(What’s Left of) Our Economy: The Real Messages of that Business Letter Opposing Tariffs on China

Tags

American Chamber of Commerce in China, Business Roundtable, China, currency manipulation, National Association of Manufacturers, offshoring, protectionism, tariffs, Trade, Trump, U.S. Chamber of Commerce, US-China Business Council, {What's Left of) Our Economy

Forty-five American business groups have just sent a letter to top Trump administration officials urging them not to impose “sweeping tariffs” on China in response to its longstanding and widespread theft of U.S. “trade secrets and other intellectual property.” That’s not especially newsy, since large elements of the American business community have long opposed any measures that would rock what they consider to be a highly profitable boat – the business they do with the People’s Republic.

Here’s what’s much more newsworthy: The list of signers is missing some of the leading lights of the U.S. trade association world, including the Business Roundtable, the National Association of Manufacturers, and two leading China-specific groups – the US-China Business Council, and the American Chamber of Commerce in China (which is distinct from the U.S. Chamber of Commerce, an organization that did sign).

Since the membership of the U.S. Chamber in particular is so all-inclusive, it’s possible that its name on the letter was thought to suffice for many companies belonging to those other groups that are absent. But these companies have never been shy about practicing double- and even triple-counting. So it’s also possible that the above absences indicate that the American business community – and especially the multinational companies that have so powerfully influenced U.S. Trade policy with China for decades – is seriously divided on the tariff issue.

What’s also noteworthy is the letter’s statement that “Tariffs would not only affect Chinese shippers but also harm U.S. companies that sell component pieces of final products exported from China.” In other words, the letter is implicitly acknowledging that many of its signers have been among those companies that have long spearheaded the offshoring of American jobs and entire supply chains to China.

Their offshoring focus of course explains much of their staunch opposition to vigorous Washington responses to such cut-and-dry protectionist Chinese practices as currency manipulation: Although this trade predation has damaged America’s domestic production base, these businesses’ China-based operations have been major beneficiaries.

Similarly, the strong interest of so many of these companies in continuing to coddle China’s mercantilism at the domestic economy’s expense explains the seeming paradox of their main policy message to President Trump: On the one hand, they “continue to have serious concerns regarding China’s trade policies and practices” and admit that their persistence endangers “U.S. global competitiveness, innovation, productivity, and cybersecurity.”

And on the other, they insist that American countermeasures be limited to steps – like “measured, commercially meaningful actions consistent with international obligations” and working “with like-minded partners to address common concerns with China’s trade and investment policies” – that have been tried for years, and that so far have produced nothing but failure.

Advertisements

(What’s Left of) Our Economy: Why the Trump-ers (So Far) Aren’t Wrong About the Dollar

Tags

bubbles, consumption, currency, debt, dollar, exchange rates, finance, Financial Crisis, growth, inflation, investment, protectionism, Steve Mnuchin, Trade, Treasury Department, Trump, {What's Left of) Our Economy

The economics, finance, and business worlds are kind of up in arms over U.S. Treasury Secretary Steve Mnuchin’s suggestion earlier this week that a weaker U.S. dollar would be good for the American economy.

I say “kind of up in arms” because Mnuchin’s remarks were more nuanced than generally reported; because financial markets in particular seem to be on steroids and have barely reacted; and because he took pains afterwards to profess his confidence that, despite its recent falling value, nothing fundamental had changed to undermine the greenback’s historic appeal to investors. Indeed, just a little while ago, President Trump stated that he “ultimately” wants to see a strong dollar. 

I say “up in arms” to some extent because, the President’s newest words notwithstanding, no American Treasury Secretary has ever said anything remotely like this in public for decades; because Mnuchin’s original words looked suspiciously consistent with what the establishments in these interconnected economic worlds abhor as the Trump administration’s protectionist instincts on trade policy (because all else equal, a weak dollar promotes U.S. exports and curbs U.S. imports); and because dollar strength (and the big U.S. trade deficits it’s encouraged) has long been a cornerstone of the global economy, and a major growth engine for the numerous countries that rely on selling to Americans to promote their own output and employment. (Hence many of them fiddle around with their own currencies’ values to make sure they can sustain these strategies.) Many strong dollar proponents also claim that a weaker American currency could dangerously stoke inflation (especially by boosting import prices) and deter investment inflows into the United States.

But two crucial points are Missing in Action in the tumult sparked by Mnuchin’s remarks. One should be obvious but can’t be repeated often enough, especially in these current overwrought times: You can have too much and too little of a good thing. An overly weak dollar would cause major problems for the U.S. economy. So would an overly strong dollar. Therefore, the key is not to assume either extreme (especially in the absence of any evidence that they’re around the corner) but to figure out a dollar level that achieves the best combination of benefits.

The second has been much less much widely recognized even in calmer periods, but it’s closely related to my longstanding point about the importance of the quality of American growth. As I’ve written frequently, growth based largely on production and the growing incomes it generates place the economy on the soundest foundation. This approach may not always produce the fastest growth, but it fosters the growth that tends to last longest, and that’s least likely to inflate bubbles that then collapse into economic and financial crises).

Such disasters, as we should have learned, stem from growth largely based on borrowing and consuming – i.e., on shopping sprees that eventually can’t be paid for responsibly, and can only continue by racking up enormous debts. And other than legitimate (though clearly overblown nowadays) concerns about inflation, that’s a main reason why folks in finance – and everyone on their payroll in the U.S. government and the rest of Washington – like the strongest possible dollar. Until the merry-go-round stops, they make tons of money by lending to those borrowers.

Here’s where the dollar’s value comes in. A strong-ish greenback tends to result in that borrowing and consuming brand of growth. A weak-ish dollar tends to result in the healthier kind of growth. And as indicated by this chart showing the change in the dollar’s value (also called the exchange rate) against other currencies, only looked at over the shortest possible period could the dollar nowadays be called weak or even weakening. Over a much longer period, it’s obviously still well in “strong territory.” 

And it’s no coincidence, as I’ve also written, that although the U.S. economy seems to be making some slight progress toward creating healthier growth, it still has way too long a way to go – especially given that the current recovery from the crises and the painful recession that followed is now more than eight years old.

The lessons, then, look clear. If you only care about the fastest growth possible regardless of its makeup or the longer-term consequences, and/or if you think finance should be the dominant part of the American economy, you’ll join the chorus of critics scolding Mnuchin for even hinting that some further dollar decline wouldn’t be a disaster for the nation. If you’d like the economy to steer clear of near-meltdowns like the one experienced just about a decade ago, you’ll be applauding what still looks like a subtle call from him for a somewhat weaker dollar.

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

Tags

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(What’s Left of) Our Economy: A Big New Hit to Free Trade Theory

Tags

Adam Smith, Bruce R. Scott, comparative advantage, David Ricardo, economics, economists, factors of production, free trade, Great Britain, machinery, manufacturing, Portugal, protectionism, Ralph E. Gomory, Steve Keen, technology, textiles, The Wealth of Nations, Trade, William J. Baumol, wine, {What's Left of) Our Economy

OK, time for some good news – at least if you’d like the economics community to come up with more realistic views of trade policy and its impact on the national and global economy. As made clearest by a (sadly overlooked) journal article by Steve Keen of Kingston University in London, some noted academic economists have identified fatal-looking flaws in comparative advantage theory – the 18^th century concept that ever since has anchored mainstream scholarly thinking about the entire discipline, along with justifying the virtues of the freest possible trade flows.

As Keen writes, comparative advantage identified benefits flowing from economic specialization, and was first advanced by British economist Adam Smith in his seminal The Wealth of Nations to explain the superiority of laissez-faire, free market practices within industries. His compatriot David Ricardo extended the concept to relationships between industries and countries. The core idea in its trade theory version is that all countries and their peoples will reap maximum gains if they limit themselves to those tasks that represent their own best efforts – even if they’re laggards by international standards in that particular sector.

I first encountered a compelling objection to comparative advantage in the early 1990s, in the form of a sharp observation by Harvard Business School professor Bruce R. Scott. As he noted, Portugal, one of two countries in Ricardo’s classic description of comparative advantage’s virtues, basically hewed to the Ricardian prescription, specialized in turning out relatively simple products (in this case, wine) – and remained a poor country for centuries. The second country was Great Britain. It specialized in higher value goods (epitomized, in that era, by textiles), and became the world’s greatest and richest empire.

More fundamentally, Portugal specialized in activity that could generate good levels of growth in the short-term, but whose long-term wealth creation potential was limited by low levels of productivity growth, capital and technology intensiveness, by limited potential for innovation, and by deficiencies in other closely related indicators of dynamism. Great Britain specialized in activity whose positive spinoffs were bound to be far greater.

Other major Ricardo blind spots have been pointed out since then – for example, his skepticism that capital would ever easily move across borders. But his central insights have continued commanding pervasive respect among professional economists. Just as important, they’re still revered by political leaders and opinion molders who find these theories convenient for portraying their often self-interested trade policy preferences as indisputable truths, or who learned in a freshman economics class that they’re gospel.

Keen’s big addition to comparative advantage critiques has to do with unfettered free trade’s likely effect on an economy’s diversity and growth potential. As he notes, Ricardo’s case for liberalizing trade flows hinges on a completely unrealistic assumption about its impact on a national productive base, and hence on national output and incomes. The assumption: that countries will wind up better on net if they abandon those activities that don’t meet the comparative advantage test, and refocus their efforts on activities that can pass it, and that such a transition is feasible in the first place.

In other words, Portugal would scrap all of its textile factories (and presumably all its other industries as well), and become for all intents and purposes a mono-economy devoted to wine. Great Britain would abandon whatever wine-making and other non-textile work it was engaged in, and turn into a big cloth-making facility. What of the other necessities of national and individual life, at least those that are in theory trade-able? They would be imported – and paid for by the earnings from exports of the national champions.

Simply articulating this scenario reveals how completely fanciful it is. For example, what about supplying needs before the envisioned transitions are completed? How long will they last? And even over decades under a free trade regime, could the global economy possibly be expected to turn into the kind of exquisitely complex but perfectly functioning mechanism that could enable a large number of mono-economies from securing the full range of traded goods and services that are either needed or simply wanted?

Keen, however, identifies what he reasonably seems to view as a more fundamental problem: The sectors of the economy in which Ricardians want countries to specialize are relatively strong because they efficiently use various factors of production (chiefly, according to Keen, machinery). The Ricardian transition entails other parts of the economy switching to that strong sector (again, wine-making and textile-making in Portugal and Great Britain, respectively), and essentially becoming just as good as wine-making – largely because all the kinds of machinery used in that economy can easily, and indeed seamlessly be redeployed in the strong sector.

If this assumption was valid, as Keen observes, then it would be reasonable to suppose that each rejiggered national economy could produce even more output, and generate higher incomes for its population, than before. But as the author also observes, this outcome makes no sense because “machinery is specific to each industry, and the crucial machines in one industry cannot simply ‘move’ to another without loss of productivity.” And if you believe, as is the case with mainstream economics, that rising productivity is a key – and over the long run, the biggest key – to rising incomes, then you should recognize this Ricardian transition also as a recipe for worsening national impoverishment.

That is, in the kind of mono-economy Ricardo hoped would eventually comprise the global economy, most of the populace would be struggling with inappropriate capital stock and other assets to earn a living engaged in activity with which it boasted little, if any, experience.

Why did Ricardo overlook something so obvious? In Keen’s words, it’s an example of “a confusion of monetary capital (which Ricardo, as a stockbroker by trade, knew intimately) with the physical machinery in factories (about which he knew very little). Yes, monetary capital moves easily in search of a profit—today, even internationally. But machinery is specific to each industry….”

However, Keen continues, “The archetypal machines for cloth and wine manufacturing in Ricardo’s time included the spinning jenny and the wine press. It is stating the obvious that one cannot be turned into the other, but stating the obvious is necessary, because the easy conversion of one into the other was assumed by Ricardo, and has been assumed ever since by mainstream economic theory.”

Here’s another example of the same delusionality that will be familiar to everyone who’s followed the U.S. trade policy debate for the last few decades: the claim by supporters of current trade policies that trade-related production and job losses are no big deal because America’s real edge in the global economy going forward is, say, services. So the best response is to train all those displaced auto workers to become nurses (and, pace Keen, to use all that surplus auto production machinery to write software).

Just as interesting, Keen points to a small but growing body of research touting the advantages of industrial and other economic diversity – the opposite of Ricardo’s aim. A broad-based manufacturing and technology base has of course long been supported by critics of current trade policies for national security reasons (to ensure the ability to produce an adequate range of defense assets), and to avoid potentially dangerous dependence on foreign supplies of civilian goods as well.

Similarly, it’s been contended that too many linkages exist among manufacturing industries, and between manufacturing and many kinds of services, to assume that entire sectors can be lost without major collateral damage.

Keen’s piece, however, also spotlights evidence that the world’s least successful national economies tend to possess narrow – at best – productive bases and to generate a comparably narrow range of exports, and that the most successful turn out a wide variety of goods for both domestic and foreign markets.

Keen’s theoretical critique of Ricardo is by no means the only one that’s come from the ranks of economists themselves. In 2001, William J. Baumol (a former President of the American Economic Association no less) and Ralph E. Gomory, one of the nation’s leading technology authorities, produced this study purporting to show that explicitly promoting national industries and technologies via various forms of government intervention (including tariffs) can produce better results for individual countries that toeing the free trade line.

But the Baumol-Gomory case has (so far) failed to dent confidence in Ricardian trade theory notably. And certainly the Mainstream Media never displayed much interest. In that vein, of possible import is the appearance this week on Bloomberg.com of this follow-up of sorts to Keen-like analysis. More steps on a  journey of a thousand miles?

(What’s Left of) Our Economy: More Evidence of Germany’s Stealth Protectionism

Tags

Angela Merkel, consumers, consumption, developing countries, Financial Times, Germany, Global Imbalances, globalization, imports, Matthew C. Klein, protectionism, savings, taxes, Trade, Trump, value-added taxes, VATs, wage suppression, wages, {What's Left of) Our Economy

President Trump’s charges that the United States has signed terrible trade deals in recent decades, and that foreign economies have been the main beneficiaries, inevitably have triggered a potentially useful debate over which major countries are most open to trade and which are tightly closed. Unfortunately, such arguments won’t actually be useful until “open” and “closed” are properly defined, and a new Financial Times column on Germany’s economic policies nicely illustrates how remote that goal remains.

I’ve previously made the case that accurately measuring protectionism – and thus accurately gauging which countries are contributing adequately to global prosperity and which are free-riding – entails much more than adding up individual trade barriers. Such simple counts also mislead on the equally important question of which countries the United States can reasonably hope to trade with for mutual benefit, and which countries can’t possibly qualify.

And because Germany’s government has both taken trade fire from Mr. Trump and vigorously replied, I’ve used it to illustrate the above points. In a short op-ed for USA Today and a much more detailed RealityChek post, I’ve noted that, as with many other leading foreign economies, the main problem with Germany as a promising trade partner stems at least as much from its overall national economic strategy as from its specific trade practices. That is, countries like Germany, which heavily emphasize growing by saving, producing, and exporting, can’t possibly be good trade matches for countries like the United States, whose priorities have been the diametric opposites.

Of course, those national economic strategies manifest themselves in specific practices and policies. (How else could their focus be established?) But the links to trade flows aren’t always clear. For example, there’s widespread reluctance to acknowledge the trade impact of value-added taxes (VATs), which promote exports and penalize imports. The role played by other German policies, like suppressing wages or skimping on infrastructure spending, has been even less apparent.

What the new Financial Times post adds to the mix is a generally neglected form of wage suppression: Germany’s taxes on low-wage workers – which author Matthew C. Klein describes as “among the highest in the world” since at least the turn of the century.

These taxes inflict an outsized blow on Germany’s imports – and on the the world economy as a whole – in at least two important respects. First, economists tend to agree that the lower an individual’s or household’s income, the higher the share of that income will be spent (as opposed to saved). If they’re right, then these taxes ave been hitting Germany’s overall consumption and import levels especially hard. Therefore, these levies look like notable contributors to the bloated German trade and current account surpluses that are not only detrimental to America, but that could threaten the entire world’s financial stability.

Second, as supporters of pre-Trump U.S. trade policies constantly point out, much of what low-income consumers buy is produced and exported by low-income countries (e.g., apparel or school supplies or furniture). So since high taxes on low-wage workers in Germany prevent them from importing as much from the developing world as they could, third world countries need to focus more on customers in more promising markets – like America’s.

Germany and its leader Angela Merkel lately have been basking in the glow of praise from the political classes in the United States and abroad, which have anointed them as among the new, post-Trump champions of free trade and all its purported benefits. (China’s another alleged globalization champion, but that’s another story.) Its lofty taxes on low-wage workers add to the evidence that these titles are wildly premature.

(What’s Left of) Our Economy: Being Tom Friedman Means Never Having to Say You’re Sorry About China Trade

Tags

China, Mainstream Media, protectionism, pundits, The New York Times, Thomas Friedman, Trade, World Trade Organization, WTO, {What's Left of) Our Economy

Uber-pundit Thomas Friedman’s New York Times column this week about China demonstrated both that “better late than never” may not always be true, and that there’s precious little accountability in the Mainstream Media. Too bad he performed both vital tasks completely unwittingly?

As he traveled through China recently, Friedman told us, his conviction grew that, as President Trump has been charging, “China is not playing fair on trade and has grown in some areas at the expense of U.S. and European workers….” Moreover, he adds, this China challenge “needs to be addressed — now.”

Continued Friedman: “The core problem, U.S. and European business leaders based in China explained, is that when the U.S. allowed China to join the World Trade Organization in 2001 and gain much less restricted access to our markets, we gave China the right to keep protecting parts of its market — because it was a ‘developing economy.’ The assumption was that as China reformed and become more of our equal, its trade barriers and government aid to Chinese companies would melt away.

“They did not.”

And Friedman did a pretty good job of summarizing what RealityChek regulars and so many others have known for years – that China’s mercantilism became considerably worse.

The author ended his piece with a (sort of) ringing call for action: “China needs to know that some people who disagree with everything else Trump stands for — and who value a strong U.S.-China relationship — might just support Trump’s idea for a border-adjustment tax on imports to level the playing field.”

But Friedman also included this kicker: According to someone he called “the smartest person I know inside China on trade (who will have to go nameless),” such actions “if anything… may be too late.”

As the author’s reaction – “Ouch!” – suggests, there’s a distinct possibility that his source is right about the consequences of waiting sixteen years to grapple seriously with China’s predatory practices.

But here’s what Friedman didn’t tell you: One of the folks who pushed vigorously for the boneheaded American WTO decision was none other than Thomas Friedman! As he wrote in 2000, opponents of China’s admission, like U.S. labor unions, were “head-in-the-sand” protectionists. Nor did Friedman seem to think much of fears that “China’s entry into the WTO will make it a more formidable geopolitical rival to the United States.”

Instead, he confidently wrote that “to say that [admission] will hurt the cause of democratization in China or that it won’t help create more islands from which Chinese democrats can operate and more tools by which they can communicate, is to speak utter nonsense.”

Interestingly, by 2011, Friedman seemed to be having important second thoughts about China’s reformist intentions. But he still doggedly opposed meaningful actions to neutralize Beijing’s currency manipulation, for example, with tariffs.

Since no one likes to admit mistakes – especially whoppers – I can certainly understand Friedman’s failure to report his enthusiasm for a China trade strategy he now recognizes as a titanic failure. Much less clear is why so much of the rest of the Mainstream Media – and especially news talk shows who view him as a globalization oracle – keep giving him a pass.

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

Tags

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Im-Politic: It Was Trump – and Nationalism – That Killed TPP for Good

Tags

Campaign for America's Future, Congress, Democrats, fast track, free trade agreements, Im-Politic, Jobs, Lori Wallach, manufacturing, nationalism, progressives, protectionism, Public Citizen, Republicans, Tobita Chow, TPP, Trade, Trans-Pacific Partnership, Trump

However understandably it’s been overshadowed by the earthquake election of 2016, the demise of President Obama’s Trans-Pacific Partnership trade deal (TPP) is a very big, indeed historic, deal. Think of it this way: Do you know how many times since 1950 that a trade agreement concluded by an American administration has been turned back by public opposition? Try “none.”

As a result, it’s vital that trade policy critics correctly understand the ingredients of this victory – if only because they’ll decisively influence the nature of alternative approaches able to pass public and legislative muster. And in this vein, it’s becoming apparent that left-of-center trade activists – who deserve most of the credit for organizing impressive campaigns of opposition to U.S. trade policy since the NAFTA fight of the early 1990s – have especially important lessons to learn. The biggest ones: first, that Donald Trump’s election as president delivered the coup de grace against TPP; and second, and that his fundamentally nationalist arguments made the trade critics’ movement genuinely, and victoriously, bipartisan.

Just to review the history briefly, in 1950, President Truman decided that his plans to create a global trade body with strong enforcement powers were going nowhere, and so the White House announced in December that legislation to approve the globally endorse International Trade Organization would not be put before Congress.

Over the following six and a half decades, Congress did formally or informally rebuff three presidential requests to renew the executive’s trade negotiating authority in conjunction with expedited “fast track” voting procedures. But when actual trade deals came before the House and Senate, all of them passed. Not even the financial crisis and Great Recession were able to generate winning coalitions against new trade agreements, as lawmakers approved deals with Colombia, Korea, and Panama in October, 2011, when the current (historically weak) recovery was still in a relatively early and not especially strong stage.

During all of these trade battles, left-of-center forces such as labor unions and environmental groups provided most of the opposition’s political and financial muscle, its lobbying strength on Capitol Hill, and its grass roots organizing. And considering how tremendously outspent these groups were by Big Business (including Wall Street), and how vigorously the national media tried to marginalize them, these groups performed heroically.

Both President-elect Trump and his Democratic rival, Hillary Clinton ran deeply divisive campaigns. And Mr. Trump’s displayed a clear penchant for assailing numerous liberal social and cultural sacred cows. So it wasn’t entirely surprising that trade critics on the left consistently tried to minimize the overlap between their positions on globalization and those of the GOP candidate. Much more surprising, and less defensible, is how this practice has continued and even intensified since the Trump victory.

The most egregious example seems to have come from Tobita Chow, who heads a Chicago-based political organization called The People’s Lobby and, more important, just wrote on the president-elect and trade for the nationally influential Campaign for America’s Future. According to Chow, although Mr. Trump opposed TPP, he “plans to pursue bilateral trade deals with a number of Asian countries, including with Vietnam, which is also part of the TPP. Expect Trump’s trade deals to be even more damaging for people in the US and abroad than the TPP would be.”

Working a different but related angle, Public Citizen’s Lori Wallach claims that although President Obama’s continuing push for the TPP “helped to elect Donald Trump…Trump himself did not derail the TPP – people power united across borders accomplished that first by delaying the TPP’s completion beyond its 2012 deadline and then by ensuring that a majority in Congress could never be built to implement the deal since it was signed 10 months ago.

“By declaring he will formally bury the zombie TPP, the president-elect is merely acknowledging the obvious: The deal died under the weight of its own terms and could not achieve sufficient support in Congress.“

If Chow is indeed speaking for much of the progressive community, then he’s vividly demonstrated that this faction has become just as oblivious to the concerns of working class Americans as the corporate-funded Clinton wing of the Democratic Party. Here’s why he has such a beef with the President-elect on trade. As he explains it, Mr. Trump’s fundamental mistake is basing his approach to trade

“on his nationalistic politics. Trump has promised to step in and stop competition across borders, and to defend ‘real Americans’ against the immigrants and foreigners whom are too often perceived as threats to their livelihood and their way of life. And in trade policy, Trump is a protectionist. The very name, ‘protectionism’, implies that jobs and investment in other countries are threats, and that we can and should ‘protect’ the American economy against these threats. A protectionist like Trump would have us believe that if we throw up trade barriers and stop investment in foreign countries and force goods to be made in the US, then we can ‘bring back’ jobs and factories from China and Mexico and return to the middle-class economy that flourished between WWII and the 1970s. This is what is captured in Trump’s slogan, ‘Make America Great Again.’”

Chow goes on to sound like a charter member of the nation’s offshoring lobby, or a Mainstream Media columnist, by insisting that

“[T]he slogan is a lie. You can’t ‘bring back’ jobs that don’t exist anymore. Manufacturing jobs are on the decline around the world–including in China. Economist Joseph Stiglitz sums it up: ‘Global employment in manufacturing is going down because productivity increases are exceeding increases in demand for manufactured products by a significant amount.’”

As I’ve written previously, countries much less important economically than the United States has long used their market power to influence multinational companies’ investment decisions and the contours of their supply chains to lure investment – and jobs – to their economies. Why does Chow believe that similar U.S. efforts are bound to fail?

I have other substantive issues with his arguments, but more important is Chow’s conclusion that what Americans should back instead is

“what is sometimes called progressive nationalism: an agenda to pursue a progressive agenda across borders to create a more just and sustainable global society. And since, as progressives, we understand that the labor movement is central to all our struggles, this means that a core goal of progressive internationalism must be to increase the power and status of workers internationally.”

Does he really believe that this will be a winning message in American politics for the foreseeable future? Is there any evidence that the working class that rallied behind Mr. Trump (including many union households) would respond favorably? And if so, what does Chow believe has changed over the last quarter century? After all, progressives have made these points at every opportunity during that period’s trade battles. They never galvanized enough voters to win.

Which brings us to the main weakness of Wallach’s case. She’s right about “people power united across borders” delaying TPP’s conclusion and ratification – and about the importance of buying such time. But ultimately the deal was signed by all the countries involved, and most prospective TPP members with reasonably democratic systems made clear that the U.S. Congress’ ratification was crucial to bringing the treaty across their own various finish lines. The reason was obvious: America’s market would have represented nearly two-thirds of the final free trade zone.

Now ask yourself about TPP’s fate had Clinton won her expected victory this year. Can anyone seriously doubt that she would have pushed for a few cosmetic changes and then worked with pro-TPP Republican Congressional leaders to win a final passage sometime early in her first term that mirrored President Obama’s fast track triumph last year? In fact, as Wallach repeatedly warned before Election Day, when Mr. Trump seemed dead and buried and Clinton seemed sure to win the White House, a TPP vote during a lame duck session of Congress was entirely possible.

Mr. Trump’s election was the event that finished off the treaty for good – both because of his own opposition and because of the shock effect of his upset victory, which revealed that a substantially transformed Republican party electorate wasn’t about to take its cues on trade anymore from the likes of offshoring lobby hired guns like House Speaker Paul Ryan and Senate Majority Leader Mitch McConnell.

In other words, President-elect Trump’s successful conversion of a critical mass of Republicans into energized trade policy critics who actually voted their convictions was what turned the opposition led for so long by the progressives into a truly bipartisan – and therefore winning – movement.

As a result, progressives face a major choice. They can ensure a more lasting defeat for job- and growth-killing trade deals – and lay the foundations for realistic plans to promote greater prosperity outside the United States, too – by acknowledging the political and substantive merits of more nationalistic American trade policies. Or they can keep inveighing against the President-elect and his approach, or provide at best niggardly support, and boost the odds that a genuine revolution in the politics of trade in the United States fizzles out.

Im-Politic: The Meaning of Trump-ism

Tags

2016 election, Andrew Jackson, Barry Goldwater, big government, Donald Trump, establishment, Franklin Roosevelt, free trade, Hillary Clinton, Im-Politic, Immigration, internationalism, Jacksonian Democracy, Mainstream Media, middle class, New Deal, Open Borders, Populism, presidential debate, protectionism, Ronald Reagan, Sun Belt, working class

On the eve of what could be an historically transformational debate for American politics, I’m still struck by (a) how mysterious to the nation’s chattering classes Donald Trump’s appeal to so many Main Street Americans remains; and (b) how vividly the elites’ befuddlement at – and clear disdain for – the maverick Republican presidential nominee keeps signalling their (witting or unwitting) cluelessness about life outside their increasingly chichi urban bubbles.

First, though, I’m serious about the importance of tonight’s debate between Trump and his Democratic counterpart, Hillary Clinton. His insurgency against an entire, bipartisan national political power structure may be no more sweeping than Ross Perot’s in 1992. But having captured one of the two major parties, he faces none of the so-far insuperable institutional obstacles encountered by third party candidates in presidential politics. As a result, Trump’s odds of victory in November seem solid, and it’s at least arguable that this event would produce the greatest shock to America’s political culture since the Jacksonian revolution of the 1820s.

Of course, American political history has been dotted with other strong candidates for the mantle of revolution (at least by the nation’s admittedly moderate standards). Ronald Reagan originally came from Hollywood, and promised to kill off the post-New Deal model of mixed capitalism that even a critical mass of Republicans had embraced since the Eisenhower era. But Reagan was strongly backed not only by big segments of middle- and working-class Americans who felt neglected, and on the tax front, even exploited, by Big Government politicians. He would never had made the White House had he not also championed a counter-business establishment that had risen outside the Northeast, and especially in a Sun Belt region that styled itself as the embodiment of traditional American rugged individualism.

Moreover, although Reagan also promised a much harder line in foreign policy, in crucial respects his worldview and proposals still fell within the bounds of the strategic ideology that had prevailed in America since Pearl Harbor – which has been dubbed internationalism. Though much more confrontational than his immediate predecessors, Reagan still bought the notion that America’s vital interests still spanned the globe, and the related assumption that active U.S. engagement of some form in even the remotest countries and regions was essential.

Barry Goldwater had run on a similar insurgent platform in 1964, but lost in a landslide – though his nomination victory over that Republican establishment of that era clearly paved the way for Reagan’s far more complete and lasting triumph.

Policy-wise, a strong case can be made that Franklin Roosevelt’s New Deal was more of a break with the past than practically anything Trump has proposed. Nor was New Deal innovation restricted to the domestic economy, as its pursuit of trade liberalization reversed a protectionist approach that had reigned in America for most of its history since the founding. In political, social, and cultural terms, Roosevelt’s triumph in 1932 revealed that eastern ethnic cities and their worldviews had supplanted those of small midwestern towns and rural communities. In many cases, moreover, the New Dealers themselves were something fundamentally new – especially the academics. But in an ironically Reaganesque way, they were less outsiders than representatives of an emerging counter-establishment.

As personally flamboyant as he was, Theodore Roosevelt was an establishmentarian at heart as well. In fact, one of his most important – and underappreciated – contributions to American politics was encouraging his upper class patrician peers to stop looking down their noses at public life, take an active role in politics, and make sure that noblesse oblige steered the nation’s course as opposed to the petty concerns of Democratic machine politicians and the ferocious greed of the nouveaux riches Captains of Industry.

So I really do think that you need to go back to Old Hickory to find an American politician who explicitly stood for the rabble and actually won the White House. Will Trump actually follow through with a populist agenda ? I know how many skeptics continue insisting that Trump’s only interest is further lining his own pockets and those of the Wall Street-ers he’s chosen as economic advisers. Since I’m not clairvoyant, I don’t feel confident in voicing an opinion either way. But interestingly, much of the rest of Wall Street doesn’t seem to agree. Nor does Big Business. Further, would Trump excite such vehement opposition from the nation’s offshoring- and Open Borders-happy Mainstream Media and bipartisan policy establishments if he was simply a crook? Their reactions to Trump’s views on national security don’t seem exactly blasé, either.

Which brings us to the combination of bafflement and outrage voiced ceaselessly by these elites regarding Trump’s appeal – which has brought him to within striking distance of the White House. I don’t claim to have all the answers on this score, but here’s one consideration that establishment Never-Trump-ers not only haven’t thought of but seem incapable of appreciating: Their charges of Trump bullying and even Trump business scamming are failing and even backfiring for the same reason that their charges of Trump’s working the system as relentlessly as any other special interest have met the same fate.

Simply put, when many of his supporters hear these indictments, they’re not thinking about whatever rudeness or prejudice or even indecency the relevant remarks allegedly reveal. Just as Trump’s lobbying apparently has prompted hopes that, “Finally! Someone’s going to work the system for me!” the moral turpitude charges suggest “Finally! Someone’s going to be my bully! Someone’s going to be a con man on my behalf!”

And though these aspirations sound odious themselves, it’s revealing – and in my view encouraging – that the two likeliest issue candidates for this Trump approach seem to be trade and immigration. After all, they concern international relations, where for all the talk issuing from the establishment about the importance of and need for norms and rules, power and skill in its use is the paramount currency, and will remain so for the foreseeable future.

Nonetheless, as has been true throughout his campaign, this source of Trump strength has been a persistent Trump weakness – or perhaps more accurately, a foregone opportunity. For as I have long maintained, with just a little more precision, these points could be made every bit as powerfully without slurs directed at largely blameless parties (e.g., illegal immigrants, moderate Muslims), or understandably perceived in this way, and without vulgar sexism (against, e.g., his Republican primary rival Carly Fiorina, or Fox News anchor Megyn Kelly, or even Clinton for taking a lavatory break). Hard-core Trump-ers would have been just as enthusiastic, and many fewer independents turned off.

All the same, since Trump has essentially pulled even in the race, since not trivial amounts of voters remained undecided, and since big turnout questions dog Clinton in particular, his foregone opportunity has not been completely lost. Will he begin seizing it starting tonight?

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

Tags

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

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

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

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

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

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

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

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

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

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

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

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