(What’s Left of) Our Economy: (Much) More Evidence That Tariffs Can Work

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aluminum, Biden administration, China, economics, free trade, inflation, mercantilism, metals, output, prices, protection, protectionism, steel, subsidies, tariffs, Trade, Trump administration, {What's Left of) Our Economy

An independent U.S. government agency that most of you have never heard of just issued a blockbuster report full of evidence that further lobotomizies the clearly brain-dead but longstanding and still-prevailing conventional wisdom on a major economic issue facing Americans – how to deal with the global economy.

The agency is the U.S. International Trade Commission (USITC) and the conventional wisdom is that the sweeping, often towering Trump (and now Biden) administration tariffs on metals and on imports from China have cost the American economy on net.

Just as important: The report’s findings also shred the equally enduring belief that such trade protection causes the beneficiary companies or industries to become fat and lazy – and in particular to stop investing in expansion – because it’s so much easier and lucrative to reap higher profits from the higher prices they can charge from their existing operation.

The tariffs most comprehensively examined were those imposed on steel and aluminum imports starting in early 2018. The USITC looked at both their impact on those metals producers themselves, and on the “downstream industries” that use steel and aluminum.

As might be expected, the study reported that the metals levies – imposed to counteract massive foreign subsidies and other predatory practices – reduced imports of the products they covered significantly between 2018 and 2021 (the last year for which full statistics were available). U.S. purchases of affected foreign steel products sank by an annual average of 24.0 percent, and of their aluminum counterparts by an annual average of 31.1 percent

Further, as might also be expected, users of these metals often had to turn to buying domestically produced steel and aluminum in many instances. (In others, where U.S,-made alternatives weren’t available, they needed to eat the increased prices of the imports.)

But here’s where the conventional wisdom starts breaking down. According to USITC researchers, the price of Made in America steel and aluminum barely budged as a result of the tariffs. For steel, it rose by an annual average of 0.74 percent between 2018 and 2021. For aluminum, these increases were 0.87 percent. That sure doesn’t sound like price-gouging.

And one big reason undermines another claim of the tariff conventional wisdom. These prices hikes were so modest due significantly to output increases of these metals. And the higher output wasn’t due simply to the (modestly) higher prices metals-makers could charge. It reflected greater quantities of steel and aluminum that were manufactured. Between 2018 and 2021, because of the tariffs alone, steel companies boosted production volume (not dollar value) by an annual average of 1.9 percent and aluminum companies by an annual average of 3.6 percent. (See the table on p. 21.)

In fact, as the report notes, “Many domestic steel producers announced plans to invest in and greatly expand domestic steel production in the coming years” and capacity utilization in the industry hit a 14-year high in 2021. That’s resting on their laurels?

But the worst blow delivered by the report to the conventional wisdom was to the claim that the metals tariffs damaged the U.S. economy overall because whatever benefits the metals sectors enjoyed were completely swamped by the harm done to much larger metals-using sectors. (Here’s a detailed version. Unlike the USITC study, it focuses on employment and not output impacts, but undoubtedly there’s a pretty close relationship between the two.) According to the USITC, nothing of the kind happened.

As stated in footnote 342 on p. 125, thanks to the tariffs, steel production climbed by $1.90 billion in 2018, by $1.86 billion in 2019, by $0.92 billion in 2020, and by $1.33 billion in 2021. That adds up to $6.01 billion.

Aluminum production was $1.74 billion higher in 2018, $1.72 billion in 2019, $0.88 billion in 2020, and $0.92 billion in 2021 (footnote 347 on p. 126). That adds up to $5.26 billion. Add these steel and aluminum totals, and you get $11.27 billion in production gains by value attributable to the tariffs.

On p. 132, the USITC estimates that the tariff-induced production decline of steel- and aluminum-using industries averaged $3.40 billion from 2018 through 2021 – or $13.60billion in toto. So American output did indeed fall overall?

Not so fast. As the authors note (p. 125), the annual impact of the tariffs decreased during these years because the percentage of metals imports covered by the tariffs shrank – in part due to deals struck by Washington with various foreign metals producers to end levies on their products in return for agreeing to end illegal practices like dumping and to work harder to prevent previously tariff-ed Chinese metals pass through their countries to America via customs fraud.

So it’s likely that the gap between the U.S. metals output increases generated by the tariffs and the users’ output losses generated by the levies – pretty measly to begin with – would have shrunk and even vanished completely had all the tariffs remained in place. And who can reasonably rule out the possibility that the tariffs would have wound up boosting more American manufacturing production than they reduced – especially if the metals users were able to increase their production despite higher costs by improving their productivity. (See this post for a fuller discussion of the relationship between import use and productivity.)

The report didn’t look at the downstream effects of the much greater tariffs on Chinese goods, but presented evidence that they’ve been economic winners for the United States as well. As the study concluded, the China tariffs per se – also imposed to offset systemic economic predation by the People’s Republic – cut the value of Chinese imports by an annual average of 13 percent, and increased the price of domestically produced competitor products and the value of domestic competitor production by an annual average of 0.2 percent and 0.4 percent, respectively. between 2018 and 2021.

In other words, the China tariffs raised domestic production twice as much as domestic prices. And the problem is….?

The USITC authors admit that their model for evaluating the tariffs can’t capture all their effects. And their conclusions certainly don’t mean that all tariffs will work splendidly all of the time. But it’s arguable that for all the trade liberalization achieved since the end of World War II, protectionism and mercantilism by foreign governments remains widespread.  The USITC report strengthens the case that comparable U.S. responses should be used much more often.     

P.S. I published a detailed look at the impact of the 1970s and 1980s tariffs (including those imposed during the Reagan years) back in 1994 in Foreign Affairs and reported similar conventional wisdom-debunking findings.          

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Making News: National Radio Podcast Now On-Line on Fingering the World’s Real Protectionists…& More!

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CBS Eye on the World with John Batchelor, China, economics, Following Up, global economy, Global Imbalances, globalization, Gordon G. Chang, Immigration, Jeremy Beck, labor shortages, NumbersUSA, protectionism, Trade

I’m pleased to announce that the podcast of my interview last night on John Batchelor’s nationally syndicated radio show is now on-line.

Click here for a timely discussion – with co-host Gordon G. Chang – on the crucial issue of whether recent U.S. moves bythe Trump and Biden administrations represent a worrisome new lurch toward destructive trade protectionism, or efforts to defend and promote legitimate American – and sometimes global – interests.

In addition, on January 10, in his blog for the immigration realist organization NumbersUSA, Jeremy Beck quoted from my December 29 post debunking the numerous recent claims blaming the labor shortages that have popped up in many U.S. industries on policies that have enabled too few foreigners to join the American labor force. 

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

Making News: Back on National Radio Tonight on Defending the U.S. Against Protectionism Charges

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Biden, CBS Eye on the World with John Batchelor, Donald Trump, global economy, Global Imbalances, globalization, Gordon G. Chang, Inflation Reduction Act, Making News, protectionism, Trade

I’m pleased to announce that I’m scheduled to be back tonight on the nationally syndicated “CBS Eye on the World with John Batchelor.” Our subject – the crucial question of whether recent U.S. moves bythe Trump and Biden administrations represent a worrisome new lurch toward destructive trade protectionism, or efforts to defend and promote legitimate American – and sometimes global – interests.

No specific air time had been set when the segment was recorded this morning, but the show – also featuring co-host Gordon G. Chang – is broadcast beginning at 10 PM EST, the entire program is always compelling, and you can listen live at links like this. As always, moreover, I’ll post a link to the podcast as soon as one’s available.

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

(What’s Left of) Our Economy: Two New Must-Read Reports on U.S. Trade Policy

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African Americans, Ana Swanson, China, Donald Trump, globalization, imports, Information Technology and Innovation Foundation, intellectual property, ITIF, Jobs, manufacturing, mercantilism, minorities, non-market economy status, protectionism, Section 337, The New York Times, Trade, trade law, U.S. International Trade Commission, USITC, wages, {What's Left of) Our Economy

Good things just came in twos on the U.S. trade policy front, in the form of two separate reports that spotlighted a major, vastly under-appreciated result of America’s approach to the international economy for many decades, and that proposed an excellent new idea for shielding U.S.-based workers and businesses from Chinese (and some other foreign) predatory trade practices.

The first study was released November 14 by the U.S. International Trade Commission (USITC) and alertly covered by Ana Swanson of The New York Times. The USITC researchers usefully reviewed the academic literature on trade policy’s impact on various U.S. population groups and found that overall, and came to two major conclusions. First, “in the face of trade shocks [like the soaring levels of imports from China that followed Washington’s decision in the 1990s to expand greatly bilateral economic ties], Black and other Nonwhite workers [fared] worse than their White counterparts.” Second, “import competition had a large and disproportionately negative effect on wages of minority workers.”

The reasons, the USITC stressed, were many and varied, and included discrimination in hiring and firing practices and the generally lower education levels of minority groups, which has tended to concentrate them in labor-intensive manufacturing sectors that have been vulnerable the longest to penny-wage competition from China and other developing countries. But one conclusion that shone through was the historic importance of manufacturing generally – including the kind of heavy manufacturing found in the Midwest, to minority prospects for economic progress.

And these conclusions will come as no surprise to RealityChek regulars, as the harm done to minority communities by a trade policy that I’ve long argued has been offshoring- and import-friendly has been the subject of two posts from several years back. (See here and here.) But as the X indicated, and the USITC report emphasized, too many gaps remain in the data currently available and too much of what can be accessed is too poorly structured to create a genuinely satisfactory picture. So how about USITC folks getting on the horn to their Census Bureau counterparts to get cracking?

One other point worth mentioning (which the USITC understandably didn’t include): The first recent President who tried at all to change the trade policies that apparently have hit U.S. minorities hardest was one Donald Trump – who’s still being widely pilloried as a white supremacist.

The second, more forward-looking report was released Monday by the Infomation Technology and Innovation Foundation (ITIF), a Washington, D.C.-based think tank, and recommended a creative way to use U.S. trade law to shut out of the American market products whose competitiveness has benefited from “unfair trade practices in non-market, non-rule-of-law economies such as China.”

The trade law provision ITIF would employ is called Section 337. The reason? Unlike other U.S. trade law measures, rather than authorize the imposition of tariffs on imports that are sold to Americans at below-market prices (dumping) or enjoy certain kinds of subsidies, or profit from intellectual property theft (the main alleged trade crimes addressed by American trade law), in certain circumstances Section 337 authorizes completely banning U.S. imports from foreign entities shown to have profited from such practices.

ITIF proposes to increase greatly the number of these circumstances, especially for cases not involving intellectual property, for transgessions by China and other economic rogues.

Perhaps most important, in cases involving such outlier countries, it would eliminate the (already weakened) requirement that a plaintiff domestic company or industry has been injured by predatory trade practices. (In the U.S. trade law system, plaintiffs not only need to demonstrate that an outlawed practice exists, but that it has seriously harmed them.) As ITIF argues,

“It should be irrelevant if the domestic company is harmed in the here and now. The point is that the unfair practices should not be rewarded, period. The other point is that all too often, especially in technologically complex industries, by the time harm is determined it is too late: The company has suffered irreversible decline in its competitive position. Adjudicating blame becomes a coroner’s inquest over dead U.S. companies.”

Two other crucial ways ITIF would lower barriers to winning Section 337 cases involving non-market economies: First, it would spur U.S. trade law to cover foreign governments that provide predatory support for their entities, as well as specific foreign entities themselves. This improvement matters a lot because in so many instances (for example, in every single instance of Chinese transgressions), American businesses and workers are facing an entire national system aimed at creating advantages having nothing to do with free market forces. As a result, U.S. plaintiffs typically wind up facing a defendant with ultimately much deeper pockets, and the high costs of American trade lawyering and the uncertain chances of success deter many from going this route to begin with.

Second, current U.S. trade law implicitly assumes that the damage inflicted by foreign trade predation is limited to a plaintiff company or industry. But given all the linkages among industries nowadays, that view is way too narrow, and can leave the entire economy exposed to much wider-ranging and long-term damage.

To remedy both problems, ITIF would also entitle Washington to take up their causes by permitting any U.S. government agency to file a trade case against a non-market economy.

I’ve got a few bones to pick with these ITIF recommendations. For example, damaging trade predation is by no means confined to China. Many economies that it would let off the hook, especially in East Asia, operate national systems of protection and predation, too. At the same time, as the report suggests, this approach could induce the kind of international cooperation that would increase by orders of magnitude the price China – clearly a culpit in a class by itself – would pay for what ITIF rightly calls its “economic aggression.”

Moreover, the new trade law regime wouldn’t encompass “multinational firms operating in China.” That’s an awfully big loophole, not only because it’s these companies (including U.S.-owned companies) send stateside lots of products that benefit from China’s mercantilism, but because taking advantage of these predatory practices has been a prime reason for moving their factories to China to begin with (as well as lying behind their support for admitting China into the World Trade Organization, and thereby providing these exports with a vital layer of international legal protection against effective, unilateral responses from Washington).

But in the name of making sure the perfect doesn’t prevent the good, I can support this policy, too (at least as a start). And because ITIF’s proposals would go far toward adjusting the decades-old U.S. trade law system to recent global economic reality, I hope both major paties in Washington get behind it ASAP.

(What’s Left of) Our Economy: A Strong Case for Decoupling from China Much Faster

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China, China market, decoupling, exports, globalization, imports, Joseph C. Sternberg, protectionism, The Wall Street Journal, Trade, XiJinping, {What's Left of) Our Economy

What if Americans no longer had to pay so much attention to two of the biggest economic reasons for worry about China? Specifically, if Americans didn’t need to be nearly so concerned that much smarter, tougher measures against China’s predatory economic policies would cost their exporters access to a gigantic current and potentially bigger market? And they believed that decoupling from the hostile, dangerous People’s Republic could be much less economically damaging than widely supposed? 

Those are fascinating and important questions asked and suggested by Wall Street Journal columnist Joseph C. Sternberg in a piece over the weekend, and he presented some compelling evidence that, however “preposterous” it sounds now, these possibilities are surprisingly close to becoming realities. Moreover, they’re getting closer all the time, thanks to dictator Xi Jinping’s reversal of the free market-ish reforms and integration into the global economy begun by Beijing in the 1980s.

His evidence? The big payoff that supposedly motivated the U.S. and foreign governments and their multinational companies to push so hard to bring China into the world trading system – that aforementioned access to the Chinese market – is stalling out way short of expectations. In fact, as Sternberg documents, “China makes a disproportionately low contribution to Western firms’ bottom lines relative to its population and potential.”

To support these claims, the author cites data showing that the China market’s share of the revenues of several big Western economies’ multinational businesses (including America’s) remains well below ten percent. And this even though:

(a) more than twenty years have passed since China’s entry into the World Trade Organization (WTO), which entitled the People’s Republic to nearly all the benefits of integration with the global economy (while de facto enabling it to avoid most of the obligations); and

(b) China’s share of global economic output (which should approximate its share of the worldwide market for goods and services) had reached more than 15 percent in 2020 – and this percentage had jumped by some 50 percent in 2013.

But even these figures may be exaggerated, at least in the U.S. case. The financial research firm Calcbench has examined the share of revenues 67 of companies in the Standard & Poor’s 500 stock index earned in China in 2020. It came to a total of 10.48 percent – a little higher than Sternberg’s figure.

Most of the firms most reliant on China revenues, however, like Qualcomm (59.5 percent of its global total), Texas Instruments (55.5 percent), Lam Research (35.1 percent), and Applied Materials (31.7 percent) are either semiconductor manufacturers, producers of semiconductor manufacturing equipment, or makers of other advanced electronics parts and components. And large percentages of their China revenues are sold to the China-based factories that turn out consumer electronics products (like personal computers and cell phones), and that export huge shares of their own output. That is, those revenues aren’t really earned by sales to final customers located in China. They’re earned by sales to final customers located outside China (like the United States).

Just how large are some of these export percentages? According to this source and this source, 64.4 percent of all the cell phones made in China were sold overseas. According to this source and this source, 65.04 percent of the notebook computers made in the People’s Republic were exported that year. So that should more than satisfy the definition of “large”.   

One important claim that Sternberg gets wrong, however – that contention that “Countries wanted to open China to trade because of its population of more than 1.4 billion consumers. Their ascent into the global middle class, buying U.S. and European goods and services along the way, was the great prize to be won.”

In fact, as Ohio Democratic Senator Sherrod Brown explained in 2007, the companies “really had way more interest in one billion Chinese workers” when they were lobbying so hard to bring China into the WTO. I.e., they recognized at that point that China would long remain far too poor to become a major final market for their goods and services. But they were rightly confident that, with foreign training and management, China’s vast population could become highly productive (but still extremely cheap workers) long before that. A 2000 study by yours truly presented abundant evidence 

And China’s continuing heavy reliance on exports means that for all its spectacular progress, the People’s Republic is still far from the point where it can generate acceptable levels of growth and employment by relying on its own market for sales. In other words, for decades, the United States in particular -which has run the by far the world’s biggest trade deficit with China – has enjoyed much more leverage over China than vice versa. 

This doesn’t mean that Sternberg is under any illusions that further decoupling the U.S. and other foreign economies from China’s would be painless (though the still relatively self-sufficient U.S. economy would obviously feel much less – short-term – pain). But as he notes, China’s economy is running into big, growing problems – in particular a massive, already deflating real estate bubble that is undercutting the ability to China’s consumers to maintain current levels of spending on anything. In addition, Xi Jinping’s evident determination to squeeze foreign companies out of China as soon as feasible is leaving these foreign companies and economies little choice over the longer run.  So shouldn’t the United States and the rest of the world take these hints more closely to heart and greatly step up decoupling from China?  

Glad I Didn’t Say That! Free Trade Bolsters Security…Except When it Counts?

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CCP Virus, coronavirus, COVID 19, export bans, free trade, Glad I Didn't Say That!, health security, medical devices, national security, PPE, protectionism, supply chain, The Washington Post, Trade, Washington Post, Wuhan virus

“Mutually beneficial exchange among countries,

conducted freely within a legal framework, is the path to

maximum security, economic and strategic. Autarky, by

contrast, is a dead end.” 

 

– The Washington Post, February 25, 2021

 

“As demand soared for masks and gloves, more than 100

countries and territories imposed export restrictions on

coronavirus-fighting essentials, according to the

International Trade Center.”

 

– The Washington Post, February 10, 2021

 

(Sources:  “America needs to shore up its supply chains. That shouldn’t become an excuse for protectionism,” Editorial Board, The Washington Post, February 25, 2021, https://www.washingtonpost.com/opinions/biden-trade-supply-chain-protectionism/2021/02/25/3dd0a164-7787-11eb-948d-19472e683521_story.html and “Trump  tried to block her. Now Ngozi-Iweala is about to make history,” by Danielle Paquette and David J. Lynch, ibid., February 10, 2021, https://www.washingtonpost.com/world/africa/ngozi-okonjo-iweala-wto/2021/02/09/99e3b028-67eb-11eb-bab8-707f8769d785_story.html) 

 

 

 

 

Our So-Called Foreign Policy: Why America’s Stakes in East Asia’s Security are Looking Vital Again

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allies, America First, China, East Asia, East Asia-Pacific, extended deterrence, free-riding, globalism, Intel, Japan, Joe Biden, manufacturing, Michele Flournoy, nuclear weapons, Our So-Called Foreign Policy, protectionism, Samsung, semiconductors, South Korea, Taiwan, Trump, TSMC

News flash! This past week I read a newspaper column by George F. Will that didn’t prompt me to say “What an ignoramus!’ In fact, not only did I learn something. I learned something so important that, in conjunction with some other recent developments, is causing me to rethink some long and deeply held ideas I’ve had about America’s grand security strategy in the East Asia-Pacific region.

Specifically, although Will’s own focus in the September 8 piece was who Joe Biden would pick as Secretary of Defense, the piece itself described some ominous changes in the U.S.-China military balance in Asia that call into question my main concerns about America’s approach to region, and especially what I’ve depicted as an increasingly dangerous reliance on nuclear weapons to deter Chinese aggression. Meanwhile, as I’ll detail in a forthcoming freelance article, two U.S. Asian allies – Taiwan and South Korea – whose value to the United States I’ve long insisted doesn’t remotely justify running such risks, are looking for now like critical assets.

To review, since the Cold War began, the United States has resolved to defend its East Asian allies in large part by using the threat of nuclear weapons use to persuade potential attackers to lay off. Presidents from both parties agreed that the conventional military forces needed to fight off China and North Korea (and early on, the Soviet Union) were far too expensive for America to field. Moreover, the Korean War convinced the nation that fighting land wars in Asia was folly.

Before China and North Korea developed nuclear weapons able to reach the U.S. homeland, or approached the verge (the case, it seems, with the latter), this globalist policy of extended deterrence made sense whatever the importance to America of Asian allies. For the United States could threaten to respond to any aggression by literally destroying the aggressors, and they couldn’t respond in kind.

As I noted, however, once China and North Korea became capable of striking the continental United States with nuclear warheads, or seemed close to that capability, this U.S. policy not only made no sense. It was utterly perverse. For nothing about the independence of South Korea and Taiwan, in particular, made them worth the incineration of a major American city – or two, or three. The security of much larger and wealthier Japan didn’t seem to warrant paying this fearsome price, either.

Greatly fueling my opposition to U.S. policy and my support for a switch to an America First-type policy of military disengagement from the region was the refusal of any of these countries to spend adequately on their own defense (which, in combination with U.S. conventional forces, could deter and indeed defeat adversaries without forcing Washington to invoke the nuclear threat), and their long records of carrying out protectionist trade policies that harmed the American economy.

As Will’s column indicated, though, the threat, much less the use, of nuclear weapons is becoming less central to American strategy. Excerpts he quotes from recent (separate) writings by a leading Republican and a leading Democratic defense authority both emphasize dealing with the Chinese threat to Taiwan in particular with conventional weapons. The nukes aren’t even mentioned. Especially interesting: The Democrat (Michele Flournoy) is his recommended choice to head a Biden Pentagon – and she’s amassed enough experience and is well regarded enough among military and national security types to be a front-runner. I also checked out the journal article of hers referenced by Will, and nuclear weapons don’t come up there, either.

Moreover, neither Flournoy nor her Republican counterpart (a former aide the late Senator John McCain) shies away from the obvious implication – accomplishing their aim will require a major U.S. buildup of conventional forces in East Asia (including the development of higher tech weapons). In fact, they enthusiastically support it.

Any direct conflict involving two major powers has the potential to escalate beyond the expectations of the belligerents. But certainly bigger and more capable American forces in East Asia would reduce the chances that war with China will go nuclear. So in theory, anyway, the nuclear dimensions of my concerns could be reduced.

Moreover, my willingness to run greater risks to safeguard Taiwan and South Korea in particular, and pay the needed economic price – even if they keep free-riding on defense spending – is growing, too. That’s because of the theme of that forthcoming article I mentioned: Intel, the only major U.S.-owned company left that both designs and manufactures the most advanced kinds of semiconductors, has run into major problems producing the last two generations of microchips. In fact, the problems have been so great that the company has lost the technological lead to South Korea’s Samsung and in particular to Taiwan’s TSMC, and their most advanced facilities are in South Korea and Taiwan, right on China’s rim.

Given the importance of cutting edge semiconductors to developing cutting edge tech products in general, and ultimately cutting-edge weapons (including advanced non-weapons electronic gear and cyber warfare capabilities), acquiring the knowhow to produce these microchips by whatever means – outright conquest, or various forms of pressure – would make China an even more formidable, and even unbeatable challenge for the U.S. military, at least over time.

So until Intel, whose most advanced factories remain in the United States, figures out how to regain its manufacturing chops, or some other U.S.-owned entrant rides to the rescue, there will be a strong argument on behalf of protecting South Korea and Taiwan against Chinese designs at very high risk and cost. And as noted above, Americans may even have to tolerate some more military free-riding along with, in the case of South Korea, fence-sitting in the overall U.S.-China competition for influence in East Asia.

At the same time, because of the military (including nuclear) risks still involved, seizing back control of the semiconductor manufacturing heights ultimately is the best way out of this bind for Americans. So shame on generations of U.S. leaders for helping this vulnerability develop by swallowing the kool-aid about even advanced manufacturing’s obsolescence and replacement by services. But this grave mistake can’t be wished away, or overcome instantly, either – though efforts to regain this lost tech superiority need to be stepped up dramatically. So shame on current leaders, their advisers, and wannabe advisers – whatever their favored foreign policy strategy – if they fail to acknowledge that dangerous new circumstances may be upon the nation, and the sharp imperatives they logically create. And that includes yours truly.

Im-Politic: A World Trade Organization Pull-Out Proposal that Falls Sadly Short

Tags

America First, CCP Virus, China, conservartives, coronavirus, COVID 19, export bans, GATT, General Agreement on Tariffs and Trade, health security, Im-Politic, Josh Hawley, Marco Rubio, national treatment, nationalism, non-discrimination, Populism, protectionism, reciprocity, Republicans, rules-based trade, sovereignty, Trade, unilateralism, World Trade Organization, WTO, Wuhan virus

I can barely describe how much I wanted to like Missouri Republican Senator Josh Hawley’s May 6 op-ed piece in The New York Times calling for a U.S. withdrawal from the World Trade Organization (WTO). That’s why I can also barely describe the growing disappointment I felt as I read through it.  At best, it deserves only an “A for effort” grade.

First, let’s give Hawley (considerable) credit where it’s due. As I’ve been arguing since it went into business at the start of 1995, and in fact was predicting during the national debate preceding Congress’ approval of the idea the fall before, the WTO has gravely harmed crucial American economic interests. (This recent post briefy summarizes my views.)

Let’s also give The Times op-ed page credit for running an article that’s even more strongly opposed to the pre-Trump U.S. trade policy status quo than President Trump has been – because although he’s approved policies that have thrown the WTO’s future into doubt, he’s never explicitly called for a pull-out, and in fact his administration has portrayed these measures as vital steps toward WTO reform.

Hawley, moreover, articulates many powerful indictments of the WTO’s failure to defend or advance U.S. interests satisfactorily – notably, the cover it’s given to China and other protectionist economies. 

Unfortunately, Hawley’s anti-WTO case and recommendations for going forward are fundamentally basedsed on two big misunderstandings. The first is that the pre-WTO global trading order set up by the United States was based on reciprocity, and therefore adequately safeguarded the interests of American workers. Absolutely not. In fact, the concept of reciprocity – holding that a country has no obligation to reduce its trade barriers any more than those of its partners – was explicitly rejected by the pre-WTO rules, which were known collectively as the General Agreement on Tariffs and Trade (GATT).

Instead, this global trade regime was based on two principles that actually entitled protectionist countries to maintain higher trade and related economic barriers than those of freer trading countries. The first was called non-discrimination. It simply urged all member countries to treat all other countries the same trade-wise. So if, say, Japan largely closed its markets to one country, all it needed to do to satisfy GATT rules was to treat other countries just as badly.

The second core GATT principle was called national treatment. Under its terms, member countries agreed to treat foreign-owned companies the same as their own companies. So if, say, a country like (again) Japan, which was is still known for fostering cartel-like arrangements that favored some of its own companies over others wanted to discriminate against whatever foreign companies it wished, that was OK according to the WTO.

Some limited exceptions were permitted to both principles. But they explain in a nutshell why Japan’s trade predation (among others’) inflicted so much damage on U.S.-based manufacturing during the WTO period, and why its own economy (among others’) remained so hermetically sealed throughout.

The GATT’s only saving grace – as I just tried to hint by using terms like “urged” and “agreed”  – was that its rules were essentially unenforceable. All told, though, it’s a lousy model for post-WTO U.S. trade policy.

The WTO has featured a strong enforcement mechanism, which is why Hawley (and other critics, like me) have rightly argued that the organization has eroded U.S. national sovereignty. But at the same time, Hawley wants to replace it with “new arrangements and new rules, in concert with other free nations, to restore America’s economic sovereignty and allow this country to practice again the capitalism that made it strong.”

If the rules are for all intents and purposes voluntary, as with the GATT, then fine – although the question then arises of why the rules are needed in the first place. And the question becomes particularly pointed when it comes to the United States, whose longstanding role as the world’s importer of last resort has long given it more than enough unilateral leverage to create all by itself whatever terms of trade it wishes with any trade partner.

At the same time, this business about creating new arrangements with “other free nations” reveals a second major flaw in Hawley’s argument: a belief that there are lots of other countries out there that agree with the United States on defining what is and isn’t acceptable in international trade and commerce. That kind of consensus is a sine qua non of any rules-based system. In fact, it needs to predate the formal creation of that system. The existence of the system itself can’t summon it into existence – unless one or a group of members can force holdouts to accept the consensus, which brings us back to the question of why countries with those capabilities need a system in the first place.

But if anyone really believed in the required preexisting consensus before the CCP Virus struck, their conviction should lay in smoking ruins now. Because as of March 21, no fewer than 54 countries worldwide had been imposing export curbs of some kind on medical supplies, and the same think tank that compiled this data reported that, as of early April, that number had risen to 70. And their ranks included many U.S. allies. So it should be obvious that, when major chips are down, global trade becomes more of a free-for-all than ever.

Hawley has been among those leading U.S. conservatives and Republicans who are trying to develop a nationalist and populist approach to both domestic and international U.S. policy-making that can survive President Trump’s departure from the White House. (Another has been Florida Republican Senator Marco Rubio.) And I’ve been very impressed by much of their work so far.

But if they’re genuinely concerned about transforming U.S. trade policy, they’ll recognize the need not only to pull the United States out of the WTO, but to replace that organization with a unilateral strategy incorporating the street smarts and the flexibility to free up America to handle its trade policy needs on its own. If others want to sign on and accept U.S. rules and unilateral enforcement, so much the better. But that kind of “America First” arrangement is the only kind of international regime that can adequately serve the national interest.

(What’s Left of) Our Economy: Trump-Like China Trade War Advice – from China!

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America First, Asia, China, Clyde V. Prestowitz, free trade, globalism, Japan, Long Tongyu, managed trade, protectionism, South China Morning Post, Trade, trade talks, trade war, Trump, {What's Left of) Our Economy

When I first entered the trade and manufacturing world, I worked for a fellow named Clyde V. Prestowitz, Jr., who was shaking up American attitudes on international economic policy (in a good way) with sharp critiques of the prevailing dogma and often ingenious ideas for reform and even transformation. (The most complete statement of his views – this 1988 book.) 

And one of his most intriguing thoughts held that died-in-the-wool protectionist Asian governments like Japan’s would much rather deal with an openly economic nationalist U.S. President than with a standard preacher of free trade. So imagine my (pleasant) surprise to see this morning that a former senior Chinese economic official who still clearly retains much influence express substantial agreement – and in the process light the way for an American approach toward China’s trade transgressions that moves from what might be called a “Trump Lite” strategy that only partly reflects the President’s sharpest instincts to a much more thoroughly America First-oriented policy.

These views can be found in an interview in Hong Kong’s South China Morning Post describing the views of Long Yongtu. This retired Vice Minister led China’s successful decade-and-a-half effort to join the World Trade Organization (WTO) – a top Beijing priority because membership provided the People’s Republic with valuable insulation from unilateral and other foreign efforts to retaliate against its wide range of predatory practices. And although he’s no longer on active duty, he would never, ever make public statements at odds with the beliefs of current Chinese leaders. In fact, folks in his position often float trial balloons for the regime and serve in other ways as unofficial spokespeople.

According to the Post, Long stated that “We want Trump to be re-elected; we would be glad to see that happen.” And why would Beijing prefer to deal with a President who’s imposed tariffs on hundreds of billions of dollars worth of exports on which China depends to achieve adequate growth rates, rather than with Democratic rivals who oppose such measures?

As Long explained, “Trump talks about material interests, not politics.” Further clarifying, he contended that “He makes the US decision-making process efficient and transparent, because he basically says what it is. The pros of [having Trump] outweigh the cons. We don’t need to spend so much time figuring out what Americans want any more, or search for each other’s real thoughts in the dark, like we used to.”

Even more specifically, according to the Post‘s paraphrase, “Despite his fickleness, Trump is a transparent and realistic negotiator who is concerned only with material interests such as forcing China to import more American products, on which Beijing is able to compromise….”

Although Long didn’t use this phrases, it’s clear that he was lauding a Trump trait denounced by the President’s globalist critics – an approach to foreign policy described as “transactional.” In other words, Mr. Trump is more interested in securing relatively immediate, tangible, specific goals when dealing both with allies and adversaries than with more ambitious objectives valued by globalists for their supposed potential to promote U.S. interests most effectively over the long term, whatever the short-term risks or costs – like preserving American alliances and international institutions, and keeping other relationships (i.e., with China) on an even keel. (See this early post-Cold War article of mine for a more complete analysis of such conceptual differences.)

In the process, it’s clear that Long was also endorsing Prestowitz’ belief (which he based on his own personal experiences as a U.S. trade negotiator during the 1980s) that Washington could not hope to succeed with fundamentally different systems like Japan’s (his interlocutor) or, by extension, China, by demanding that these governments agree to American demands for more openness to imports, or broader structural changes that would lead indirectly to better sales for U.S. products and services.

Instead, Washington was much better advised to seek less grandiose but more concrete commitments – specifically, to increase imports by specific amounts.

This shift to “managed trade” or “results-oriented trade” ostensibly horrified the U.S. policy establishment. But the Prestowitz proposal was adopted by former President Ronald Reagan in 1986 in negotiations with Japan over semiconductors, and achieved its objectives of expanding American companies’ share of Japan’s market.

Further, Prestowitz’ main rationale was also echoed in Long’s remarks. He didn’t justify managed trade mainly for the relatively easy verification challenge it presented – although he did emphasize that Washington would be much better able to monitor promises to boost buys of specific products than foreign promises to convert to free trade principles. Nor did Prestowitz stress that such sweeping U.S. demands were unrealistic, and that protectionist countries would respond by simply stonewalling.

Rather, Prestowitz contended that Asian protectionists were genuinely bewildered and frustrated by standard American positions, primarily because the ideas behind them were so alien to their experiences. Similarly, and in line with Long’s views, they didn’t comprehend how negotiations could resolve or bridge differences that ultimately are philosophical or ideological. They much more clearly understood pragmatic haggling over quantities, and Prestowitz argued quite sensibly that superior U.S. leverage could be counted on to persuade these export-dependent economies to treat American imports more generously.

As a result, the implications for Trump trade policy couldn’t be clearer. The United States should drop its demands that China change its policies fundamentally, whether on the intellectual property front or the technology extortion front or the illegal subsidy front or various other non-tariff barrier fronts. (As I’ve previously written, there’s no chance of verifying even genuine Chinese compliance satisfactorily.)

A much better response would be a combination of (1) severely punitive tariffs to make sure that Chinese products benefiting from these practices don’t enter the American market, and harm American-owned producers; and (2) other threatened or imposed tariffs aimed at obliging Beijing to purchase much greater amounts not only of agricultural products, but the full array of advanced manufactured products.  The first set of tariffs would center on those advanced manufactures, the second on more labor-intensive Chinese products – which Beijing relies on heavily to keep employment high enough to keep China’s masses content economically.  

That first set of tariffs would not only prevent U.S.-owned producers from having to deal with heavily subsidized and/or copycat Chinese competition. It would surely prompt China to send these exports elsewhere – and finally pressure the rest of the world to get its own act together in responding to China’s excess capacity building and dumping, rather than relying on the United States to soak up these surpluses.

The second set of tariffs would need to be accompanied by a resolve not to let Beijing off the hook with claims that its own economy simply can’t absorb greater supplies of American goods across the board. Rather than enable China to use free market-oriented excuses after decades of (continuing) state planning and other interventionism, Washington should tell Beijing that, for all the United States cares, it can stick these products into warehouses if genuine customers can’t be found.

This new approach shouldn’t represent the totality of a smarter new U.S.-China economic policy. In particular, the Trump administration should keep sharply restricting Chinese purchases of American hard assets, whether defense-related or not – because why should a basically free market economy welcome state-controlled and bankrolled entities that can only further distort free market forces? And controls on exports or other transfers of advanced technology to Chinese entities will need to be further tightened.

But a shift to managed trade is nothing less than essential. And assuming that Long Tongyu reflects Beijing’s thinking, with enough American consistency and resolve, China would go along before too long.

(What’s Left of) Our Economy: How Many Strikes Does Paul Krugman Get on Trade?

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automation, China, China shock, globalization, hyperglobalization, Jobs, manufacturing, manufacturing employment, offshoring, Paul M. Krugman, protectionism, tariffs, The New York Times, Trade, Trade Deficits, World Trade Organization, WTO, {What's Left of) Our Economy

Contrary to what many trade mavens must think, Paul Krugman’s recent confession that he (and nearly all of his economics colleagues) have seriously misjudged the impact of international trade on America’s manufacturing workers isn’t his first. At least twice before (see here and here), this Nobel Prize-winning economist and New York Times columnist has admitted in print that the economics profession’s consensus was wrong to brush off (and often scorn) claims that post-Cold War trade agreements and similar trade policy decisions would foster a combination of wholly new and unbeatable (but economically unsustainable) forms of import competition for domestic industry, and related job and production offshoring. (I’m among those he’s mauled in print.) And he’s granted that trade policy critics who predicted these consequences and kept pointing to evidence of their emergence were right. (See here and here.)

Still, Krugman’s latest mea culpa is noteworthy for two reasons. First, it undercuts another tenet of trade economics dogma held almost as strongly believed as the belief that trade expansion in all circumstances is a net contributor to human welfare – the related conviction that imbalances like trade deficits don’t matter (at worst).

In particular, the author acknowledges that the rapid and massive increase in America’s manufacturing-dominated goods trade deficit – especially from super-low cost economies (and offshoring destinations) like Mexico and especially China – occurred at exactly the same time that U.S. industrial employment cratered. And not coincidentally, the destruction began right about when China was admitted into the World Trade Organization (WTO). That mattered greatly because the Beijing subsidies and other predatory trade practices that benefited both foreign- and Chinese-owned producers in the PRC gained invaluable protection from unilateral U.S. responses.

How greatly? According to Krugman, the worsening of the trade deficit “reduced the share of manufacturing in GDP by around 1.5 percentage points, or more than 10%, which means that it explains more than half the roughly 20% decline in manufacturing employment between 1997 and 2005.” In other words, most of the manufacturing job loss during this crucial period – which is a particularly important one because that’s when critical masses of recently offshored factories got up and running and began exporting to the American market – should be blamed not on supposedly impersonal and clearly positive forces of progress like containerization in global shipping, and automation generally, but on actions by American leaders.

Not that Krugman abandons conventional trade economics completely. Specifically, he contends that trade deficits generally speaking are still ultimately unimportant, partly because countries can’t grow indefinitely indebted to the rest of the world and “must pay their way eventually.” The post mid-nineties surge in the manufacturing trade shortfall hammered domestic American manufacturing, he explains, only because it skyrocketed so suddenly.

Readers, however, will ask themselves how the United States can pay its way in the foreseeable future when manufacturing still dominates its lopsided goods trade flows. And they should note that although the damage to manufacturing could still prove temporary, it’s already lasted nearly twenty years, with no imminent end in sight until the past year. (See this post for one of my recent claims that President Trump’s trade policies are starting to bend the curve.)

Second, and following logically from the first point, Krugman continues to insist that protective tariffs should be avoided. Now his opposition focuses on his contention that the trade-related danger to U.S. manufacturing is coming to an end. The China shock in particular, which spearheaded the recent period of “hyperglobalization,” was “a one-time event” that’s already showing signs of ebbing.

But if Krugman was so offbase in evaluating trade’s economic effects, why should such predictions deserve any credibility? Off the top of my head, I can think of several reasons for ongoing concern. For example, China still has massive reserves of super cheap, U.S. wage-depressing labor in its interior and, counter-intuitively, in its national student body. In addition, the progress Beijing has fostered in capital- and technology-intensive industries means that these sectors of American manufacturing will keep facing the same kinds of low-wage (but high productivity) challenges that decimated less advanced, more labor-intensive U.S.-based sectors in previous decades. Moreover, if China does lose competitiveness even in these portions of manufacturing, there’s no shortage of bargain basement third world population giants – like India, Indonesia, and Brazil – that would be more than happy to receive more manufacturing investment from the United States and other high-income countries.

Everyone’s entitled to make mistakes – even know-it-alls like Krugman, who’s known for torching those disagreeing with him as know-nothings and liars. And Krugman deserves praise for owning up to his own mistakes. But it’s also appropriate to ask this question: Since Krugman first established his economic chops as a trade expert, and since he’s clearly been proven wrong about the leading trade-related controversy of our time, how many more strikes does he get?