chinese economy ipso facto benefits the United States these days). And since a deal that promotes real U.S. interests remains impossible to reach because of verification obstacles, it’s also time for Mr. Trump to start signaling to American business that major tariffs on China are here to stay for the time being, and may even increase down the road. That’s one way to eliminate any uncertainty employers are feeling about doing business with China that will increase the odds of building a new, improved bilateral relationship – not restore its epically failed predecessor.

The only reasons for optimism on the U.S.-China trade front right now? Just two that I can identify, but they’re hardly trivial. First, for all the reasons cited above, the supposed Phase One deal is clearly still so tentative and, frankly, so flimsy, that it’s likely to fall apart sooner rather than later. Second, U.S.-China decoupling will continue – precisely because the closely related technology and national security gulf dividing the two countries can’t be bridged diplomatically, and because even previously gullible U.S.-owned companies in numerous industries will now be thinking twice about exposing themselves, or exposing themselves further, to the whims of China’s utterly lawless and unreliable government. 

(What’s Left of) Our Economy: America’s Persistent China Delusion Syndrome

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agriculture, China, comparative advantage, establishment, Made in China 2025, Mainstream Media, offshoring lobby, private sector, tariffs, The New York Times, The Wall Street Journal, Trade, {What's Left of) Our Economy

The week has barely started and already the Mainstream Media have delivered some genuinely bizarre – indeed seemingly clueless – China-related moments.

There’s the big New York Times series titled “China Rules.” It usefully describes how the People’s Republic has completely confounded the bipartisan American political and policy establishment’s confidence that its growing integration into the global economy would turn it into more cooperative, more economically and politically open power. And thankfully, the series does point out this mistaken official U.S. optimism – which it notes spanned fully eight presidencies. But it says nothing about the massive amounts of money spent by offshoring multinational corporations in Washington, D.C. and the rest of the country’s political and policy communities (encompassing academia and think tanks alike) to foster China myth-making and spoon-feed it to the national media, which overwhelmingly swallowed it hook, line, and sinker.

Given that this self-interested myth-making bears so much blame for China’s emergence as a major threat to America’s national security and prosperity, it’s imperative that The Times (and the rest of the Mainstream Media) start telling this story in detail – both to reveal how active and influential the myth-makers remain, and to reduce the odds that they’ll stage a comeback down the road.

The Times itself just provided one clear example of such influence in a tweet this morning about a piece on the just-concluded summit of Asia Pacific countries in Papua New Guinea – which tells readers that “The Chinese delegation sought to reaffirm its opposition to the protectionism and unilateralism that have been a focal point for criticism of the United States.” Honestly. “Reaffirm”? Like China’s (stated) opposition to protectionism as such is something to be taken seriously? Or that even China takes seriously?

Are such longstanding journalistic conventions the product of simple laziness? Or of literally decades of media reliance for information and analysis on myth-makers with strong vested stakes in portraying China as a steadily reforming economy? The answer, of course, is “both” – and that the latter fosters the former.

Another example of these habits’ persistence: today’s Wall Street Journal article describing how China’s central government and major local governments are now trying to support a “private sector” that “has become a weak link in a slowing economy.” Yes, there are entities in China that are now customarily called “private sector.” But in a command economy like China’s, where the state wields power in a wide variety of direct and indirect ways, they have about as much in common with genuine private sector companies as fool’s gold has with the real thing.

But perhaps the week’s most important China media reference – at least so far – appeared in a Journal article on how the country’s farm sector is coping with the advent of high tariffs on many U.S. agricultural products. It came in the form of some statements made by China’s President, Xi Jinping that deserve major coverage on their own, but that were presented as little more than boilerplate:

“Unilateralism and trade protectionism are rising, forcing us to take the road of self reliance. This is not a bad thing. China ultimately depends on itself.”

Xi was speaking specifically about agriculture, and can’t reasonably be criticized for wanting his country to be more self-sufficient in this sector. After all, what national leader could genuinely be happy about depending on other countries for food?

But there are two glaring problems brought up by his remarks. First, as I’ve written frequently, the contemporary global trading system, and the conventional economics underlying it, condemn the quest for self-sufficiency in any part of a country’s economy as a No-No. Trade (and therefore production) patterns are supposed to help develop the most efficient global division of labor possible. In plain English, this means that countries are supposed to specialize in what they make best, and to remain satisfied with importing most of the rest. And if food production isn’t their strong suit, they should be confident that they’ll always be able to buy from abroad all that they need.

Second, as I’ve also written, China’s quest for self-sufficiency is hardly confined to food. The country’s policy record makes clear that it’s the goal for its entire economy. The regime’s Made in China 2025 manufacturing and technology program is only the latest example. Among its objectives is reducing the country’s dependence on foreign-made parts, components, and materials for a wide range of manufactures. In other words, China’s leaders aren’t satisfied with importing goods and services where it currently lacks what economists call “comparative advantage.” They want to create this advantage for China – and according to a very specific schedule of highly concrete goals.

Whether dealing with another party, it’s crucial to define it correctly, and doubly so when that party is a “competitor” or a “rival” or outright enemy. Thanks to articles like those above, Americans have just been reminded vividly how far much of their leadership class remains from achieving this objective when it comes to China.

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.

(What’s Left of) Our Economy: Is the Offshoring Lobby Shaping U.S. China Policy Once More?

Tags

Bob Davis, China, Logan Act, offshoring lobby, Robert Mueller, Special Counsel, The Wall Street Journal, Trade, Trump, U.S. Chamber of Commerce, {What's Left of) Our Economy

Quite the nugget that came near the end of The Wall Street Journal‘s April 29 report on the run-up to the upcoming U.S. trade talks with China scheduled to begin in Beijing this week:

“During the past few weeks, China’s ambassador to the U.S., Cui Tiankai, and the U.S. Chamber of Commerce’s executive director, Myron Brilliant, operating as a backchannel between the two governments, called on their extensive contacts in Washington to try to get talks going again.”

It’s bizarre on so many levels. Most notably, but far from certainly, is the possibility that President Trump (whose campaign for the White House emphasized remaking America’s China trade and broader economic policies specifically to promote U.S. growth and employment) is being significantly influenced by the Chamber of Commerce (which has long championed a China policy that helps America-based businesses supply the lucrative U.S. market from super low-cost and largely unregulated China)?

That would be some kick in the pants to Trump supporters expecting the President to keep his China trade campaign promises.

Alternatively, the President might simply have been using the Chamber as a means of communication. But this decision would be puzzling, too, since the United States maintains a big embassy in Beijing, complete with a full-fledged ambassador, as well as numerous other official ways to talk with the Chinese. What could the Chamber add?

It’s even more interesting, and potentially important, to consider the chances that the Chamber took the initiative. If so, could the Logan Act have been violated? You may remember that this is a U.S. law requiring criminal penalties for

“Any citizen of the United States, wherever he may be, who, without authority of the United States, directly or indirectly commences or carries on any correspondence or intercourse with any foreign government or any officer or agent thereof, with intent to influence the measures or conduct of any foreign government or of any officer or agent thereof, in relation to any disputes or controversies with the United States, or to defeat the measures of the United States….”

You might also remember that in the wake of former Trump national security adviser Michael Flynn’s admission of lying to the FBI in connection with the the Bureau’s Trump Russia collusion investigation, calls proliferated to prosecute him – and other Trump-ers – for violations of this (little used) eighteenth century statute. No one outside his office knows whether Special Counsel Robert Mueller is looking into this possibility in its own probe, but this former Chairman of the organization Common Cause believes he should. If the Chamber was acting as a free agent, might it be in legal jeopardy, too?

I asked Bob Davis, a co-author of the Journal piece, about how this backchannel began, and he responded that he couldn’t go beyond his description of the actions he was told about. Which is of course fair enough for any reporter.

What should be clear, however, is that, if the Journal report is accurate, neither of the above explanations should comfort anyone, whatever their views on U.S.-China trade issues. The former could signal the imminent shattering of a campaign promise – which could only fuel further corrosive public cynicism about American politics. The latter could indicate that special interests unaccountable to the American people keep wielding ever greater influence over the nation’s policies – including those extending “beyond the water’s edge.”

So let’s all hope that Davis and his Journal colleague will keep digging, and/or that other reporters start.

(What’s Left of) Our Economy: Trump Tariffs Evoke Summers Snake Oil

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Al Gore, China, Clinton administration, current account surplus, Emergency Committee for American Trade, exports, FDI, Financial Times, forced technology transfer, foreign direct investment, General Motors, intellectual property theft, Larry Summers, Obama administration, offshoring lobby, tariffs, Trade Deficits, Trump, {What's Left of) Our Economy

Larry Summers doesn’t like President Trump’s China trade policies – that’s not news. After all, he served in senior economic policy posts both in the Clinton administration, which proudly championed expanded trade with China and laid the groundwork for the PRC’s entry into the World Trade Organization, and in the Obama administration, which less proudly but nonetheless effectively coddled much of the Chinese trade predation (including intellectual property theft) that even most globalization cheerleaders now admit is a major problem.

Newsier are two arguments Summers made yesterday in the Financial Times that indicate how dishonest years of justification of the China trade policies by globalist U.S. administrations have been, and how clueless they remain.

The dishonesty entails Summers’ dismissive treatment of China’s intellectual property “extraction” (as he calls what is usually and rightly recognized as “extortion”) from U.S. and other foreign companies that are forced by Chinese policy into joint venture partnerships with Chinese entities. According to Summers, this form of theft is no big deal for Americans because these episodes

“typically involve cases where the company in question produces for China in China and so have little impact on US employment. In many cases a substantial number of the company’s shareholders are foreign and it pays taxes to many governments. It is more than a little ironic that an administration that condemns outsourcing should make standing up for those who move production to China so central a priority.”

As should be clear to anyone who has followed U.S. trade policy toward China and other offshoring-friendly countries, that’s a heckuva way to describe the outbound American investment that’s been encouraged by the trade deals and related policy decisions enthusiastically supported by Summers and his White House bosses.

For especially during the Clinton years, when so many of these policies were put in place, the construction of American-owned factories, labs, and similar facilities in China was depicted not as activity that would substitute for American exports, or for U.S.-based production (in the form of goods shipped from these factories to the U.S. market), but as activity that would benefit the domestic American economy and its workers by supercharging U.S. exports – which would comprise much of the content of these foreign-made products.

Here’s a typical example from a 1998 report by the (Offshoring Lobby-funded) Emergency Committee for American Trade:

“American companies with global operations ship the large majority — between 60 percent and 75 percent — of total U.S. exports. Their foreign affiliates are important recipients of these exports; their share has increased to over 40 percent today.”

And let’s not forget one of the showcase examples of such Clinton-era investments – General Motors’ 1997 agreement with a Shanghai-run entity to produce autos in China. GM gushed that the joint venture would generate billions in American auto parts exports to China, and the importance attached by the Clinton administration to such deals was made clear by the decision to send Vice President Gore to the PRC to attend the signing ceremony. (Neither GM Chairman John Smith nor Gore mentioned that the agreement’s provisions mandated that the factory achieve 80 percent Chinese content levels within five years.)

Now, according to Summers, these joint ventures don’t significantly benefit the American domestic economy at all. Of course, there’s still the matter of how this Chinese tech theft – including from world-leading U.S. companies in cutting edge industries – will affect America’s innovation and technology futures. But these critical issues don’t seem to be on Summers’ screen.

The author’s cluelessness is evident from his insistence that

“it is wrong to say nothing has been achieved through negotiation with China. Only a few years ago, China’s current account surplus was the largest relative to GDP among significant countries….Today China’s global surpluses are far below past US negotiating targets of a few years ago….”

Here’s the (glaringly obvious) problem. During the current economic recovery, China’s total trade surplus with the United States (including its services deficit) jumped by 75 percent – from $219.47 billion in 2009 to $385 billion in 2016 (the last year for which such figures are available). Can a piece from Summers expressing his astonishment that so many U.S. voters opted in 2016 for a candidate promising to look after “America First” be far behind?

(What’s Left of) Our Economy: More Offshoring Lobby Snake-Oil on NAFTA

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China, Cummins Inc., free trade agreements, manufacturing, Morning Trade, NAFTA, North American Free Frade Agreement, offshoring, offshoring lobby, Politico, steel, tariffs, Tom Linebarger, Trade, Trump, Vietnam, {What's Left of) Our Economy

If Tom Linebarger conducts business the way he talks about trade policy, I’d watch out for my wallet if I dealt with his company. Because recent remarks made by the Cummins Inc. Chairman and CEO about President Trump’s efforts to rewrite the North American Free Trade Agreement (NAFTA) represent an unusually brazen example of snake-oil peddling.

In an interview with Politico‘s “Morning Trade,” Linebarger, whose firm is a leading manufacturer of diesel and natural gas engines and engine components, contended (in the reporter’s words) that “Although Trump believes differently, the United States is a much less attractive place for companies to invest if NAFTA no longer exists.”

In Linebarger’s view (and his own words), even if they’re only bargaining tactics, Mr. Trump’s threats to terminate the deal are “a terrible idea” because “Investors make decisions based on what they project is going to happen and one of the challenges in posturing with something of this nature is that people will begin to change their plans.”

Continued Linebarger:

“Not only would terminating NAFTA worsen the position of the U.S., but it causes multinational companies like mine to figure what’s the best way to position yourself for a world without NAFTA, which might mean changing manufacturing locations. Mexico has 44 free trade agreements. The U.S. has free trade agreements with 20 countries. So the very best way to sell to everybody else is to be in Mexico.”

But here’s what Linebarger didn’t tell Politico. First of all, according to Cummins’ latest annual report, more than half (54 percent) of all of the company’s net sales last year went to customers in the United States. The year before, it was 56 percent. Second, one of Cummins’ senior executives for Latin America stated publicly last month that all of Cummins’ Mexico engine production is exported, and that 80 percent goes to the United States. (The rest goes to the United Kingdom.)

So if Trump terminated NAFTA, and (as he has pledged) raised tariffs on Mexico-produced goods and services high enough to make the country unprofitable as an export platform, Cummins could lose nearly all of the customers for its four Mexico factories if it failed to return that production to the United States. It would also lose a big chunk of its total worldwide customers. 

Of course, Linebarger, Cummins, and other footloose multinationals could always try to skirt those tariffs by producing for the American market in other countries.  But that strategy could only succeed if the Trump administration simply sat back and did nothing about U.S. trade with any of these countries.  And just this week, Washington served notice that it would respond to such production-shifting ploys by announcing stiff new tariffs on Chinese-made steel entering the American market from Vietnam.        

In addition, the Latin America executive made clear that, despite Linebarger’s touting of Mexico’s non-U.S. trade deals, the company has made scarcely any use of them. And continuing U.S. domination of Cummins’ Mexico exports is all the more striking given that Mexico has been able to benefit from a free trade deal with the European Union (which the United Kingdom of course will be leaving) since late 2000, and from such an agreement with Japan since mid-2005. (Incidentally, counting all the EU countries separately is the only way the number of Mexico’s free trade agreements gets anywhere close to Linebarger’s 44.)

The only conclusions that can be drawn from the numbers: Either Linebarger is a complete incompetent and has failed to use Mexico as a supply base for dozens of promising non-U.S. markets, or he recognizes that Europe, Japan, and much of the rest of the world have little interest in importing advanced manufactured goods like those made by Cummins — or at least little interest in importing them from Mexico.

But let’s not ignore an equally important conclusion made clear by this piece: If journalists don’t stop simply taking at face value the claims of Offshoring Lobby mainstays like Linebarger, Americans will never have the kind of informed debate they need on trade and their place in the global economy.

(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: New Lows for Mainstream Media Coverage of Trade & Manufacturing

Tags

Don Lee, exports, imports, intermediate goods, Mainstream Media, manufacturing, media, MSM, National Foreign Trade Council, offshoring lobby, producer goods, The Los Angeles Times, The New York Times, Trade, U.S. Business and Industry Council, William Reinsch, {What's Left of) Our Economy

Everyone, no matter what their views on trade and related economic issues, agrees that reviving the U.S. domestic manufacturing sector represents a major challenge. What everyone needs to agree on is that the goal will never be reached as long as the Mainstream Media keeps presenting views on the subject that are as silly as they are downright ignorant. If you think I’m exaggerating, consider these two recent examples.

The first came in a piece by a team of New York Times reporters earlier this month. According to headline on the December 2 article, “Trump’s Tough Trade Talk Could Damage American Factories.” The reason?

“[M]any existing American manufacturing jobs depend heavily on access to a broad array of goods drawn from a global supply chain — fabrics, chemicals, electronics and other parts. …Mr. Trump’s signature trade promise [steep tariff hikes], one ostensibly aimed at protecting American jobs, may well deliver the reverse: It risks making successful American manufacturers more vulnerable by raising their costs. It would unleash havoc on the global supply chain, prompting some multinationals to leave the United States and shift manufacturing to countries where they can be assured of buying components at the lowest prices.”

To be sure, this article suffers numerous flaws. For instance, what’s the “U.S.-made product” it uses as its signature example of globalization-related trends that (one must logically assume) are being portrayed as beneficial for American industry? A movie seat chair comprised of two-thirds imported parts by value. Talk about a formula for a hollowed out manufacturing base!

But the main problem is with the authors’ apparent belief that these parts and components and materials (often called intermediate or producer goods) must be imported because they’re either not made in America, or can’t be made in America at all, or at competitive prices.

Nothing could be further from the truth. In fact, a huge percentage of American manufacturing output consists precisely of these products. It’s hard to know exactly how big because of shortcomings in U.S. data collection. But the U.S. Census Bureau’s monthly trade figures show that, on a pre-inflation basis, America’s goods exports for the first 10 months of this year have totaled just over $1.2 trillion. Of those, nearly 62.5 percent consisted of “capital goods” and “industrial supplies” – i.e., intermediate goods. (See Exhibit 6 in this release.)

But such exports are surely far greater, because the Census figures don’t break out the numbers for auto parts.

Similar problems plague American manufacturing output numbers, but also leave no doubt about the prominence of intermediate goods in the U.S. industrial complex. They show that, in 2014 (the last year for which detailed data are available), American manufacturing’s pre-inflation production was slightly more than $2 trillion. Of this amount, nearly 37.5 percent consists of products clearly identifiable as intermediate goods (like machinery, metals, and chemicals).

But again, due to data shortcomings, it’s difficult to tease out other leading intermediates – including not only auto parts but semiconductors and other electronics components and electrical equipment. (These figures are calculated from the “GDP by State” interactive tables in this section of the Commerce Department Bureau of Economic Affairs website, which includes national totals.)

So the claim that Trump-ian tariffs would eviscerate domestic manufacturing by cutting off American industry’s access to imported producer goods completely ignores the potentially greatly positive impact of stimulating demand for the nation’s immense (remaining) domestic producer goods complex.

The second example is even nuttier. In a December 12 piece, Los Angeles Times reporter Don Lee quoted an attack on tariffs from William Reinsch, identified as a “distinguished fellow at the nonpartisan Stimson Center.” That’s a big problem right there, as what Lee didn’t mention is that for 15 years, Reinsch was president of the National Foreign Trade Council, a pillar of Washington’s corporate offshoring lobby.

Yet it was Reinsch’s actual statement – and Lee’s apparent failure to see its fatal flaw – that was the real eye-opener. According to Lee, one of Reinsch’s main objections to tariffs broadly is that “We may assemble more stuff here, but we’ll export less because they’ll be more expensive. We’re going to be losing market share. Ultimately, the cost is jobs.”

Of course, as shown by that aforementioned New York Times article, too much American manufacturing already consist of “assembly.” More important, however, is that it seemingly hasn’t occurred to Reinsch or to Lee that the United States is running immense trade deficits overall, and especially in manufacturing. In other words, all else equal, the potential gains of producing “more stuff here” (and Reinsch never explains why it would be restricted to assembly) vastly outweigh the losses from exporting less.

Outsized domestic gains are even likelier because the United States has much more control over its own market and access to it than over foreign markets. Nor do Reinsch and Lee seem to know that the nation has been losing major market share even in advanced manufacturing industries for many years, as documented by several reports of mine issued by the U.S. Business and Industry Council. Here’s the latest.

President-elect Trump’s trade policy proposals are anything beyond controversy, and a thoroughgoing debate over the best globalization approach for the U.S. economy would be a long overdue and welcome development. Sadly, these two articles make clear that too much of the Mainstream Media remain far from making valuable contributions.

(What’s Left of) Our Economy: Offshorers’ Protests (Unwittingly) Reveal Why Trump’s Tariffs Can Work

Tags

Al Gore, Bill Clinton, imports, Mexico, NAFTA, North American Free Trade Agreement, offshoring, offshoring lobby, Ross Perot, tariffs, Trade, Trump, {What's Left of) Our Economy

A funny thing has happened on the way to this early stage in the development of Donald Trump’s policies on using trade measures to foster manufacturing employment: The nation’s powerful corporate Offshoring Lobby has just revealed that the critics have been right in charging that America’s trade agreements have fueled massive net job and production flight.

The evidence? Its panicky reaction to the president-elect’s declared intention to slap stiff tariffs on the exports its foreign factories try to send to the United States.

Think about it. Ever since the debate over the North American Free Trade Agreement (NAFTA) turned trade into a front-page issue, supporters of new deals insisted that their main aim was fostering exports from the United States. And since these new foreign sales would be added to the exporting firms’ existing sales, American growth and job-creation would increase. The quintessential boast along these lines? Then-Vice President Al Gore’s promise during his 1993 debate with former independent presidential candidate Ross Perot that NAFTA would further open an already huge, fast-growing Mexican consumer market to U.S. producers:

“Did you see the Wal-Mart that opened in Mexico City on the news?…Largest one in the world, if I understand it. They have 72 cash registers ringing constantly with people in that- in Mexico taking American products out of that store….They prefer American products. If we lower those trade barriers and get rid of them altogether, we will have an export surge into Mexico.”

Moreover, during that debate, Gore explicitly refuted Perot’s claim that the vast majority of American exports to Mexico eventually come back to the United States because they’re parts and components of finished goods that Mexicans have been too poor to consume. That is, Gore insisted that when American business looked at Mexico, it overwhelmingly saw those net new customers for their U.S. facilities and employees that would boost their American production and employment. And he dismissed as not even a half-truth the notion that the multinationals valued Mexico largely as a source of low-wage workers in a regulation-light country that could replace American workers in their U.S.-focused supply chains.

Years later, a different export-oriented justification for free trade agreements and offshored production emerged – especially in the policy community: American multinational companies were mainly building factories overseas because they were the most effective way to reach foreign customers, but that these new plants were engaged in the relatively simple activity of assembling finished goods from large numbers of more advanced parts and components. And since domestic U.S. factories and workers excelled in the latter, offshored production would serve as an immensely powerful magnet for those more sophisticated products.

Interestingly, by 1997, these contentions were all debunked by an unusually authoritative source – Gore’s boss, President Bill Clinton. In a speech aimed at convincing American labor unions to endorse his quest for new trade agreements, Clinton insisted that the deals he had in mind weren’t “about NAFTA or factories moving there to sell back to here.” Not that anyone noticed at the time – and I didn’t even find this quote till researching my book The Race to the Bottom in 1999.

Fast forward to today. There’s no doubt that purchasing power in many low-income countries (especially China) has increased substantially. But there’s also no doubt that it hasn’t improved nearly enough to enable them to rely on their own domestic consumption to spearhead their growth and modernization. Therefore, “moving there” by American businesses is still heavily motivated by “selling back to here.”

And even stronger evidence comes from the howls of corporate protests against Trump’s tariff plans. After all, if serving those foreign markets was the top priority for production offshoring – and especially if Gore was right and that “80 to 90 percent” of American sales to Mexico even more than 20 years ago stayed in Mexico (and similar countries) – why would tariffs reducing their access to the United States matter so much? In particular, if corporate offshoring has had so little to do with supplying U.S. customers, why would Corporate America not in effect throw a bone to a new president and win more than a little White House good will – not to mention great PR with so many Main Street Americans?

The answer, of course, is that the Gore view of offshoring remains as bogus today as it was the night he debated Perot, and that Trump is absolutely right: Without easy access to the U.S. market, offshored production loses a decisive share of its value. Therefore, denying or at least interfering with this access via trade curbs should create powerful incentives to bring these factories (and related facilities, like labs) stateside again. Clearly these firms know it. Mr. Trump’s election indicates that much of the public knows it. The only remaining question is whether, and how quickly, Congress and the chattering classes will catch on.

Im-Politic: The Day After, Part I

Tags

2016 election, Bernie Sanders, Cheap Labor Lobby, conservatism, Democrats, Donald Trump, Hillary Clinton, Im-Politic, Immigration, Jeb Bush, Mainstream Media, Marco Rubio, Obama, offshoring lobby, Open Borders, Paul Ryan, Populism, Republicans, Ross Perot, Ted Cruz, Trade

How did I go wrong on analyzing President-elect Donald Trump’s rise during this epochal presidential campaign? Let me count the ways.

My first post on this populist phenom expressed full confidence that he would never win the Republican presidential nomination – or even “come close.” Although I didn’t explicitly say it, I viewed the idea that he could win the White House as positively ludicrous.

After several of his insult barrages and other verbal bombshells, I was all but certain that his campaign was finished.

I had no doubt that, as with third party presidential candidate and fellow tycoon Ross Perot in 1992, his unwillingness to take advice – especially of the critical kind – would cripple his candidacy. Similarly, I believed that he would run his presidential operation the same way that many successful business leaders engage in politics – incompetently.

So I guess I’m qualified to be a Mainstream Media pundit! But seriously, since I got at least some things right – like translating Trump-ish into language that the chattering class should have been able to grasp – I’m not totally sheepish about serving up a first batch of thoughts about what all Americans either are chewing over or should be in the weeks ahead.

>For all the teeth-gnashing about the ugliness of the presidential campaign, and for all the responsibility for it that Trump deserves, imagine what the race for the White House would have been like without him. The Republicans would have nominated either a tool of the Cheap Labor and Offshoring Lobbies like former Florida Governor Jeb Bush or Florida Senator Marco Rubio, or a social conservative extremist like Texas Senator Ted Cruz. And none of them would have felt major pressure to pay attention to the Republican base’s anger about mass immigration, job- and growth-killing trade deals, or the income stagnation they fostered.

On the Democratic side, this kind of conventional Republican nominee may well have enabled Hillary Clinton to win that party’s crown without many nods to the populist positions taken by her chief rival, Vermont Senator Bernie Sanders – including on trade policy, along with Wall Street reform.

What a clueless – and maybe dangerously clueless – campaign that would have been! In particular, with no political safety valve, the continuing buildup of working- and middle-class rage that both major-party standard-bearers would have kept blithely ignoring could have exploded much more powerfully.

>The Trump victory could be a milestone in not only American politics, but policy. Yet the potential may never become performance unless this most successful outsider in U.S. history meets a staffing challenge that has hung over his campaign since his strength starting being apparent. Specifically, where is he going to find the populist policy specialists and academics and business types and politicians to fill the hundreds of key cabinet and sub-cabinet posts where presidential ambitions can just as easily die a lingering death as produce real, on-the-ground change?

The institutions needed to nurture and train such cadres simply haven’t existed. Or they’ve been way too small (i.e., modestly funded) to produce the needed numbers and possibly the needed quality. After his first White House victory, President Obama dismayed many of his followers by appointing to key economic positions in particular the kinds of Wall Street-friendly Clintonians that he had raked over the coals during that campaign (including Hillary Clinton, his rival for the Democratic nomination that year). His response? As I recall at the time (and I’m still looking for a link), something to the effect “What choice do I have?”

Although Mr. Obama never intended to bring the substantive break with the past that his successor has vowed, Mr. Trump could find himself in the same position, and his administration could drift steadily, and even imperceptibly towards a more conventional, and indeed donor-class-friendly, form of conservatism.

>Finally, for today, the Trump triumph places the Republican party in its current form in just as much jeopardy as a narrow Trump loss.

Had Trump lost in a landslide, the GOP’s future would have been easy to predict: The Never-Trumpian Washington establishment would have loudly crowed, “I told you so,” and advanced an overpowering rationale for returning to its low-tax, small-government, free-trading, open-borders, global interventionist orthodoxy of recent decades.

But last night’s results could be the death knell of establishment Republicanism – at least as a viable political force. It’s entirely possible that this establishment’s corporate and similar funders could decide for the time being to keep afloat the think tanks, media outlets, lobbying shops, and political consultancies comprising the GOP/conservative establishment. Indeed, since Trump could flop disastrously, preserving this infrastructure in preparation for 2020 makes perfect sense.

But for the foreseeable future, this is Donald Trump’s Republican party (whether he has to staff his administration with lots of standard-issue Republicans or not). House Speaker Paul Ryan, who strongly opposes his own party’s president-elect on issues ranging from trade and immigration to entitlement reform to foreign policy, can talk all he wants about reestablishing party unity. But the key question surrounding such calls is always “Unity on whose terms?” Until Mr. Trump fails a major test of leadership (or even two or three), or until events beyond his control render him ineffective (like a weakening economy) he’ll be calling the shots.  

And however lavishly financed the party’s establishment may remain, this election has made painfully obvious that its grassroots are shrunken and browned out. Since one of the prime takeaways of this election cycle is that voters ultimately count even more than money, it will become increasingly difficult even for the donors to treat the Washington Republicans as a true national political movement, as opposed to a self-appointed clique of supposed leaders with embarrassingly few followers.

So there’s of course a chance that the Ryan wing (emboldened by some truly desperate plutocrats) might at some point bolt and try to reclaim the Republican brand as its own or launch a third party. But these well-heeled dissidents will face the strongest of tides with the weakest of paddles – the more so given Ryan’s acknowledgment that Trump’s unexpectedly strong showing helped the GOP retain both houses of Congress. 

Tomorrow I’ll be offering some further initial thoughts. Until then, like so many others, I’ll go back to catching my breath!