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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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(What’s Left of) Our Economy: New Peterson Pro-Globalization Study Only Deserves a “Nice Try”

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China, Financial Crisis, Gary C. Hufbauer, Global Imbalances, globalization, Great Recession, Larry Summers, manufacturing, Peterson Institute for International Economics, productivity, secular stagnation, technology, Trade, trade agreements, trade liberalization, trade policy, World Trade Organization, {What's Left of) Our Economy

The Peterson Institute’s new study of the benefits to Americans of globalization apparently leaves no doubt that the nation should promptly forget about any retreat from conventional trade liberalization policies and resume its aggressive pursuit of new trade agreements like the Trans-Pacific Partnership (TPP). Or does it? A close reading of the report reveals gaping holes in these claims.

According to authors Gary C. Hufbauer and Zhiyao Lu, between 1950 and 2016, “trade expansion” has enriched the overall U.S. economy by $2.1 trillion, and boosted America’s output per head and per household by just over $7,000 and $18,000, respectively. Even better, lower-income households probably gained the most (since the greatest trade liberalization progress has been made in the goods that comprise so much of their consumption).

Yet the phrase quoted in that previous paragraph points to the first big hole in the Peterson findings. “Trade expansion’s” benefits, the authors specify, entails much more than either signing new trade deals or otherwise reducing trade barriers. It also includes “technological advances in transportation and communications [that] have drastically slashed the economic distance between countries.”

Of course, there’s been a lot of the latter over the last 66 years. What share of expanded trade’s benefits has come from trade liberalization policy decisions and what share from that technological progress? Darned if the authors know.

The long time frame, in turn, reveals a second major problem with the central argument. Obviously over that last two-thirds of a century, the world economy, and America’s position in it, have changed in numerous and fundamental ways. One prominent example: For the first roughly three post-World War II decades, the United States was the only fully intact developed country. How could trade liberalization not have been a major net benefit? America produced countless products that the rest of the world desperately needed. And none of its important industries faced significant import competition until the 1970s. That doesn’t sound much like current circumstances.

And in fact, Hufbauer and Lu acknowledge this problem, noting, for example, that “compared to previous decades, increased trade since 2003 has not delivered substantial gains.” At this point, however, their analysis gets dicey. For example, they speculate that that low recent payoff resulted partly from “the lack of fresh policy liberalization on a large scale (the failure of the Doha Round)….” But that period actually saw a hugely important liberalization initiative completed – China’s accession to the World Trade Organization. And don’t forget the numerous free trade deals signed by the George W. Bush and Obama administrations, including with South Korea’s very large economy.

Moreover, although Hufbauer and Lu rightly note that the financial crisis and Great Recession also have marked the post-2003 period, they claim that “The decade that experienced the greatest gains from increased trade was 1970 to 1980.” That decade witnessed no less than two recessions (three if you count the 1980 downturn).

Undaunted, the authors contend that returning to the trade liberalization policy course will result in even more American wealth creation. But here’s where their discussion of the post-2003 period fails badly – and unmistakably. They never mention that, thanks largely to that aforementioned boost to incredibly lopsided U.S.-China the first decade of this century produced the greatest U.S. trade deficits and associated global economic imbalances in world history. They ended in the financial crisis and the nation’s worst economic downturn since the Great Recession.

Since America’s main trade partners – including China – seem either just as export-dependent, and/or just as import-and consumption-phobic as ever, it’s difficult to understand why a return to conventional trade diplomacy, combined with the cumulative and often lagged impact of past deals (as noted by Hufbauer and Zu) wouldn’t end in near-catastrophe again.

Another big problem: Former Treasury Secretary and chief Obama economic adviser Larry Summers, along with many others, worry that the United States has fallen into an economic trap they call “secular stagnation.” They speculate that the nation has become so incapable of generating healthy growth that it’s grown dependent on blowing up credit and consumption bubbles to at least produce (misleading) signs of economic life – and that these bubble’s inevitable bursting keeps creating financial crises and serious slumps. Do Hufbauer and Zu believe that the sandbagging of domestic manufacturing (which hasn’t grown in real terms since 2006) due to import competition and offshoring isn’t partly to blame? 

Finally, and similarly, American leaders have finally recognized that the economy is experiencing a major productivity growth slowdown. Can trade liberalization’s real economic impact be measured without considering the effect on productivity of allowing all that trade damage to manufacturing, which historically has led the nation in productivity growth?  

It’s definitely encouraging that a major think tank like the Peterson Institute is looking in detail at globalization’s impact on America’s economy.  Let’s hope that its next effort reflects some actual thinking.  

(What’s Left of) Our Economy: Let’s Stop Hiding the Main Facts About Multinationals and Trade

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2016 election, automotive, Caroline Freund, Colgate Palmolive, Donald Trump, exports, Ford, Hillary Clinton, imports, Jobs, multinational corporations, NAFTA, North American Free Trade Agreement, offshoring, Peterson Institute for International Economics, Trade, trade balances, {What's Left of) Our Economy

Since U.S. trade policy is such a hot topic in this year’s presidential election, you’d expect that American leaders and voters and journalists could rely on reasonably good data for judging the claims of office-seekers and other participants. Sadly, when it comes to a crucially important globalization-related subject – the activities of multinational corporations – you’d be wrong. The following media and think tank examples show exactly what I mean.

Last week, Republican presidential candidate Donald Trump last week slammed Ford Motor Company for announcing the move of its U.S. small-car production to Mexico. This week, the firm denied his charges that it was a serial killer of American jobs, and noted that last year, it had moved big truck production from Mexico to American factories.

In the process, it made the plausible point that these sourcing decisions made eminent sense. Low-cost Mexico, Ford noted, was a great place for small-car production because these products are low-margin, Meanwhile, the higher priced United States was a perfectly fine place for building its larger, higher margin vehicles.

Of course, Trump could have countered by asking why truck production had been located in Mexico to begin with, and added that Ford had confirmed one of his previous indictment of such offshoring by stating that most of this new Mexico production would be imported back to the United States – a practice made much easier by the North American Free Trade Agreement (NAFTA).

But this debate – and so many others like it – could be easily resolved with the following information:

>The share of Ford’s total global vehicle and parts production located in the United States the year before NAFTA went into effect (1994), and the share located in Mexico.

>That Ford U.S.-Mexico division of labor today.

>The share of Ford’s Mexico vehicle and parts production sold in the Mexican market, exported to the United States, and sold to third countries pre- and post-NAFTA.

>The same export information for Ford’s U.S. production.

>The Mexican and U.S. shares of Ford’s vehicle content pre- and post-NAFTA.

>A breakdown of all these results by segment.

>A tally of Ford’s domestic exports to and imports from Mexico, and to and from the rest of the world, year-by-year since NAFTA’s signing. A breakdown detailing information for other Ford foreign production sites would be helpful, too.

That seems like pretty basic stuff. It also seems like the kind of information that’s absolutely essential for properly evaluating the impact of NAFTA – and similar trade policy decisions – on the American economy.

But Ford won’t produce it, and Washington doesn’t require such disclosure – agreeing with the company that it’s proprietary information crucial to competitive advantages and ultimate success. But as the press coverage make clear, Ford is free to release any information voluntarily, whether it illustrates the big picture or not, and does so with gusto when it portrays the company in a favorable light. Does that sound like a sound basis for policymaking to you?

The Peterson Institute for International Economics recently provided our second example of this problem. In a September 12 post, Senior Research Fellow Caroline Freund looked at the question, “Multinational Corporations: Friends or Foes of the American Worker?” and more specifically at the charge (leveled in this case by Democratic presidential candidate Hillary Clinton) that “Too many companies lobbied for trade deals so they could sell products abroad but then they instead moved abroad and sold back into the United States.”

She concludes that, although stagnating American wages are indeed a valid concern, “On balance, multinational corporations are very good for the US economy.” And in response to a question she received from a concerned citizens, she used the example of the Colgate-Palmolive Company and its Mexican-made toothpaste.

According to Freund, Colgate merits an American seal of approval because the company makes more of its profits in Latin America than in the United States; because its “future growth prospects are in emerging markets”; because the share of Colgate employees in America is roughly the same as the U.S.’ share of those profits; because low Mexican production costs generate savings for American consumers; and because research ostensibly shows that companies that boost their employment in Mexico tend to increase their American employment, too.

So Freund deserves credit for using company-specific statistics. But many crucial questions remain unanswered. In addition to the production, sourcing, employment, and trade information mentioned above (and for the entire company, not just toothpaste), it would be helpful to know if even those Colgate-specific data provided are typical of multinational companies as a whole. One reason for suspecting they’re not: Colgate makes consumer goods. Many of America’s leading offshoring firms are producers of parts and components and material for finished manufactured products.

Also, I wouldn’t be so sure about the emerging markets as Colgate’s most promising going forward – especially Latin America. The United States’ hemispheric neighbors benefited tremendously over the last decade or so from a boom in the prices of the raw materials on which their economies heavily depend. Unfortunately, few of them used the opportunity to diversify into higher value sectors that are more durable sources of prosperity. Once commodities demand began slowing, so did their growth. And in the case of the region’s giant, Brazil, along with Venezuela, the news looks like a horror story.

In addition, I’d like to know whether Colgate out so much manufacturing in Mexico before or after Latin America began taking off. Finally, as implied above, if the region goes completely into the tank, will the company move those factories to faster-growing places – including the United States, if it qualifies?

The way to fill this globalization-related information vacuum is obvious: Require such disclosures from the multinationals. The response to their concerns about divulging proprietary information is just as obvious: If all companies are required to release such business secrets, no one of them loses on net. And the penalties? Let’s just say, “Enjoy life as a global company without access to the U.S. market.”

Proposing these measures would bring an added bonus, too: Anyone or any company opposing them will stand revealed want to know less, not more, about America’s position in the world economy, and the policies that deserve responsibility.

Im-Politic: The Real Know-Nothings on Manufacturing Job Trends

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2016 election, China, Committee for Economic Development, Donald Trump, Im-Politic, Jobs, Joseph J. Minarik, manufacturing, manufacturing employment, Nicholas Lardy, Peterson Institute for International Economics, The Conference Board

One of the seemingly strongest (and most reasoned) claims raised by his critics against Donald Trump’s promise to bring large numbers of manufacturing jobs back to the United States is that he’s ignorantly trying to buck a global trend. As claimed by many journalists and analysts, the Republican presidential nominee doesn’t seem to realize that, as one columnist recently put it, “manufacturing jobs are disappearing everywhere, not just in the U.S.” Even China, one of Trump’s biggest targets, allegedly hasn’t been immune.

The prominence of this push-back actually adds up to good news for Trump and his supporters. For what the numbers actually show is that, by the most meaningful measures, China has been adding jobs in its manufacturing sector in recent years, not shedding them.

Earlier this summer, Richard McCormack reported in his invaluable Manufacturing & Technology News findings from the Conference Board that between 2002 and 2013, Chinese manufacturing employment increased by nearly 28 million. That’s more than twice the total number of manufacturing workers currently left in the United States.

At the end of last year, moreover, the Peterson Institute for International Economics – which has been a strong defender of the trade policies Trump and others have attacked – posted even more compelling evidence for the health of manufacturing employment in the People’s Republic. China specialist Nicholas Lardy found that manufacturing payrolls in China’s cities, which he considers the most reliable Chinese data, not only nearly doubled in absolute terms between 2003 and 2015 (to just under 80 million). But these jobs also rose as a share of total Chinese urban employment from 15 to 20 percent.

Incidentally, a June Conference Board post contains more statistics pointing to American policy failure on the manufacturing jobs front. According to Joseph J. Minarik of the private Committee for Economic Development, most high income countries have indeed joined the United States as manufacturing employment losers in absolute terms from 1990 to 2014. But during that period, the United States was one of the biggest proportional losers. Further, from 2008 to 2014 – years during which American manufacturing supposedly was experiencing or verging on a renaissance – the U.S. manufacturing jobs performance lagged behind that of South Korea, Taiwan, Germany, and Canada.

Here are the charts Minarik used:

Trump’s positions on trade can be legitimately criticized on any number of grounds. But when it comes to describing global trends in manufacturing employment, he sure doesn’t look like the one who deserves the label “know nothing.”

(What’s Left of) Our Economy: This is the Best Trump’s Tariff Critics Can Do?

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China, Donald Trump, free trade agreements, Mark Zandi, Moody's Analytics, Peter Petri, Peterson Institute for International Economics, Reuters, Susan Schwab, Trade, U.S. Trade Representative, Washington Post, Wendy Cutler, {What's Left of) Our Economy

Whatever you think of him personally, Americans should be grateful to Donald Trump’s presidential campaign for at least one big reason: The longer the New York magnate runs for the Republican nomination, the more evidence emerges of how pitifully weak the case for maintaining current U.S. trade policies has become. Here are just two recent examples.

The first comes from last weekend’s Washington Post Outlook piece claiming that Trump’s arguments for using tariffs to boost American economic growth and employment rests on “five myths.” The piece is full of problems – like the insistence that Washington has never signed a free trade agreement with China debunks Trump’s contention that U.S. trade policy toward the PRC has been disastrously mismanaged. Talk about taking literalism to an absurd extreme!

But even stranger is the argument that better U.S. trade policies won’t bring back significant numbers of offshored manufacturing jobs because “Many economists doubt that companies would move much factory work back from China. They wouldn’t be certain how long tariffs might last, for example, and wouldn’t want to be stuck with higher U.S. production costs if trade flows picked up again under a future president.”

Translated into plain English, this contention essentially states that Trump-like tariffs wouldn’t work because before long…there might not be any Trump-like tariffs. On the one hand, it’s true that policy measures in countries with representative governments are rarely written in stone. On the other hand, if that’s the predominant framework, then maybe we should apply it to other issues as well – and logically conclude that almost nothing government does will produce benefits because none of the relevant private sector actors will assume that such actions last? Or should we instead examine the intrinsic strengths and weaknesses of proposals and not play the mug’s game of predicting the politics?

The second big problem is actually one that’s resurfaced – the media’s habit of touting endorsements of current trade policies (and condemnations of any alternatives) by citing the opinion of supposed experts with no track record of being right on trade. No more egregious an instance of this practice has appeared lately than a March 31 Reuters article featuring the anti-tariff perspectives of one of George W. Bush’s chief trade negotiators Susan Schwab, and Wendy Cutler, a multi-decade veteran of the U.S. Trade Representative’s office.

As Reuters made clear, among Schwab’s achievements was negotiating “major portions” of the new U.S. free trade deal with South Korea. Cutler was the chief American diplomat working on this agreement during the Obama years. What Reuters didn’t make clear was how disastrous the Korea deal has turned out for the American economy, as the U.S. merchandise trade deficit with Korea has more than quadrupled on a monthly basis since it went into effect in March, 2012.

More broadly, the trade deficit heavily shaped by trade policies – the non-oil goods deficit – stayed astronomical under Schwab’s tenure despite a slowing economy and surged throughout Cutler’s. Are Schwab and Cutler solely to blame? Of course not. Did Reuters present any evidence that anything they did helped stem the tide? Again, of course not.

The economists that seem to be most often showcased in articles attacking the Trump positions aren’t to blame for such American trade policy failures, either. But their credentials are dubious as well. In particular, Peter Petri of Brandeis University and the Peterson Institute for International Economics (featured, e.g., here) and Mark Zandi of Moody’s Analytics (featured, e.g., here) have been more than happy to insist that Trump-like tariffs would backfire big-time on the U.S. economy. They may be right. But is there any evidence of either one correctly predicting the outcomes of previous American trade measures, like admitting China into the World Trade Organization? None that shows up in exhaustive Google searches.

Scrutinizing the proposals and promises of office-seekers is definitely a major media duty. But judging from the debate so far, reporting how much opposition to Trump-like tariffs consists of inanities, and comes from critics with no special claim to credibility, should be a much bigger part of this story.