(What’s Left of) Our Economy: Lots to Like in Biden’s (Trump-y) China Trade Policy Vision

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allies, Biden, Biden administration, Center for Strategic and International Studies, China, Comprehensive and Progressive Agreement for Trans-Pacific Partnership, CPTPP, decoupling, Donald Trump, economics, economists, exports, Katherine Tai, managed trade, multilateralism, multinational companies, Phase One, tariffs, U.S. Trade Representative, USTR, Wall Street, World Trade Organization, WTO, {What's Left of) Our Economy

Despite my strong interest in U.S.-China trade issues, I’d originally decided not to post on chief U.S. trade official Katherine Tai’s Monday speech on the Biden administration’s strategy for these challenges for two main reasons. One, her remarks were widely (and reasonably well) covered by major news organizations; and two, the big news they revealed was, as expected (including by me), making clear that the Trump administration’s sweeping and often steep tariffs on Chinese goods would remain in place for the foreseeable future.

Since then, however, the think tank that hosted the event (the Washington, D.C.-based Center for Strategic and International Studies) has posted not only her presentation as delivered, but the transcript of a lengthy Q&A session that followed. And those exchanges, along with passages from her speech that have received little attention, shed lots of new light on a great many other significantly promising points about the Biden China trade approach that Tai only touched on in her speech, and one-and-a-half points that are still worrisome.

The grounds for encouragement?

First, Tai made an especially forceful and pointed argument that the pre-Trump China trade and broader economic policies (which Biden strongly supported as a Senator and as Barack Obama’s Vice President) had been a major failure. In her prepared text’s words, “For too long, China’s lack of adherence to global trading norms has undercut the prosperity of Americans and others around the world.”

In addition, China’s predatory policies (my term, not hers)

“have reinforced a zero-sum dynamic in the world economy where China’s growth and prosperity come at the expense of workers and economic opportunity here in the U.S. and other market-based democratic economies. And that is why we need to take a new, holistic, and pragmatic approach in our relationship with China that can actually further our strategic and economic objectives for the near term and the long term.”

In other words, after decades of promises and hopes that commerce between the two countries would become a winning proposition for both (as mainstream economists also insisted), the Biden administration has officially declared such interactions to have been win-lose – with the United States and especially its workers the losers.

Indeed, Tai wasn’t even close to being finished horrifying the economic mainstream or the corporate China Lobby. She pointedly refused to call Trump’s January, 2020 Phase One trade deal a “failure,” and declared that even though it “did not meaningfully address the fundamental concerns that we have with China’s trade practices and their harmful impacts on the U.S. economy,” it ”is useful and has had value in stabilizing the relationship.”

In addition, going forward, Tai told her audience that more trade Trump-ism was likely. She indicated that the administration might approve a new Trump-like initiative to impose new tariffs to enforce Phase One more effectively. She also poured decidedly cool water on the idea that the President would move to join a Pacific Basin trade deal (now called the “Comprehensive and Progressive Agreement for Trans-Pacific Partnership” or CPTPP) touted as a means of containing China, but nixed by Trump partly because its rules created wide open backdoors for goods with lots of China content.

More broadly, Tai signalled that the United States was now perfectly fine with dispensing with free trade orthodoxy in practice much of the time in favor of “managed trade” – which a questioner defined correctly as “governments setting targets [for exports and imports] and trying to achieve them” and which was embodied in China’s Phase One commitments (not yet satisfied) to boost buys of U.S. imports. ‘

Tai depicted such arrangements as having “evolved out of a frustration with the previous model. [which she described as “let’s seek market access and then, you know, let the chips fall where they may.”] And so the question that I bring to this issue that you’ve presented is not ideologically how do I feel about it, but what is actually going to present results and what is actually going to be effective.”

And she plainly portrayed them in a much more favorable light than the notion of relying on the World Trade Organization (WTO), which trade policy traditionalists have fetishized as the globe’s best hope for creating an international trade system that promoted free and fair competition through a set of detailed rules and regulations, along with a supposedly impartial legal system for resolving disputes.

In Tai’s words, however, “We brought 27 cases against China, including some I litigated myself, and through collaboration with our allies. We secured victories in every case that was decided. Still, even when China changed the specific practices we challenged, it did not change the underlying policies, and meaningful reforms by China remained elusive.”

As a result, Tai said, “as much as we will continue to invest and commit and try to innovate in terms of being a member at the WTO and seeking to bring reform to the WTO…we also need to be agile and to be open-minded and to think outside of the box with respect to how we can be more effective in addressing the concerns that we really have been struggling to address with China on trade.”

In addition,Tai also surely shocked her audience (and yours truly – pleasantly) by openly questioning the decades-long bipartisan push to increase U.S. exports to China:

“I think that part of the story of the U.S.-China trade relationship over these recent few decades has been about this thirst on the part of our business sector in particular for increased market access to China. In business sector I include our agriculture sector, obviously. You know, I think along the traditional lines of the way we’ve thought about trade and how benefits come from trade, it has been very focused on securing market access. I think that what we’ve seen is our traditional approach to trade has run into a lot of realities that are today causing us to open our eyes and think about, is what we’re looking for more liberalized trade and just more trade or are we looking for smarter and more resilient trade?”

With China facing mounting economic troubles due largely to its Ponzi-like real estate housing system and a stagnating population, that’s a valuable warning for American producers who still expect China to keep growing spectacularly and to offer gigantic, ever-expanding new markets for their goods and services.

Nonetheless, Tai specified that the Biden administration isn’t on board with widespread calls to decouple America’s economy from China’s:

“I think that the concern, maybe the question is whether or not the United States and China need to stop trading with each other. I don’t think that’s a realistic outcome in terms of our global economy. I think that the issue perhaps is, what are the goals we’re looking for in a kind of re-coupling? How can we have a trade relationship with China where we are occupying strong and robust positions within the supply chain and that there is a trade that’s happening as opposed to a dependency?”

I understand Tai’s reluctance to embrace decoupling openly. It runs too great a risk of making life in China for U.S. companies doing entirely ordinary, unobjectionable business there even harder than it’s already become, especially lately. But the reference to “re-coupling” struck me as totally unnecessary – and as unrealistic as the notion that Washington is skilled enough to preserve just as many connections to make sure that bilateral commerce does serve mutual legitimate interests, but not so many as to maintain or worsen dangerous dependencies on China, or increase its economic and technological power.

And Tai’s speech lauded the Biden aim of dealing with the China economic and technology challenges in concert with U.S. allies way too enthusiastically. As I’ve written, my prime worry has always been that priotizing this kind of multilateral approach will force the US to accept lowest-common-denominator measures that will always be sorely inadequate because so many of these allies depend so heavily on trading with and investing in China.

Nevertheless, Tai declared that “vitally, we will work closely with our allies and likeminded partners towards building truly fair international trade that enables healthy competition,” and even called this approach “the core of our strategy” on China and trade generally.

As I’ve written, U.S. Trade Representatives are rarely the last word on trade policy. So whatever Tai’s just said, I’m still not ruling out the possibility that the President will use some pretext (promises of climate change progress?) to bring back the bad old days. Certainly, that’s what Wall Street and multinational businesses want. But these Tai observations have made such a U-turn much more difficult politically. And if you agree with my cynical view that politics (mainly due to growing American public hostility toward China) and not principle is what’s produced Mr. Biden’s unexpectedly Trumpy positions toward the People’s Republic, that ain’t bean bag.

Glad I Didn’t Say That! Biden Keeps Following The Trump on China Trade

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Biden, China, Donald Trump, Glad I Didn't Say That!, Katherine Tai, Phase One, tariffs, Trade, trade war

“China is the big winner of Trump’s ‘phase-one’ trade deal with Beijing. True to form, [then President Donald] Trump is getting precious little in return for the significant pain and uncertainty he has imposed on our economy, farmers, and workers.”

– Candidate Joe Biden, January 15, 2020

 

“President Joe Biden’s chief trade negotiator pledged to build off the deal with China reached under Donald Trump and said that….[the] Biden administration respects the continuity of the so-called phase-one agreement….”

– Bloomberg.com, May 5, 2021

 

(Sources: “Biden Slams Trump-China Trade Deal as Lacking on Key Disputes,” by Jennifer Epstein, Bloomberg.com, January 15, 2020, Joe Biden Blasts Trump Phase One U.S.-China Trade Deal – Bloomberg & “Biden Trade Chief Pledges to Build Off Trump’s China Agreement, by Eric Martin, Ibid., May 5, 2021, https://www.bloomberg.com/news/articles/2021-05-05/biden-trade-chief-pledges-to-build-off-trump-s-china-agreement?srnd=economics-vp)

(What’s Left of) Our Economy: A Trump-y New U.S. Trade Report – in a Good Way

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Biden, CCP Virus, China, coronavirus, COVID 19, Donald Trump, exports, goods trade, imports, Made in Washington trade deficit, manufacturing, non-oil goods trade deficit, Phase One, services trade, Trade, trade deficit, trade war, Wuhan virus, {What's Left of) Our Economy

Although it covered a presidential transition month, there wasn’t much transitional about the official U.S. international trade figures for January that came out Friday. Trump-y policy fingerprints were all over them – and mostly in a good way – mainly in the form of continuing declines in the monthly deficits for China and the manufacturing sector, two main targets of the former President’s efforts to reduce the overall shortfall.

At the same time, also visible were the distorting affects of the CCP Virus, and the stop-and-start nature of so much economic activity in the United States and throughout the world, which seem certain to impact all economic data for several more months.

Overall, the combined goods and services trade deficit rose 1.86 percent sequentially in January, and the $68.21 billion total was the second highest on record – after November’s $69.04 billion. The goods deficit also hit its second largest total in history, with its $85.45 billion level representing a 1.58 percent increase over December’s total, and trailing the $86.89 billion all-time high also set last November. The services surplus, meanwhile, inched up on month in January by 0.47 percent, to $17.24 billion. This monthly improvement was the first since June for this virus-battered segment of the U.S. and world economies.

Total exports rose by a mere 0.53 percent, to $191.14 billion, and goods exports grew by 1.56 percent, to $135.66 billion. These were the best monthly performances in both categories since last February. Services exports, however, dipped for the first time since July, with the 0.47 percent monthly January decrease bringing the level to $56.28 billion.

A new record was set on the import side – January goods purchases from abroad reached $221.11 billion, surpassing October, 2018’s 218.91 billion, and exceeding December’s total by 1.57 percent. Total imports grew by 1.19 percent on month, to $260.16 billion, but services imports fell sequentially in January by 0.88 percent, to $39.05 billion – the first monthly decrease since May.

In an apparent setback for Trump’s tariffs and other elements of his trade policy, January also saw the second highest monthly deficit in U.S. non-oil goods trade. RealityChek regulars know these trade shortfalls as the “Made in Washington trade deficit”, since they strip out the results for petroleum and services – sectors that are rarely dealt with in trade deals or similar policies, and in which liberalization efforts remain minor.

But the $85.52 billion January level has been topped only by November’s $86.40 billion.

Nonetheless, the U.S. manufacturing deficit in January sank by 6.32 percent, from $106.52 billion to $99.79 billion. The decrease was the third straight, and the monthly gap was the smallest since last June’s. Manufacturing exports declined by 3.47 percent sequentially, to $81.66 billion, while imports dropped by a greater 5.05 percent, to $181.46 billion.

One big reason for this encouraging manufacturing performance was the January narrowing of the manufacturing-heavy U.S. goods deficit with China. January’s $26.50 billion total was 3.60 percent lower than December’s $27.23 billion, and the best such figure since May’s $26.96 billion.

U.S. goods exports to the People’s Republic plunged sequentially by 12.19 percent, to $12.86 billion, and this fall-off was especially discouraging given Beijing’s commitments under the year-old Phase One trade deal to boost imports. Moreover, the monthly decrease (to the lowest level since October) was the biggest percentage-wise since the January, 2020 crash dive of 18.96 percent, when much of China’s economy was shut down by the virus.

Yet China’s much greater goods exports to the United States fell by 6.60 percent, from $41.86 billion to $39.11 billion. This monthly total was the lowest since July’s $40.66 billion, and the sequential decrease also was the third straight. This slump, coming on top of the 3.59 percent decrease in U.S. goods imports from China in 2020, was no doubt due in part to the Trump tariffs on some $360 billion worth of Chinese goods that were as central to the former President’s China trade policies as the trade deal, and that President Biden has decided to keep so far.

Even more important, it can’t be a complete coincidence that U.S. manufacturing output has held up well during the pandemic period as these levies stayed in place. They must have played a significant role in preventing Chinese products from outcompeting their domestic counterparts for the American demand for manufactures that the virus left over.

As a result, the clearly related China and manufacturing performances could be teaching a valuable lesson to the Biden administration: Although virus-related distortions to U.S. trade flows will end sooner or later for reasons only partly related to official policy decisions, the fate of Trump’s China tariffs is entirely up to the President. That makes his eventual decision whether to continue or lift them the most important trade-related wildcard of all still facing the U.S. economy.

Making News: Podcast Now On-Line of New National Radio Interview on Biden & China

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Biden, China, Donald Trump, Gordon G. Chang, Making News, Phase One, tariffs, The John Batchelor Show, Trade

I’m pleased to announce that the podcast is now on-line of my interview last night on John Batchelor’s nationally syndicated radio show on U.S. China trade policy. Click here for a timely discussion with John and co-host Gordon G. Chang on the outlook for America’s approach to the People’s Republic as the Biden administration settles into office.

One especially interesting point: Although John seemed to focus on how China fell well short of meeting its commitments under Donald Trump’s Phase One trade deal to boost its purchases of American-origin goods and services, I pointed to some data indicating that the agreement produced some important achievements on this front.

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

Those Stubborn Facts: A Trump China Trade Deal Scorecard Without the Hysteria

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China, China trade deal, Phase One, tariffs, Those Stubborn Facts, Trade, trade agreements, trade policy, trade war

China’s global imports, calendar year 2020 y/y: -1.1 percent

China’s imports from the U.S., calendar year 2020 y/y: +9.8 percent

 

“Thus [Trump’s] Phase 1 agreement appears to have contributed to 

some improved U.S. export performance to China, even if China is

far away from meeting the year one commitments.”

 

(Source: “U.S.-China Phase 1 Trade Agreement – Data Through December 2020; China has increased purchases of agricultural and energy products above 2017 levels but did not reach first year agreed purchases in 2020 and won’t reach the agreed level even if measured from March 2020-February 2021,” by Terence P. Stewart, Current Thoughts on Trade, February 6, 2021, https://currentthoughtsontrade.com/2021/02/06/u-s-china-phase-1-trade-agreement-data-through-december-2020-china-has-increased-purchases-of-agricultural-and-energy-products-above-2017-levels-but-did-not-reach-first-year-agreed-purchases-in/)

Glad I Didn’t Say That! A Changed Biden Tune on Trump’s China Trade Deal

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Biden, China, Donald Trump, Glad I Didn't Say That!, Phase One, tariffs, Trade, trade deal, trade war

”China is the big winner of Trump’s ‘phase-one’ trade deal with Beijing.  True to form, Trump is getting precious little in return for the significant paid and uncertainty he has imposed on our economy, farmers, and workers.”

–Presidential candidate Joe Biden, January 15, 2020

 

”The Biden administration will review all national security measures put in place by former President Donald Trump, including the U.S.-China Phase 1 trade deal signed in January 2020….”

—Reuters, January 29, 2021

 

(Sources: “Biden Slams Trump-China Trade Deal as Lacking on Key Disputes,” by Jennifer Epstein, Bloomberg.com, January 15, 2020, Joe Biden Blasts Trump Phase One U.S.-China Trade Deal – Bloomberg and “White House says U.S.-China trade deal among issues in broad review,” by Steve Holland and Andrea Shalal, Reuters, January 29, 2021, White House says U.S.-China trade deal among issues in broad review | Reuters)

Our So-Called Foreign Policy: US Allies Have Just Trashed Biden’s Allies-Centric China Policy

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alliances, allies, America First, Biden, China, European Union, globalism, investment, Jake J. Sullivan, Our So-Called Foreign Policy, Phase One, Trump

Apparent President-elect Joe Biden says that, although he’s hoping for and expects some cooperation from Congresional Republicans once he assumes office, he’s also ready for a “punch in the mouth” from his political opponents.

This morning, though, he faces an at least equally important question about both political pugilism and about his vaunted foreign policy expertise: Has he been ready for a punch in the mouth from America’s allies? Because that’s what he’s just gotten from the European Union, which has just announced that it’s reached what it, anyway, touts as a major investment deal with China.

The agreement matters because Biden’s core claim about America’s China policy lately (in his supposedly post-flagrant coddling phase), has been that President Trump has gotten it all wrong about countering Beijing’s threats to U.S. national security economic interests with an “America First” approach that’s antagonized allies like the Europeans. He says he’ll meet the Chinese challenge much more effectively by fostering a united anti-Beijing front with these countries.

The former Vice President – and most of his fellow globalists in the U.S. foreign policy establishment who made the same arguments (e.g., here) – consistently overlooked the gaping holes in this case. Economically speaking both leading European and Asian allies have created and long maintained mutually beneficial trade and investment ties with China. Worse, many of their gains came at America’s expense, since Germany, Japan, and South Korea in particular supplied much of the capital equipment for the export-oriented Chinese manufacturing sector that relied crucially on selling to the United States – not back into their markets. (See here for Asia’s trade with China and the United States and here for Germany’s.)

Since the Trump tariffs on U.S. imports from China were threatening this lucrative arrangement, the allies were bound to be dead set against any American efforts to balance trade flows in particular better.

In terms of national security, these allies have nearly all practiced cynical defense free-riding, skimping on their own defense spending while counting on Washington to ride to their rescue if events go south. A key aim of Mr. Trump’s foreign policy was pushing the allies to act – after decades of globalist enabling – as if their own security mattered at least as much to them as to the United States. But the dogged resistance of most of the Europeans and Asians makes clear their determination to stay on the sidelines militarily, too.

The European Union (EU)’s talks with Beijing on the investment deal represented the first test of the Biden China strategy, and it’s failure couldn’t be more clear. The negotiations began in early 2014, but progress was modest until China evidently concluded that the end of the Trump era created a golden, costless, risk-less chance to notch a major diplomatic triumph. (See here for a good, short account.)

With a few concessions on protectionist practices that look just as vague and unenforceable as China’s standard pledges of economic good behavior, and promises on human rights abuses and climate change that appear even emptier, the big logjams were broken, and the Europeans wasted no time in seizing the resulting opportunity to curry favor with the Chinese.

And the EU’s haste was especially noteworthy because it amounted to an unmistakable rejection of a public Biden team request to consult and coordinate with the incoming administration before it moved forward. Although in response to news of rapid progress on the agreement, Biden’s national security adviser-designate Jake J. Sullivan tweeted on December 21 that “The Biden-Harris administration would welcome early consultations with our European partners on our common concerns about China’s economic practices,” the Europeans steamed ahead anyway.

The Europeans insist that their deal with China simply places their economic ties with the People’s Republic on the same footing as America’s as a result of the “Phase One” trade deal signed by President Trump a year ago. But this position doesn’t pass the laugh test, as there’s no evidence that China has made specific commitments to buy EU products and services, or that the investment deal’s enforcement mechanism is as loophole-free as that secured by Washington. (See this article for a detailed analysis of the Trump agreement.)

There’s no question that U.S. efforts to counter China would be more effective with genuine allied help than without it. But since the allies clearly aren’t on board with this agenda, any further Biden insistence on a multilateral approach would demonstrate that he’s not serious about this goal, either. Fortunately for the United States, for the last four years, it’s had a President who’s realized that the nation’s own devices – and maximizing the national strength and wealth behind them – are by far its best guarantee of satisfactorily advancing and defending its own China-related interests. Unless the allies or Biden change their tacks quickly, expect the next four years to be ones marked by major Chinese gains, and an America that’s considerably less secure and prosperous.

(What’s Left of) Our Economy: U.S. and Other Foreign Investors Keep Funding the China Threat

Tags

bonds, China, decoupling, delisting, FDI, Financial Times, foreign direct investment, investment, Joe Biden, pension funds, Phase One, portfolio investment, Steven A. Schoenfeld, stock markets, stocks, Trade, trade surplus, Trump, Wall Street, {What's Left of) Our Economy

Here’s one of the most depressing articles I’ve read in a long time, and it deals with a (big) piece of U.S.-China economic relations to which I haven’t paid enough attention so far:  flows of financial investment.

It’s depressing because it shows that, although the Trump administration has (rightly, in my view) begun to decouple America’s economy from China’s, and made impressive progress in trade and foreign direct investment (purchases of “hard assets,” like factories and labs and enterprises and real estate), portfolio investment (purchases of stocks and bonds) into China from around the world is not only continuing – it’s booming. And these capital flows, including resources from Americans, are already much bigger than direct investment flows and are  rapidly approaching even the mammoth scale of trade flows.

According to this Financial Times piece, in total, investors outside China this year have bought about $150 billion worth of Chinese stocks and bonds – including Chinese government bonds. (Not that the debt of Chinese entities practically speaking differs fundamentally from national and local Chinese government debt, since there’s no private sector worthy of the name in China.)

The Financial Times reports that the vast majority of these inflows are bond purchases, meaning that investors outside China are lending to all manner of borrowers inside the People’s Republic. But buys of stocks in the Chinese entities commonly and misleadingly described as “companies” that presumably closely resemble their counterparts in genuine free market systems matter as well, because they, too, make new resources available to the Chinese regime. And after suffering from net outflows earlier this year, when Beijing locked down much of the country’s economy after the CCP Virus broke out, Chinese stocks are enjoying net inflows once again.

Moreover, China is starting to enjoy this foreign capital windfall just as its own ability to generate the savings needed to finance the huge debts that have fueled the latest phase of its ongoing economic expansion has begun weakening. Indeed, the need to replace faltering domestic capital sources with foreign capital is exactly what’s behind Beijing’s recent spate of decisions to reduce the barriers to overseas investing in China’s financial markets.

Foreign purchases of Chinese financial assets are still dwarfed by China’s global trade surplus (i.e., its profits) this year, which stands at just under $500 billion through November. But they’re now twice as great as global direct investment in China (about $115 billion through October, Beijing reports).

Obviously, the Trump administration can’t directly control non-U.S. foreign investment into China. But capital coming from the United States hasn’t exactly been chump change. I haven’t been able to find official data, but Steven A. Schoenfeld of the investment research and advisory firm MV Index Solutions, who has been investigating this issue for several years, has written that, in 2019, “nearly $400 billion of new foreign investment into Chinese equities was driven by changes in allocations within benchmark indexes, with American investors accounting for more than a third of these massive portfolio flows.” In addition, he has estimated that the 30 largest U.S. public workers’ pension plans had invested more than $50 billion in Chinese entities as of the beginning of this year. (Full disclosure: Steven is a long-time close personal friend.)

The Trump administration belatedly has tried to curb American portfolio investment in China, and has both forced a big federal workers’ pension fund to halt a planned great increase its China holdings, and has ordered a ban on all U.S. financial investment in dozens of companies linked to the Chinese military.

But unless more comprehensive curbs are enacted, the decisions by Wall Street research firms to boost China’s presence in the stock indices they construct, and which both government pension and private fund managers generally try to track, will still ensure that these investors’ exposure to China keeps rising. And the lure of expanded opportunities in China’s already huge and potentially huge-er financial services market, and its still healthily growing real economy, will continue fueling American and other foreign investors’ appetite for both Chinese stocks and bonds. Ironically, the President’s Phase One trade deal could help sustain and even increase U.S. investments in China via the commitments China has made to ease barriers to entry for American finance companies.

In fact, Steven Schoenfeld’s research makes clear that overall, despite these Trump administration curbs, total foreign holdings of Chinese stocks and bonds could approach and even exceed the half trillion dollar level in the next two or three years. These sums would equal several percentage points of China’s total economy.

Nor does the foreign financial support for China stop there. Although the Trump administration and Congress have been working to tighten the standards Chinese entities must meet to list on U.S. stock exchanges, their presence in the three biggest such financial markets as of October had allowed them to achieve total market capitalization of $2.2 trillion.

Of course, the Trump years seem to be nearing a close, raising the question of whether apparent President-elect Joe Biden will try to tighten the clamps on U.S. capital flows further and even encourage American allies to do the same, or whether he’ll simply let current trends continue, or open the flood gates further.  Something we do know for sure:  Investors in Chinese markets seem awfully confident that Washington will let them continue with their version of selling Beijing the rope with which it can hang the free world.  Why else would Chinese stock prices be way up since his apparent election? 

(What’s Left of) Our Economy: New U.S. Figures Show That a Trumpian Trade Boom Could Follow Trump

Tags

aerospace, automotive, Boeing, CCP Virus, Census Bureau, China, consumer electronics, coronavirus, COVID 19, goods trade, healthcare goods, manufacturing, merchandise trade, Phase One, recession, services trade, Trade, trade deficit, travel, Wuhan virus, {What's Left of) Our Economy

As usually the case when the U.S. government’s data keepers, in their infinite wisdom, decide to issue several sets of important statistics on the same day, I prioritized the monthly jobs report in last Friday’s blogging. After all, it may be the nation’s single most closely followed economic indicator.

But that doesn’t mean that the monthly trade figures released on the same day deserved to be overlooked. In fact, they were unusually interesting for making clearer than ever how these numbers have been thoroughly distorted this year – and for the worse, in terms of America’s trade deficits – by the CCP Virus’ impact on the U.S. and global economies. The effects were especially evident in aerospace trade, which has suffered both from the virus’ decimation of much air travel around the world, and from the lingering damage inflicted by Boeing’s safety woes.

At the same time, these distortions also both point to a big silver lining for U.S. trade and especially the country’s manufacturing sector – especially if apparent President-elect Joe Biden is smart enough to keep most of President Trump’s tariffs in place. For if these trade curbs – highly concentrated on Chinese goods – remain largely on the books, not only will the pandemic’s eventual  (vaccine-induced?) end and recent steps toward returning Boeing’s troubled 737 Max model to the air boost the huge aerospace sector tremendously. In addition, domestic industry will be able to keep making progress filling the demand gap that’s clearly been left by the absence of Chinese products in the U.S. market, and capitalizing on Beijing’s commitment under the Trump Phase One trade deal to increase its imports from the United States.

As for the new monthly trade data – which cover October – one of the biggest stories concerned the revisions of September data, which dramatically changed the overall trade deficit number, and which stemmed almost entirely from astounding new services trade figures.

October’s combined goods and services trade deficit came in at $63.12 billion, according to the Census Bureau analysts who monitor the nation’s trade flows. On the surface, that represented a 1.68 percent increase over September’s total, and continued a troubling pattern of the overall trade gap continuing to widen even though the CCP Virus and associated business and consumer restrictions keep depressing U.S. economic growth dramatically.

Indeed, the October monthly total deficit was the second highest figure recorded since July, 2008’s $66.99 billion. And on a year-to-date basis, this shortfall is now 9.50 percent bigger in 2020 than in 2019.

But that September trade gap itself was revised down from the previously reported $63.86 billion – a huge 2.79 percent adjustment. And all that revision and much, much more resulted from re-estimates of the service trade numbers – where the surplus was revised up from $16.82 billion to $18.69 billion. Even given the relative difficulty of measuring any service sector economic activity, that 11.10 percent revision is nothing less than a mind-blower.

Underscoring the virus effect on all the service sub-sectors that go into economic activity, and on the travel industry in particular, the October service surplus of $18.29 billion was a 2.17 percent sequential decline, and the smallest such figure since August, 2012’s $17.08 billion. And through the first ten months of this year, the service surplus has shrunk by 15.60 percent.

The monthly and year-to-date moves in goods trade haven’t been nearly as big. This deficit did hit $81.41 billion in October (the second largest such total ever, after August’s $83.90 billion). But the monthly increase was only 1.28 percent, and year-to-date this merchandise gap has risen by a mere 1.28 percent.

Still, it’s legitimate to ask why the goods trade gap has risen at all with the economy still exiting (however rapidly in the third quarter) its deepest downturn since the Great Depression of the 1930s. It’s also legitimate to ask whether this increase despite a major (14.01 percent) drop in the year-to-date China goods deficit means that the Trump tariffs simply shifted this shortfall to other countries.

Given China’s burgeoning power and its growing aggressiveness around the world, the strategic benefits of such “trade diversion” to much less threatening countries shouldn’t be minimized. But in purely economic terms (which matter considerably), the Trump policies appear to be nothing more than a wash, and a disruptive one to corporate supply chains.

And this is where the aerospace sector comes in. From January-October, 2019 to the same period this year, the U.S. surplus in civilian aircraft, aircraft engines, and non-engine aircraft parts combined has plummeted by $43.48 billion. Had it simply remained at its 2019 levels, the huge, chronic U.S. manufacturing trade deficit – a major measure of domestic industry’s health as the Trump administration and many others, like me, see it – would be down on a year-to-date basis by five percent, rather than up by 3.22 percent.

As for the combined goods and services deficit, had the aerospace surplus not worsened, it would have increased by only 0.63 percent (to $493.21 billion), not 9.50 percent (to $536.69 billion). And if the services surplus remained the same rather than plunging by $37.26 billion, the year-to-date total trade deficit would look even better. In fact, the total trade gap actually would have shrunk during this period by 6.97 percent, to $455.95 billion.

Not that the Trump tariffs have solved all of U.S. manufacturing’s trade, or the nation’s overall trade woes. In October, industry still recorded its biggest monthly deficit ever ($110.20 billion) even though the aerospace surplus soared by nearly 36 percent sequentially. The big automotive and consumer electronics products deficits kept growing, and although detailed enough October data haven’t been posted yet, so, too, surely have been the shortfalls in protective and other pandemic-related medical equipment.

But the good October aerospace numbers indicate that this trade-crucial sector is already starting to reverse its fortunes, and as the pandemic subsides, the services trade surplus should return to normal levels as well. If a Biden administration keeps its promises to reshore crucial medical- and national security-related supply chains, the manufacturing trade balance will clearly benefit as well. And if, as he’s indicated he will, the former Vice President holds off on lifting the Trump China tariffs, and keeps the Phase One deal in force, domestic industry could be headed for salad days not only in trade terms, but on the production and employment fronts as well.

Following Up: Still No Biden Learning Curve in Sight on the Middle East or China

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America First, China, energy revolution, Following Up, fossil fuels, globalism, Iran, Iran nuclear deal, Israel, Joe Biden, Middle East, oil, Phase One, Saudi Arabia, Sunnis, tariffs, The New York Times, Thomas L. Friedman, Trade, trade war, Trump

Talk about great timing! Just two days ago, I analyzed New York Times columnist Thomas L. Friedman’s new offering warning Joe Biden not to rush back into the Iran nuclear deal because this step could undo lots of the progress made by President Trump’s America First foreign policy approach in greatly improving the prospects for advancing and protecting U.S. interests in the region.

And just this morning, Friedman has published a piece based on lengthy interview with the apparent President-elect making clear that he has no interest in learning these valuable lessons of the recent past. In addition, Biden confirmed that his China policy plans are just as dominated by cynical doubletalk these days as during the 2020 election campaign.

As Friedman argued on November 29, Mr. Trump’s message that Israel and the Arab world’s Sunni Muslim monarchies (mainly Saudi Arabia) should no longer count on the United States to fight their battles accomplished this critical objective: It

“forced Israel and the key Sunni Arab states to become less reliant on the United States and to think about how they must cooperate among themselves over new threats — like Iran — rather than fighting over old causes — like Palestine. This may enable America to secure its interests in the region with much less blood and treasure of its own. It could be Trump’s most significant foreign policy achievement.”

But as Biden made clear in his conversation with Friedman, he either can’t or refuses to understand the key development that validates the Trump approach – the U.S. fossil fuel production revolution that has eliminated America’s overriding reason for treating the Middle East as a vital national security interest, and enabled Washington to adopt a Trump-ian take-it-or-leave-it approach safely.

Not that domestic energy independence means that completely ignoring Middle East affairs is always the best response. But it certainly does mean much greater scope for Washington to advance objectives with varying degrees of importance (notably, preventing a nuclear-armed Iran from dominating the region) in ways far less risky and costly than the lengthy wars and immense military commitments that have dominated globalist strategy.

And as Friedman has indicated, the President has started lifting the United States off its dangerous hook by leaving its Middle East allies no choice but to stop quarreling over trifles (like the fate of the Palestinians) and work together to take responsibility for their own genuinely critical and shared interests.

Biden, however, still believes that America remains so dependent on “getting some stability” in this long-unstable region that deep entanglement in Middle East affairs is unavoidable. Just as worrisome: He’s laid out a genuinely Rube Goldberg-esque rationale for treating the Iran nuclear deal as his strategy’s linchpin. As Friedman describes his blueprint (based on this interview and other conversations with top Biden aides):

“[O]nce the [nuclear] deal is restored by both sides, there will have to be, in very short order, a round of negotiations to seek to lengthen the duration of the restrictions on Iran’s production of fissile material that could be used to make a bomb — originally 15 years — as well as to address Iran’s malign regional activities, through its proxies in Lebanon, Iraq, Syria and Yemen.

“Ideally, the Biden team would like to see that follow-on negotiation include not only the original signatories to the deal — Iran, the United States, Russia, China, Britain, France, Germany and the European Union — but also Iran’s Arab neighbors, particularly Saudi Arabia and the United Arab Emirates.”

To which the only reasonable response is “Good luck with that” – especially given the lack of consensus on Middle East goals among this highly diverse group of countries, and, equally important, the wildly varying stakes in success between governments inside and outside of the Middle East,

On China, the big and encouraging news is that Biden has decided not to remove the steep, sweeping Trump tariffs “immediately.” That position of course makes at best little sense given how disastrous he called these levies’ impact.

Otherwise, the former Vice President showed that his China policy statements could be even more thoroughly dominated by doubletalk and cluelessness than they were during the campaign.

Most troubling was how Biden contended (correctly) that “leverage” is the make-or-break factor in negotiating with China, and then quickly added “in my view, we don’t have it yet.” Even leaving aside Beijing’s at-least-suggestive decision to sign a Phase One trade deal whoppingly one-sided in favor of a country whose markets it needs desperately to secure adequate levels of prosperity, why did the apparent President-elect go out of his way to advertise supposed American weakness? Indeed, this perverse practice looks like an emerging habit of the Biden foreign policy camp.

As Biden told Friedman, he continues insisting that this leverage can be created in large measure by creating a “coherent strategy” behind which the United States and its European and Asian allies can unite. But as I’ve pointed out repeatedly, many of these countries (notably, Germany, Japan, and South Korea) have made too much money trading with China at the U.S.’ expense to support any position but a complete return to the pre-Trump era of actively coddling and enabling the People’s Republic.  (See, e.g., this analysis.)

At the same time, the apparent President-elect deserves credit for recognizing that gaining sufficient leverage to deal with China successfully requires (in Friedman’s words) “developing a bipartisan consensus at home for some good old American industrial policy — massive, government-led investments in American research and development, infrastructure and education to better compete with China.”

Finally, however, Biden still accepts the completely unjustified pre-Trump view that, without the kind of one-sided, pro-U.S. enforcement mechanism at the heart of the Phase One agreement, Washington can negotiate away most of China’s wide-ranging trade predation with precisely enough worded paper agreements. As I’ve explained, the only genuine hope for progress along these lines is the kind of dispute-resolution system set up in Phase One – in which Washington serves as judge, jury, and court of appeals. 

A few days before he spoke with Friedman, Biden told another journalist that he knows the nation and world are “totally different” from his Vice Presidential days and that therefore his administration would not be “a third Obama term.”  His conversation with Friedman, though, strongly indicated that he meant “except for the Middle East and China.”