Our So-Called Foreign Policy: Is Biden Learning the Limits of Multilateralism?

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Afghanistan, alliances, allies, America First, ASML, Biden, Biden administration, Blob, China, Chips Act, Europe, export controls, Japan, multilateralism, NATO, North Atlantic treaty Organization, oil, oil price, OPEC, Our So-Called Foreign Policy, Saudi Arabia, semiconductors, South Korea, Taiwan, Ukraine War

Remember the buzz worldwide and among the bipartisan globalist U.S. foreign policy Blob that Donald Trump’s defeat in the 2020 presidential election heralded the start of a new golden age of America’s relations with its longstanding security allies?

Remember how President Biden himself pushed this line with his claim that “America is back” and that Washington would end the supposed Trump practice of denigrating and even rupturing these relationships, and resume its post-World War II strategy of capitalizing on these countries’ strengths and fundamental agreement with vital American interests to advance mutually beneficial goals?

Fast forward to the present, and it’s stunning how thoroughly these American globalist hopes – and the assumptions behind them – have been dashed.

The latest example has been Saudi Arabia’s rejection of Mr. Biden’s request to delay an increase in oil prices announced by Riyadh and other members of the OPEC-Plus petroleum producers cartel. It’s true that few Americans currently view the Saudis as ideal allies. Continuing human rights abuses and especially evidence that its leaders ordered the assassination of a dissident Saudi-American journalist – and coming on top of revelations of Saudi support for the September 11 terrorists and Islamic extremism more broadly – will do that. Indeed, candidate Biden had even promised to make Saudi Arabia as a “pariah.”

But follow-through? Forget it – largely for fear of antagonizing the Saudis precisely because of their huge oil production and reserves, and because the President evidently still viewed them as a key to countering Iran’s hegemonic ambitions in the energy-rich region.

As for Saudi Arabia, it and much closer allies (including in Europe) were far from enthralled with how Mr. Biden pulled U.S. forces out of Afghanistan – which they charge took them by surprise and seemed pretty America First-y.

Under President Biden, the United States appears to have performed better in mustering allied support for helping Ukraine beat back Russia’s invasion. But look beneath the surface, and the European contribution has been unimpressive at best, especially considering that Ukraine is located much closer to the European members of the North Atlantic Treaty Organization (NATO) than is the United States.

In particular, according to Germany’s Kiel Institute for the World Economy, which has been tracking these developments since the war began, to date,

 “The U.S. is now committing nearly twice as much as all EU countries and institutions combined. This is a meagre showing for the bigger European countries, especially since many of their pledges are arriving in Ukraine with long delays. The low volume of new commitments in the summer now appears to be continuing systematically.”

In fact, European foot-dragging has reached the point at which even Mr. Biden’s Treasury Secretary, Janet Yellen, has just told them (in diplospeak of course) to get on the stick.

Apparently, America’s allies in Asia as well as Europe have hesitated to get behind another key initiative as well: Slowing China’s growing technological progress in order to limit its potential militar power.

In a September 16 speech, White House national security advisor Jake Sullivan confirmed that the United States had officially doubled down on this objective:

“On export controls, we have to revisit the longstanding premise of maintaining “relative” advantages over competitors in certain key technologies.  We previously maintained a “sliding scale” approach that said we need to stay only a couple of generations ahead. 

“That is not the strategic environment we are in today. 

“Given the foundational nature of certain technologies, such as advanced logic and memory chips, we must maintain as large of a lead as possible.”

And on October 7, the United States followed up by announcing the stiffest controls to date on doing business with Chinese tech entities – controls that will apply not only to U.S.-owned companies, but to other countries’ companies that use U.S.-owned firms technology in high tech products they sell and high tech services they provide to China.

Including these foreign-owned businesses in the U.S. sanctions regime – as well as in parallel efforts to rebuild American domestic capacity and marginalize China’s role in these sectors – is unavoidable for the time being, since the domestic economy long ago lost its monopoly and in some cases even its presence in the numerous products vital to semiconductor manufacturing in particular.

But as the Financial Times reported last month, a year after Washington drew up plans to create a “Chip 4” initiative to work with Taiwan, Japan, and South Korea to achieve these goals, “the four countries have yet to finalise plans even for a preliminary meeting.”

The prime foot-dragger has been South Korea, which fears Chinese retaliation that could jeopardize its massive and lucrative trade with the People’s Republic. But the same article makes clear that Japan harbors similar concerns.

Also unenthusiastic about the U.S. campaign is the Dutch manufacturer of semiconductor production equipment ASM Lithography (ASML). ASML’s cooperation is crucial to America’s anti-China ambitions because it’s the sole global supplier of machines essential for making the world’s most advanced microchips.

So far it’s been playing along. But similar complants about possibly losing business opportunities in China – which may account for nearly half of the world’s output of electronics products along with much of its production of less advanced semiconductors – have already persuaded the Biden administration to give some South Korean and Taiwanese microchip manufacturers a one-year exemption from the new export curbs. Could ASML try to win similar leniency?

In fairness, the Biden administration hasn’t wound up placing all its foreign policy bets on alliances and securing multilateral cooperation. Indeed, its new National Security Strategy re-states the importance of rebuilding American economic strength as a foundation of foreign policy success; the legislation it successfully sponsored to bolster the United States’ semiconductor and other high tech capabilities put considerable money behind that approach; and to its credit, it announced the new China tech curbs even after it couldn’t initially secure adequate allied cooperation – assuming, correctly, that an act of U.S. leadership could bring start bringing them in line.

Hopefully, a combination of these rifts with allies and its recognition of the importance of maintaining and augmenting national power mean that President Biden at least is learning a crucial lesson: that supporting multilateralism and alliances can’t be ends of a sensible U.S. foreign policy in and of themselves. They can only be means to ends. And although they can obviously be valuable in many instances, the best ultimate guarantor of the nation’s security, independence, and prosperity are its own devices.       

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(What’s Left of) Our Economy: Yet Another 40-Year Worst for U.S. Inflation

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Biden administration, Congress, consumer price index, core CPI, core inflation, cost of living, CPI, energy prices, Federal Reserve, inflation, monetary policy, oil prices, OPEC, Social Security, {What's Left of) Our Economy

For a change, the real headline development in my opinion revealed by today’s official report on U.S. consumer inflation (for September) wasn’t in the headline number (the figure that measures prices increases throughout the entire economy).

Instead, it was in the core consumer inflation number – the one that strips out food and energy prices supposedly because they’re volatile for reasons having nothing do with the economy’s fundamental inflation prone-ness.

Last month, the core Consumer Price Index (CPI) rose by 6.66 percent year-to-year. That wasn’t only the second month of speed up in these annual data. It was the worst such result since August, 1982’s 7.06 percent.

But even had this near-forty-year high not been recorded, the new CPI report would have been full of bad news. Contrary to recent claims that America’s cost-of-living crisis has peaked, headline inflation on a monthly basis acclerated for a second straight time, and the 0.39 percent number was the highest since June’s 1.32 percent.

On that same sequential basis, core CPI quickened for the second consecutive month, too, and the 0.58 percent result was also the worst since June (0.71 percent).

There was one bright spot on the consumer price front: Annual headline inflation declerated in September – to 8.22 percent. The slowdown was the third straight, and the best such number since June’s nine percent, but it’s tough to see this trend continuing much longer.

After all, as mentioned in yesterday’s post about the latest official wholesale inflation figures (which in and of themselves signaled renewed price increases that businesses could easily pass on to consumers), there’s no shortage of reasons for thinking that the consumer purchasing power to support such continued business pricing power will remain strong.

Moreover, on top of the aforementioned expansion of food stamp, Obamacare, and veterans’ benefits, and some possible version of student loan relief (pending legal challenges), we just learned today that Social Security recipients will get their biggest (8.7 percent) annual cost of living increase since 1981. All these actions arguably are worthy, but they all add to consumer demand without increasing the nation’s supply of goods and services – a proven recipe for stoking inflation.

And don’t forget that the global oil cartel decided last week to cut production substantially, which can only boost upward pressure on energy prices.

This lastest lousy inflation report underscores what a stunning change has taken place on the cost-of-living front – and how miserably both the monetary policy makers at the Federal Reserve and the fiscal policy makers in the Biden administration and Congress have failed. Not so long ago, Americans were debating how quickly raging inflation would end. Now the big question is how deeply it’s been embedded in the economy.

(What’s Left of) Our Economy: Now Oil’s Fueling the U.S. Trade Deficit’s Boom

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Advanced Technology Products, Biden, CCP Virus, China, climate change, COP26, coronavirus, COVID 19, exports, Glasgow, imports, lockdowns, manufacturing, non-oil goods deficit, oil, oil imports, oil trade, OPEC, supply chains, tariffs, Trade, trade deficit, Trump, UN Climate Change Conference, vaccine mandates, Wuhan virus, {What's Left of) Our Economy

So many records and multi-month or year highs and lows were revealed in this morning’s official report on U.S. trade flows (for September) that it’s tough to know where to begin. What caught my eye immediately, though, was a development that concerned a product that hasn’t generated much major trade news lately, but has produced quite a few headlines in the last few weeks alone: oil.

With the United Nations’ latest global climate change conference still underway in Glasgow, Scotland, and President Biden still asking members of the Organization of Petroleum Exporting Countries to boost their production to ease national and global energy shortages, it’s more than a little interesting that September saw America’s oil trade deficit balloon from $28 million (yes, with an “m”) in August to $3.38 billion (with a “b”).

That monthly total is the biggest since May 2019’s $3.98 billion and the $3.35 billion sequential worsening is the greatest such change for good or ill in absolute terms since the $3.52 billion improvement in this deficit in Dec., 2012 (when the monthly oil deficits were regularly some five or six times larger). It’s also the biggest increase in the oil trade shortfall since Jan., 2013 ($3.86 billion).

At least as interesting: On a year-to-date basis, the oil trade balance has shifted from a $13.98 billion surplus to a $6.84 billion deficit, mostly because oil imports are up 23.55 percent during this period.

The monthly spurt in the oil trade deficit weighed heavily on the overall September trade figures, accounting for 41.26 percent of the rise in the total deficit to a record $80.93 billion.

Moreover, not only was the September combined goods and services trade shortfall an all-time high. It beat the previous record (set in June) by a healthy (or sickly?) 10.52 percent, and the 11.52 percent monthly jump was the greatest such widening since the 19.87 percent recorded in July, 2020, when the U.S. economy was rebounding sharply from the short but deep downturn produced by the CCP Virus’ initial wave and the shutdowns and lockdowns mandated in response, along with major consumer caution.

September’s deficit resulted from both major trade flows moving in exactly the wrong way. Total imports set their third straight monthly record, increasing by 0.58 percent to $288.49 billion. And overall exports sank by 3.01 percent, to $207.56 billion. That total was the first monthly falloff since February and the biggest since the 19.96 percent plunge in April, 2020 – when the pandemic’s impact on the U.S. economy was peaking.

Still worse was the trade story in goods, where the $98.16 billion gap grew by 9.99 percent over the August total to a new record $98.16 billion. That figure broke the old mark (also set in June) by 5.25 percent, and the monthly increase was also the biggest since July, 2020 – when it rose by 12.20 percent.

Here, too, both exports and imports can be blamed. As with total exports, the former also decline for the first time since February, and the 4.71 percent sequential decrease to $142.71 billion was the steepest since the 25.10 percent crash dive suffered in pandemic-y April, 2020.

Goods imports, meanwhile, climbed by 0.78 percent to $240.86 billion – a new record , too.

Since manufacturing dominates U.S. goods trade, it’s not surprising that much of this September deterioration on the merchandise side came in industry. This sector saw its own longstanding and massive deficit hit a second straight monthly record, rising 1.60 percent to $118.75 billion.

Manufacturing exports dropped on month by 4.69 percent, from $97.13 billion to $92.58 billion. But the much greater amount of imports was down only 1.25 percent, from $214.041 billion to $211.33 billion.

These new records have pushed the 2021 manufacturing deficit so far to $968.25 billion – 22.52 percent bigger than last year’s January-through September number. So the full-year shortfall is sure to top $1 trillion for the fourth straight year – and by October.

Yet another all-time high was reported in an important manufacturing sub-sector – advanced technology products (ATP). The $50.50 billion worth of these goods imported by Americans in September set a monthy record, and one that broke the previous mark of $47.24 billion set in October, 2019, by 6.91 percent. Largely as a result, the ATP deficit surged sequentially by 22.82 percent in September, to $19.74 billion. The total was the biggest since last November’s $21.90 billion and the increase the fastest since May, 2020’s 22.98 percent – early during that US rebound following the CCP Virus’ first wave.

With many of these ATP goods coming from China, the import boom in this category understandably led to a big (15.01 percent) increase in the bilateral merchandise deficit. Indeed, the monthly rise, from $31.74 billion to $36.50 billion was the biggest since the shortfall’s near-doubling in April, 2020 – when the Chinese economy was bouncing back from its own broad virus-related shutdown – and the level was the highest since December, 2018’s $36.60 billion.

Goods imports from China hit $47.41 billion – their highest level since October, 2018’s $52.08 billion. And their 10.27 percent jump in September was the biggest such monthly change since the 18.23 percent increase of this past March, at the start of the U.S.’ last post-CCP Virus recovery.

The China goods deficit in September did worsen faster than its closest global proxy – the U.S. non-oil goods deficit (which widened by 6.47 percent). It’s still also growing more slowly on a year-to-date basis – 14.89 percent versus 18.60 percent, which indicates that the Trump tariffs continued by Mr. Biden are still restraining it. But the gap is narrowing.

What’s especially sobering about these and other recent trade figures is that the overall deficit rose by 7.50 percent between the second and third quarters of this year while the rate of economic growth fell by 40.31 percent.  That’s not supposed to happen. Clearly, virus- and lockdowns- and mandates- and supply chain-related disruptions are distorting normal economic patterns, but that’s a huge discrepancy nonetheless.  Worse (in this sense), the American economy’s expansion is so far expected to speed up again in the fourth quarter. Although trees aren’t supposed to grow to the sky, it seems a safe bet that the U.S. trade deficit going forward will do a pretty good imitation.     

Following Up: More on the Price of Economic Dependence

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Andrea Wong, Bloomberg, Cincinnati Zoo, Cold War, debt, defense manufacturing, Donald Trump, energy, energy independence, Following Up, gorilla, Harambe, Middle East, oil, oil embargo, OPEC, Richard M. Nixon, Saudi Arabia, Stephen Hawking, Treasury Department, William E. Simon

Especially given some genuinely clownish performances over the last 24 hours, it’s a great pleasure – and relief – to report that not all journalists think it’s newsworthy what Donald Trump thinks of the Cincinnati Zoo gorilla shooting, or what physics giant Stephen Hawking thinks of the presumptive Republican presidential nominee.

For instance, there’s Bloomberg news’ Andrea Wong, who’s just written a terrific story about decades of American financial relations with Saudi Arabia that vividly portrays the risks the country runs when it develops heavy dependencies on imports of crucial products – in this case, oil. It nicely reinforces the message of Saturday’s post about the blind spot Americans too often display when it comes to safeguarding their economic independence.

At the same time, a careful reading of the Bloomberg piece strongly indicates that much of the vulnerability and weakness U.S. officials perceived during that 1970s period when the crucial bilateral decisions were made were just that – perceptions. Even worse, they were arguably perceptions that were seriously off base, and the underlying potential problems were entirely avoidable.

Setting the stage skillfully, Wong makes clear that American leaders could be forgiven for not exactly feeling like world leaders when they launched a far-reaching initiative to keep Saudi money flowing into U.S. government coffers: The Arab members of the Organization of Petroleum Exporting Countries (OPEC), the global oil cartel, had embargoed sales to the United States in response to America’s military aid to Israel during the Middle East war of the previous year. Oil prices had quadrupled. As a result, “Inflation soared, the stock market crashed, and the U.S. economy was in a tailspin.”

Wong might have added that American politics and government was in turmoil as well. In July, 1974, when a Treasury Department team was sent on a crucial mission to Saudi Arabia (as part of a larger Middle East and Europe trip), Richard M. Nixon’s impeachment and removal from the presidency was barely a month away.

In Wong’s words, the mission’s assignment was to “neutralize crude oil as an economic weapon and find a way to persuade a hostile kingdom to finance America’s widening deficit with its new-found petrodollar wealth. And…Nixon made clear there was simply no coming back empty-handed. Failure would not only jeopardize America’s financial health but could also give the Soviet Union an opening to make further inroads into the Arab world.”

To complicate the task further, the United States wasn’t the only country seeking special favors from the Saudis: “Many of America’s allies, including the U.K. and Japan, were also deeply dependent on Saudi oil and quietly vying to get the kingdom to reinvest money back into their own economies. “

Yet the delegation, headed by Secretary William E. Simon, succeeded. The Saudis resumed supplying the United States with oil and plowed most of their proceeds back into U.S. Treasury debt, which enabled America to keep living beyond its means. (I know – this is a dubious benefit at best.) In return, the United States greatly stepped up sales of arms and military equipment to the Saudis, agreed to keep the scale of their Treasury holdings secret, and even gave the kingdom special access to the Treasury market. Moreover, Washington agreed (until this month) to the key condition that the Saudi Treasury holdings not be made public when the Department issued its monthly reports on foreign owners of U.S. government debt.

So it seems like the oil-rich Saudis said “Jump” and an oil-addicted America answered “How high?”, right? Not so fast. For example, Wong’s account shows that Simon didn’t enter the negotiations convinced he had a fatally weak hand. In fact, the former Goldman Sachs bond whiz “understood the appeal of U.S. government debt and how to sell the Saudis on the idea that America was the safest place to park their petrodollar.”

The arms sales angle also worked in Simon’s favor – in two ways. First, American weapons generally speaking were the world’s best. Second, the Saudis didn’t have a serious option of turning to the former Soviet Union, the closest competitor to the United States in military technology. Dealing with the atheistic Soviets could have stabilized the fundamentalist Saudi theocracy as much as disclosure that its financial support for the U.S. economy was in theory indirectly helping America pay for its own arms sales to Israel – the fear behind the Saudis’ insistence on keeping their Treasury purchases secret.

In addition, as poorly as the U.S. economy was performing in the mid-1970s, in part because it still supplied much of its own demand for oil, it was in far better shape than the Europeans and Japanese. They were far more dependent on Middle East producers, and therefore were paying much higher relative oil import bills. The real lesson here: The United States all along possessed the potential to prevent the Saudis and other foreign oil producers from even appearing to gain a stranglehold over the American economy. Its real and perceived vulnerability stemmed from neglectful policies, not geological realities.

Fast forward to today, and the energy and Middle East pictures have changed dramatically. Most important, America’s reliance on the region’s oil supplies has been greatly reduced by its own domestic energy production revolution, and influential Saudis have been revealed as not only staunch Cold War allies, but as major supporters and enablers of the the kind of Islamic terrorism that resulted in the September 11 attacks and that continues roiling the Middle East – and claiming American lives – today.

As a result, even though the Saudis remain important holders of American debt and assets, and therefore remain as significant props for U.S. economic activity, their leverage over the United States has clearly diminished since the height of their petro-power. At the same time, other forms of American economic dependency have reached worrisome levels – notably for many advanced manufactures, including those used in military systems. And these dependencies, too, result from neglectful policies, not industrial realities.

In this third decade of the post-Cold War era, with the subpar U.S. economy continuing to outperform most major competitors, it seems inconceivable that a future president would send his or her Treasury Secretary abroad to stave off the prospect of blackmail. But a few years before Simon actually left to meet with the Saudis, I strongly doubt that he or President Nixon could have imagined undertaking and ordering this mission, either.