(What’s Left of) Our Economy: Why a China Trade Deal Still Looks Unenforceable

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China, enforcement, Liu He, Robert Lighthizer, Trade, trade talks, Trump, {What's Left of) Our Economy

Yesterday’s Financial Times contained the latest in a long string of press reports – often coming after similar administration pronouncements – that the United States and China are close to concluding a deal that will resolve much and even most of their current trade conflict.

Even with Chinese Vice Premier Liu He currently in Washington, D.C. for the second round of high level talks within a week, heaven only knows if it’s true, given President Trump’s unpredictability; given the repeated (but again, only reported) postponements of a summit between Mr. Trump and his Chinese counterpart, Xi Jinping; and given how fundamental disagreements about enforcement seem to be among the final remaining obstacles.

Nonetheless, this most recent news provides as convenient an opportunity as any to review why enforcement will be not only difficult, but so difficult that it’s tough to see how a system satisfactory form the U.S. standpoint can be created.

In the first place, problems I’ve identified from the start (see, e.g., most recently, this op-ed) remain firmly in place. Chiefly, the Chinese regime has always prioritized keeping its own people in the dark about its policies and practices. That’s why it not only has never created any means of providing transparency and accountability to the Chinese public. Because they understand that knowledge is power, and because maintaining power is its paramount goal, Chinese leaders emphatically reject such principles. And if Beijing is so determined to keep secrets from its own compatriots, why would it share such knowledge with foreigners?

China’s secretiveness and equally strong rejection of Western-style rule of law also mean that the regime’s most important decisions aren’t written down even for most Chinese to see, much less foreigners. And what is written down is typically too vague to be informative. So good luck trying to document Chinese violations of any agreement.

To its credit, the Trump administration appears aware of these difficulties – which is why what it’s divulged about its enforcement proposals depart from the standard American approach of relying on the World Trade Organization (WTO) to resolve disputes and, more important, insist on some degree of American unilateral authority to punish transgressions with tariffs (rather than giving China any authority to block such moves).

Unfortunately, the Trump enforcement approach still looks incapable of promoting and defending American interests adequately. Take the new wrinkle mentioned in the Financial Times piece: “One possible [enforcement] compromise could involve a gradual lifting of US tariffs [imposed in recent months by President Trump] based on specific triggers and implementation dates….” China’s aforementioned secrecy raises major questions concerning how those triggers (presumably Chinese steps to come into compliance) would be identified. And it’s clear that, so far, Beijing isn’t on board even with this questionable idea.

Congressional testimony by the chief U.S. trade negotiator, Robert Lighthizer, revealed similarly flawed American ideas. According to this summary, Lighthizer told the House Ways and Means Committee in late February that “The US and China have agreed to an enforcement mechanism” that “would consist of monthly meetings at the office director level, quarterly meetings at the vice-ministerial level and semi-annual gatherings at the ministerial level, with these last meetings convened by Lighthizer and…Liu He, the top US trade negotiator testified….

“Lighthizer said the deal-enforcement meetings would allow government representatives from both sides to raise concerns and get them addressed. The meetings would be a chance for Washington to air complaints about any systemic problems, and to pass on any specific grievances issued to the US administration from American companies, he said….If the problems ended up at the ministerial level and could not be resolved there, then the US ‘would expect to act unilaterally’, he said. ‘Proportionally, but unilaterally.’”

But the very complexity of this structure indicates that China is going to enjoy substantial opportunities to haggle for months over any accusations – and possibly long enough for circumstances to change enough to render eventual American tariffs moot.

Ironically, moreover, the Chinese are also likely to take advantage of an American attempt to overcome one of the longest standing hurdles to enforcing deals with Beijing effectively: U.S. companies’ well-founded fear of facing Chinese retaliation if they accuse China of predatory practices publicly. On the one hand, the Trump administration’s stated willingness to bring anonymous corporate complaints would appear to solve the problem by shielding these firms. On the other, what could be easier than for Beijing to respond that it can’t fix a specific problem that an accuser’s anonymity prevents it from identifying precisely?

Finally, Lighthizer’s emphasis on proportional responses both makes any punishments eminently bearable by the Chinese economy, and belies his (accurate) description of many predatory Chinese practices as “systemic.” After all, precisely because they’re systemic, by definition they’re both widespread and approved by the Chinese government. Responding in a limited, indeed tit-for-tat, manner will almost certainly be seen by Beijing as a green light to continue violations of the agreement provisions in question everywhere else possible.

As a result, nothing known about the Trump administration’s enforcement strategy should give anyone confidence that satisfactory enforcement is possible. Which should be no surprise to anyone who’s been monitoring U.S.-China trade and commerce in general dispassionately. Decades of experience should by now have clearly taught the lesson that, at least under the present Chinese regime, mutually beneficial economic ties were never possible. It makes just as little sense to suppose that Beijing will agree to a mutually beneficial enforcement system, either.

Making News: Podcast of Last Night’s National Radio Interview on the China Trade Talks

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China, Making News, Robert Lighthizer, The John Batchelor Show, Trade, trade talks, Trump

I’m pleased to present the podcast of last night’s interview on John Batchelor’s nationally syndicated radio show.  So if you missed the live broadcast, you can click onto this link and listen to a timely update of the ongoing U.S.-China trade talks.  The special focus:  President Trump’s decision to postpone raising tariffs on Chinese imports and chief negotiator Robert Lighthizer’s testimony yesterday claiming a breakthrough on crucial enforcement issues.

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

Making News: Back on National Radio Tonight to Update the China Trade Talks

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China, Gordon G. Chang, Making News, Robert Lighthizer, Thaddeus McCotter, The John Batchelor Show, Trade, trade talks, Trump

I’m pleased to announce that I’m scheduled to return to John Batchelor’s nationally syndicated radio show tonight to help provide an update on the China trade talks.  The segment is slated to begin at 10:15 PM EST, and joining John and me will be co-host Gordon G. Chang, and former Michigan Republican Congressman Thaddeus McCotter.

With all the past week’s major developments — ranging from President Trump’s decision to postpone tariff increases stemming from his optimism on the negotiations’ progress, to trade envoy Robert Lighthizer’s Congressional testimony today on the talks’ status — it’s a show you won’t want to miss.

You can listen live on-line at this link, and as always, if you can’t tune in, I’ll post a link to the podcast as soon as one’s available.

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

(What’s Left of) Our Economy: The Atlantic’s Hatchet Job on Trump’s Trade Policy and Trade Negotiator

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Chad Bown, China, globalization, James Bacchus, Matt Peterson, Merit Janow, multinational companies, Peterson Institute for International Economics, Robert Lighthizer, The Atlantic, Trade, trade war, Trump, U.S. Trade Representative, World Trade Organization, WTO, {What's Left of) Our Economy

I wish I could say that, in the process of ringing out the old year, America is ringing out incompetent or willfully ignorant journalism about U.S. trade policy. But a looooong article just published by The Atlantic on U.S. Trade Representative Robert Lighthizer makes painfully clear that that point remains as far away as ever.

The article, by Atlantic Senior Editor Matt Peterson, would deserve quick dismissal simply due to one of its major themes: that Lighthizer, President Trump’s chief trade negotiator, takes a hard line on the issue in general, and on China in particular, because he’s long been in the pocket of the domestic steel industry as one of its principal trade lawyers.

This smear is especially rich because a trade policymaker lionized by Peterson as a strong opponent of such conflicts of interest and consequent paragon of policy virtue – another American trade lawyer named Merit Janow – followed her stint as a senior magistrate at the World Trade Organization (WTO) – by accepting a position as “a charter member of the International Advisory Council of China’s sovereign wealth fund, China Investment Corporation or CIC.” That is, she jumped onto the payroll of the Chinese government.

But more fundamentally troubling about Peterson’s piece is its – sadly, standard – description of the WTO as an institution that defends and promotes the interests of the entire American economy. How so? By creating a U.S.-style court of law that would impartially mete out commercial justice but that could be used especially effectively by American diplomats highly skilled in working with such systems. One genuine contribution made by Peterson is reporting evidence that Lighthizer himself once apparently bought into this argument.

These views, however, completely ignore two related, alternative interpretations of the WTO’s creation that at deserve consideration at least because one of them is so regularly repeated by journalists and WTO supporters. That interpretation portrays the WTO as an arrangement that aimed primarily at restraining America’s ability to combat predatory foreign trade practices by enmeshing the United States in a simple majoritarian legal system in which all countries – including the vast majority of members who relied heavily on such mercantilism for their growth.

Chad Bown of the (pro-WTO) Peterson Institute for International Economics, one of the American media’s “go to” trade policy commentators made this point abundantly clear when he told The New York Times that the main foreign impetus for establishing the WTO was a determination to find ways of resisting America’s (successful) 1980s unilateral efforts to frustrate their trade predation and pry open their markets to U.S.-made goods.

Former WTO official (and U.S. Member of Congress) James Bacchus made a similar point earlier this year when he criticized Lighthizer (and other American economic nationalists) for their belief that the United States was better off under the pre-WTO world trade system.  Why?  Because it left the (democratically elected) U.S. government “free to go on the offence aggressively in trade by taking unilateral trade actions without any international legal constraint.”

The second, related alternative interpretation of the WTO’s creation focuses on the U.S. multinational corporations that dominated U.S. trade policymaking under Mr. Trump’s immediate predecessors: They strongly favored subjecting unilateral American power in trade diplomacy because their overseas operations – especially those geared toward supplying the American market – benefited immensely, often at the expense of domestic competitors, from many of the predatory foreign practices targeted by many American leaders who don’t shill for these offshoring interests. China’s longstanding beggar-its-neighbors currency policies have been only one example.

The Atlantic is rightly proud of its long history of publishing “iconic thinkers” and “covering ideas that matter.” Many more articles like Peterson’s, and it will also be known for hatchet jobs.

(What’s Left of) Our Economy: The Case for Keeping it Simple with China Trade Just Got Stronger

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China, currency, currency manipulation, exchange rates, Great Recession, import prices, imports, Labor Department, Robert Lighthizer, Trump, U.S. Trade Representative, yuan, {What's Left of) Our Economy

I haven’t been closely following the Labor Department’s import price data lately, and that’s been an oversight. As is clear from this morning’s figures (for August), they keep telling a fascinating and important tale about China’s ongoing manipulation of its currency and how it does and doesn’t impact U.S. trade with the People’s Republic. More specifically, examining the data over time reinforces a strengthens a point I’ve posted on previously – that as important as this currency protectionism is, it’s far from the only predatory Chinese practice that’s been shafting domestic companies and workers exposed either directly or indirectly to Chinese competition.

Just as a refresher, unlike most other trading countries and regions, China prohibits the free buying and selling of its currency. For most of the previous decade, Beijing’s aim has been to keep the value of the yuan artificially low versus most other currencies and especially the U.S. dollar – in order to give its goods and services price advantages over foreign rivals in markets everywhere. As a result, China’s exports got a government-aided boost worldwide, and its domestic industry was able to undersell imports in its home market – all for reasons having nothing to do with free trade or free markets generally.

Since the latter part of that decade, and especially earlier during the current economic recovery, the story has been more complicated. The main reason: China was getting worried about wealthy Chinese concerned about political stability or the economy’s future spiriting too much of their wealth out of the country, for stashing in countries (like the United States) considered a lot safer. These capital outflows began depressing the yuan’s value much faster than Beijing wanted, and even threatened to cause a worldwide crisis of confidence in the currency – and the broader Chinese economy. So for much of this latter period, China has been trying to prop up the yuan’s value to some extent – even as its wary that an overly strong yuan would jeopardize the exports on which its growth still heavily relies.

Trade policy critics have rightly focused much and even most of their anti-China ire on currency manipulation, and that’s been understandable for two main reasons. First, this policy affects the relative prices of everything sold back and forth between the United States and China; and second, currency manipulation is one of the few protectionist practices that even some of the globalization-happy economics and business establishment (and the latter’s political hired guns), can be convinced to combat. (Much of the rest of this group, though, will simply grandstand against this form of protectionism.)

Nonetheless, the import price numbers, coupled with the oscillation in China’s currency priorities, the consequent roller-coaster ride of the yuan’s value versus the dollar, and the actual trade flows, show that the cost of Chinese goods and services aimed for the American market stems from many other causes.

The Labor Department’s import price data for China goes back to 2004, and it shows that, in the 13 years since, on an August-to-August basis, the prices of purchases from China Americans can make has fallen in eight years and risen in five. As for the yuan’s value, it’s strengthened versus the U.S. dollar in nine of those 13 years, and weakened in four.

What happens when the two indicators are paired? The numbers reveal that in five of the 13 years, the prices of imports from China in the American market have fallen while the yuan has strengthened – which isn’t supposed to happen if you believe in currency uber alles. In another year, the prices of those imports rose while the yuan weakened – another counterintuitive result. In seven of the thirteen years, in other words, currency values and import prices seem to have behaved as they should have, but in six (nearly half the time), they didn’t.

Also important : In three of the four years when both import prices and the yuan went up, the yuan’s rise was much greater, most often by a factor of two to one. And in two of the three years when both indicators fell, the change in the yuan again was much greater. So at the very least, even when the relationship is looking like economists tell us it should, it takes a lot of yuan movement to generate significant import price changes. Clearly, therefore, other factors must be at work.

In this vein, the yuan’s value and the changes it undergoes doesn’t seem to have an especially strong relationship with the amount of goods that American imports from China. Of course, they have some effect. After all, all else equal, if U.S. customers buy a certain quantity of items and services from China one year, and the same quantity the next, and the price of those goods and services falls (for whatever reason), the value of those purchases will go down. And naturally, the converse is true as well.

This point matters because purchasing patterns rarely respond to price changes right away, and the lag can mean that the impact of currency changes on import values can take some time to materialize – and often more than a year. But even taking this reality into account produces a fuzzy picture. For example, between August, 2004 and August, 2005, U.S. goods imports from China (which make up the vast majority of American purchases from China) jumped by more than 24 percent even though import prices fell (by 1.10 percent) and the yuan rose versus the dollar (by 2.13 percent). The next year, Americans bought 19.14 percent more products from China, despite their prices falling yet again (by nearly as much – 1.01 percent), and the yuan rising again (also by nearly as much – 1.80 percent).

Between August, 2007 and August, 2008, import prices rose by a very large 4.95 percent and the yuan strengthened by an even greater 9.55 percent. Yet U.S. goods imports from the People’s Republic increased by double digits again (11.96 percent). The following year, however, import prices plummeted (by 3.08 percent), and the yuan weakened by 0.70 percent. And did American imports surge again? Not even close. They nosedived by 18.93 percent.

Sharp-eyed RealityChek readers will realize why: The Great Recession was intensifying in 2008 and lingered well into 2009. So Americans’ consumption of just about everything fell off a cliff for a while. Between the following Augusts, neither the prices of imports from China nor the yuan’s value moved much, and America’s goods imports from China nonetheless soared by more than 37 percent.

Yet you don’t need these kinds of extreme economic events for import prices, import amounts, and yuan movements to confound expectations, lag or not. From August, 2011 to August, 2012, both the prices of Chinese imports and the value of the yuan were up (both by a bit) and American imports from China dipped by 0.25 percent. Even stranger, the American economy grew by a pretty decent 2.39 percent (in inflation-adjusted terms) during that period.

The following year, U.S. growth was down to 1.69 percent, prices of imports from China dropped (by a meaningful 1.24 percent), the yuan rose (by a much greater 3.61 percent), and American purchases from China jumped from a small dip to more than five percent growth.

The point here is not that China’s currency policies don’t matter, but that the prices of Chinese goods and services, and therefore America’s trade performance with the People’s Republic, are influenced by a wide array of factors. Some are legitimate – for instance, if China keeps selling Americans greater amounts of relatively pricey advanced goods (like industrial machinery and high tech products), and less in the way of cheaper, simpler products (like clothing and toys), as has been the case, the price of the average import from China is going to rise. But many reasons are much less legitimate (e.g., changing levels of subsidies like value-added tax rates), and these can be so numerous, so fungible, and therefore so difficult to document that trying to isolate them and attack them piecemeal is a fool’s quest.

Far better is to decouple American tariff policy completely from specific items of evidence of individual predatory trade practices and impose these levies proactively, until they produce the desired effects on bilateral trade flows. In fact, the case for such a sweeping approach was made just yesterday, and is worth quoting at length:

“[T]here is one challenge on the current [trade] scene. It is substantially more difficult than those faced in the past, and that is China. The sheer scale of their coordinated efforts to develop their economy, to subsidize, to create national champions, to force technology transfer and to distort markets, in China and throughout the world, is a threat to the world trading system that is unprecedented.”

This speaker also argued that “The years of talking about these problems has not worked, and we must use all instruments we have to make it expensive to engage in non-economic behavior.”

His name is Robert Lighthizer, he’s President Trump’s chief trade negotiator, and the devilishly complex relationships between currency values, import prices, and trade flows just add to the case for the administration to start following this advice pronto.

(What’s Left of) Our Economy: It’s “Big Week” on Trade

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100-day China plan, Canada, China, environmental standards, G20, Gary Cohn, H.R. McMaster, James Mathis, labor standards, Mar-a-Lago summit, Mexico, NAFTA, North American Free Trade Agreement, North Korea, Robert Lighthizer, rules of origin, steel, Steve Mnuchin, tairffs, Trade, Trump, Wilbur Ross, Xi JInPing, {What's Left of) Our Economy

During World War II, the United States and the United Kingdom launched a massive multi-day strategic bombing campaign against Nazi Germany called “Big Week.” The stakes are considerably less apocalyptic, but yesterday began a period for U.S. trade policy that qualifies as a big week, too. Here’s why, and what to look for.

First, yesterday marked the deadline for the 100-day plan announced at the summit between President Trump and his Chinese counterpart Xi Jinping to start bringing down America’s immense trade deficit with the People’s Republic. Some near-term deals were announced in May, and the Chinese seem to be playing along, to at least some extent. But even the American offshoring lobby, which has greatly soured on China since its full-court-press lobbying campaign convinced Washington to expand U.S.-China trade exponentially, has been complaining that agreements of this scope are way too small to solve their own problems with Beijing in the Chinese market. These deals have even less potential to stop most of the damage still being inflicted on the American domestic economy from wide-ranging predatory Chinese economic practices.

The results are due to be announced this week – and may be delayed to take into account whatever can be accomplished by a new high-level economics dialogue that will hold its first session in Washington this week. Will they produce some big wins for the administration and the domestic economy? As I see it, reasons for pessimism outweigh reasons for optimism.

The former include the president’s continuing statements about the threat posed by China’s imports (in this case, of steel), and the awareness demonstrated by his campaign of how varied and unconventional (meaning they went far beyond tariffs and quotas) China’s trade and trade-related transgressions have been. Among the reasons for pessimism, though, are intra-administration divisions that entail both economic issues (with the administration’s economic populists arrayed against what’s been called the pro-free trade “Goldman Sachs” gang comprised of top economic adviser Gary Cohn and Treasury Secretary Steven Mnuchin) and security issues (pitting the populists against traditional foreign policy thinkers like national security adviser H.R. McMaster and Defense Secretary James Mattis, who would sympathize with notions like the claim that China should be courted to enlist its help in sitting on North Korea). In addition, the kinds of staffing woes still dogging the administration typically make sharp departures from a policy status quo difficult to engineer.

In fairness, Commerce Secretary Wilbur Ross, who has forthrightly described the China economic challenge, acknowledged when announcing the 100-day trade plan’s first results that three months worth of talks couldn’t possibly be a game-changer precisely because China’s mercantilism was so pervasive. But in so doing, he unintentionally made the argument – which I support for U.S. trade policy generally – for dispensing with talks altogether and capitalizing on China’s urgent need to export to the United States by addressing this issue unilaterally.

Certainly, this kind of course change would be much more consistent with the president’s numerous campaign statements emphasizing the destructive effect of Chinese predation on America’s economy and working class. It’s also the kind of strategy you’d expect from a chief executive whose non-trade agenda is almost completely stalled in Congress, who’s under intense political pressure, and who could badly use a big economic win in order to prevent major Congressional losses in the next off-year elections – whose campaign cycle will be here before he knows it.

Another big (self-imposed) administration deadline falls today. It marks the date by which the White House said it would submit its detailed plan to renegotiate NAFTA – the North American Free Trade Agreement. In May, U.S. Trade Representative Robert Lighthizer sent Congressional leaders a brief letter alluding generally to some objectives, but by tomorrow he needs to fill in critical details. Many might have been contained in a draft letter released March 30, and that plan looked pretty impressive. The big question of course is which ones will wind up surviving – and whether the administration is open to other ideas.

As I’ve written, the most important issue concerns the treatment of “rules of origin” – the provisions of NAFTA aimed at ensuring that any goods sold in the three signatory countries (the United States, Canada, and Mexico) are overwhelmingly made in some combination of those countries. The deal that’s currently in place specifies North American content levels that need to be met to qualify for duty-free treatment inside the free trade zone. But the tariff penalties for goods not meeting these standards aren’t nearly high enough to achieve the goal of increasing the entire region’s competitiveness.

The March 30 letter suggested that the administration would seek origin rules that promote U.S. production and jobs more effectively, but it didn’t say how. If much higher external tariffs aren’t proposed in the plan due today, it’s doubtful that any reforms will result in non-NAFTA countries to make more of their products in any of the countries inside the NAFTA zone. Moreover, it’s of course going to be easier for Washington to persuade Canada and Mexico to go along if it re-emphasizes what President Trump has been saying since his meeting last summer, before the election, with his Mexican counterpart: NAFTA should aim to boost the competitiveness of all three countries.

The brief May 18 Lighthizer letter also suggested obliquely the need to change NAFTA’s dispute-resolution procedures, and the March 30 draft discussed the issue at greater length. But even its recommendations to strengthen America’s authority both to respond to import surges from its NAFTA partners (called “safeguards”) and to apply its own Buy American government procurement rules to intra-NAFTA trade may not go far enough.

As I’ve explained, the fundamental problem is that the current dispute-resolution process treats the three NAFTA countries as legal equals, even though the U.S. market is nearly 90 percent of the total NAFTA market, and clearly remains the most valuable prize for all three signatories. Without closing or somehow changing acceptably, the yawning gap between the NAFTA legal regime and the economic facts on the ground, it’s hard to imagine the system serving U.S. interest on net.

At this point, you might be wondering why I haven’t mentioned NAFTA’s labor and environmental provisions. The reason? Although they’ve been major objectives of Democratic party and other left-of-center NAFTA and broader trade policy critics, as with their counterparts in the Trans-Pacific Partnership (TPP) deal, they’re largely unenforceable. As I’ve asked before, how many American bureaucrats will be needed to run around how many factories in a signatory country (in this case, Mexico) to ensure that companies aren’t abusing workers or dumping sewage into nearby streams? With more effective rules of origin, however, producers in Mexico will feel less pressure to remain competitive versus rivals in China and elsewhere in Asia by offering the worst possible working conditions and ignoring environmental considerations completely.

Finally, there’s the steel tariff issue. The administration has delayed announcing its decision to impose national security-related tariffs on U.S. steel imports, but is expected to reveal its intentions this week. For what it’s worth, the president sounds determined to approve some levies on some countries’ steel. The main question is who the main targets will be. It will also be crucial to see whether and how prominently the announcement emphasizes the need to deal decisively with the underlying problem – the ocean of subsidized steel from China that has flooded and distorted world markets in recent years.

At the same time, there’s a reason for Mr. Trump to punt – or to punt for the most part: At their summit earlier this month in Hamburg, Germany, the leaders of the world’s twenty largest economies (the “G20”) agreed to require an international commission on the subject to deliver a report by November containing “concrete policy solutions that reduce excess steel capacity.” Postponing unilateral action until this mandate is fulfilled could prove a tempting option for a president who doesn’t exactly need to come under fire from new fronts.

Moreover, if the commission’s ideas don’t pass U.S. muster, Mr. Trump would be in a much stronger position to slap the tariffs on everyone, and vow to maintain or even increase them until meaningful, concrete agreements are reached.

President Trump has been sending surprisingly (at least to me) mixed signals on trade since his Inauguration Day two-step – killing the TPP but refraining from labeling China a currency manipulator. Big Week in trade isn’t likely to clarify the picture fully, but we’re bound to know more at its end than we do here at the beginning.

(What’s Left of) Our Economy: Which Democrats are Serious and Un-Serious About Trade Overhaul?

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AFL-CIO, Bernie Sanders, Canada, Charles Schumer, currency manipulation, Debbie Dingell, Democrats, dispute resolution, Elizabeth Warren, environmental standards, labor standards, Mexico, NAFTA, North American Free Trade Agreement, Politico, Richard Neal, Robert Lighthizer, Rosa deLauro, rules of origin, Thea Lee, Trade, Trump, U.S. Trade Representative, unions, Wilbur Ross, William Pascrell, {What's Left of) Our Economy

Usually, paying attention to instances of politicians and other public figures getting up on their soapboxes is a waste of time. Yesterday served up an exception: a press conference held by House Democrats in reaction to President Trump’s official decision to open talks to renegotiate the North American Free Trade Agreement (NAFTA). The statements recorded in this Politico account offer some evidence as to which leaders on America’s Left are willing to work with the administration on trade policies that can help the working class voters Democrats still profess to champion, and those who will remain content to sit on the sidelines and take partisan potshots.

Reportedly, all of the House members who spoke at the event “said…they feared Trump would make only modest changes to NAFTA after blasting it as an economic disaster throughout last year’s presidential campaign.” The basis for these worries? The letter sent yesterday by new U.S. Trade Representative Robert Lighthizer to Congressional leaders announcing the administration’s intention to open NAFTA talks with the two other signatories, Canada and Mexico. According to these House Democrats and some other trade critics, the document apparently was “short on details,” which many claimed indicated Trump’s intention simply to “tweak” rather than comprehensively overhaul the agreement.

All else equal, wondering about the president’s real intentions is anything but unreasonable. His personality, after all, is mercurial, and one of his major trade initiatives to date – the negotiations begun with Beijing following February’s summit with Chinese leader XiJinping – has legitimately disappointed advocates of the major course change he pledged during the campaign. (The other major trade initiative, scrapping the Trans-Pacific Partnership trade agreement, kept a leading campaign promise to the letter.) Moreover, the Lighthizer letter is indeed short on specifics.

But none of the participants in the press conference seems to have noticed that in previous statements –including reportedly to leading Democratic lawmakers, top Trump officials have emphasized the need for dramatic NAFTA changes.

For example, Commerce Secretary Wilbur Ross has described as high NAFTA-related priorities greatly tightening the pact’s rules of origin in order to incentivize more non-NAFTA manufacturing investment inside the free trade zone, and restructuring a dispute-resolution system that gives each signatory an equal vote even though the United States represents more than 85 percent of North America’s total economic output. Reinforcing this point was the Lighthizer letter’s contention that “establishing effective implementation and aggressive enforcement of the commitments made by our trading partners under our trade agreements is vital to the success of these agreements and should be improved in the context of NAFTA.”

Meanwhile, Lighthizer reportedly has told Senators that the administration is thinking of adding to NAFTA rules that would prohibit currency manipulation – a move that would set a valuable precedent for future trade deals. In addition, his letter mentioned the need to improve NAFTA’s labor and environmental protections. In my view, they’re largely unenforceable. But they’ve been a prime focus of Democratic Party trade policy positions for decades.

So given that background, it seems fair at this point to finger Connecticut’s Rosa deLauro, New Jersey’s Bill Pascrell, and Massachusetts’ Richard Neal as grandstanders. The former stressed the “tweaking” allegation. The latter two charged that “It was clear from the start that the administration was only interested in working with the Congressional Republican leadership in drafting this notice [the Lighthizer letter].”

I’d also include in this group several key Senate Democrats, including Leader Charles Schumer of New York, former presidential candidate Bernie Sanders of New York, and Elizabeth Warren of Massachusetts. They voted against Lighthizer’s confirmation despite his decades-long record of fighting predatory foreign trade practices both as Deputy U.S. Trade Representative during the Reagan administration, and as a trade lawyer representing domestic American producers.

More temperate in their judgments were Michigan’s Debbie Dingell, and the AFL-CIO’s Thea Lee. The former stated that she was “investing the time to understand where the consensus is.” The latter said, “We enter every negotiation in a good faith state of mind and we expect a lot from our government. Certainly candidate Trump made a lot of promises about fixing flawed trade agreements and looking out for American workers and good jobs, so we will hold him and his administration to that promise.”

I can’t think of a more reasonable position for politicians and other supporters of a movement that still styles itself as the “party of the common man [and woman].”

(What’s Left of) Our Economy: How Trump Can Get His Trade Chops Back

Tags

bilateral trade agreements, China, dispute resolution, free trade agreements, Government Accountability Office, Japan, managed trade, Mike Pence, multilateral trade agreements, North Korea, Robert Lighthizer, semiconductors, South Korea, tariffs, Trade, Trump, U.S. Trade Representative, U.S.-Japan semiconductor agreement, {What's Left of) Our Economy

Comments made by Vice President Pence on his Asia trip concerning America’s trade relations with Japan and South Korea show both the promise and peril of the Trump administration’s approach to international commerce and globalization. Major gains for the economy are possible from negotiating a bilateral trade agreement with Japan and revamping what Mr. Pence described as a failed deal with South Korea. But first, the president and his aides must show more awareness than to date of why accords with countries like these keep failing.

According to candidate Trump, and President Trump, the main problems with such measures have been, variously, incompetent U.S. negotiators, dominance of the policy process by offshoring and similar interests, and a mistaken preference for multilateral arrangements over bilateral deals where America’s leverage is less likely to be watered down.

The second reason for failure cited above has certainly shaped U.S. trade agreements with super low-cost countries that have been tempting locations for production and job offshoring, and that have revealingly comprised the vast majority of trade deals initiated and signed by Washington since the early 1990s. But footloose multinationals have played a much smaller role when it comes to higher income countries like Japan and South Korea. There, achieving better results for the American domestic economy has faced two leading obstacles.

The first has been widely noted: the longstanding tendency of the U.S. leaders to elevate geopolitical aims like strengthening security alliances over economic aims like removing distortions to trade flows. Here, strangely, the administration has been giving off mixed signals lately. The president is now clearly treating the security-related objective of gaining more Chinese cooperation in resolving the North Korea nuclear weapons crisis as a higher priority than combating the numerous predatory Chinese trade policies that have hurt domestic employers and their workers. But he blasted such priorities as recently as last month. And the Pence statements indicate that trade and security issues will be handled on separate tracks for Japan and South Korea.

The second obstacle has been less widely noted – although it’s been a major theme of mine: Opening markets in highly protectionist countries like those Asian powers is fiendishly difficult, at best. As I’ve written, these economies are most accurately seen as nation-wide systems of protection and mercantilism. The particular form taken by any of their trade barriers or subsidies at any given moment matters much less than the underlying intent to manage trade flows to their advantage. In addition, these protectionist systems are run by powerful bureaucracies whose secretiveness and agility makes even identifying problematic practices – much less combating them – excruciatingly difficult.

The bottom line is that trade agreements with such countries are virtually impossible to monitor and enforce effectively, and because their governments know this, the provisions are violated routinely.

By contrast, because the U.S. government is so transparent, almost of America’s trade barriers and subsidies are easy to identify and attack, and American compliance with trade agreements is easy to measure. So it’s easy to see how these agreements strongly tend to create more (and more strongly guaranteed) access to the U.S. market than vice versa. This new report from the U.S. Government Accountability Office shows how these damaging results can stem from multilateral agreements, but the Korea deal spotlighted by Spence and a long string of agreements with Japan show the similarly dismal record of bilateral arrangements.

That’s not to say that worthwhile trade deals with Japan and South Korea are impossible. But they’ll require thinking that’s much further outside the box than the administration seems to be engaged in. The best possibility would be going the managed trade route. That is, rather than accept unverifiable promises to dismantle trade barriers or end subsidies, America’s interlocutors would commit to allot specific shares of their domestic markets to specific U.S.-origin goods and services. There’s even a precedent for this practice – the 1986 semiconductor trade agreement reached between Washington and Tokyo.

Managed trade of course isn’t free trade. But little about Japanese and South Korean policies fits the definition, either. And the history of the semiconductor deal is well known by President Trump’s choice to head the U.S. Trade Representative’s office, Robert Lighthizer, because he was personally and deeply involved.

Another possibility would be to expand one of the few modestly worthwhile leafs from former President Obama’s 2012 trade agreement with South Korea. Precisely because Seoul’s predatory practices in the automobile sector specifically were so difficult to combat via the standard, legalistic procedures used in the dispute-resolution systems in most American free trade agreements (and the international counterpart run by the World Trade Organization), Mr. Obama secured South Korean acceptance of provisions that are especially appropriate in dealings with opaque bureaucracies that prevent significant evidence gathering.

Specifically, if a dispute-resolution panel convened under the agreement decides that Seoul is violating the auto provisions, and the United States restores pre-agreement tariffs on Korean products, it’s up to the Koreans to prove that they’re back in compliance with the treaty before the new tariffs are removed. Even better, however, would be to impose the burden of proof on South Korea, Japan, and similar countries as soon as a complaint is filed.

Yet there’s a strong argument that the very structure of dispute-resolution mechanisms is fatally flawed. Whether the trade agreement in question is bilateral or multilateral, these arrangements treat the United States as an equal party. But given the huge size of the U.S. economy relative to any other trade agreement signatories, and therefore given its status as the paramount prize in any such agreement, this “one country-one vote” set-up is as absurd as it is detrimental to American interests.

Rather than agree to such standard dispute-resolution systems – which invariably result in deadlocks that penalize open economies like America’s – Washington should insist that dispute-resolution votes be allotted more realistically. Basing them on the sizes of the various signatory economies is one obvious formula.

And don’t forget the ultimate America-First trade policy: Dispense with negotiations altogether, or for the most part, and start imposing tariffs on the imports of predatory trading powers, or on all imports (in order to prevent offshore exporters from switching production sites). Of course, that universalism is a big virtue of the border adjustment tax proposed by the House’s Republican leaders. In return, Mr. Trump could offer greater U.S. market access to those countries that prove (after years of good behavior according to exclusively American judgments) that they’re giving American exports a fair shake. This form of unilateralism should have special political appeal for an administration that’s increasingly in need of some big early economic wins.

President Trump (at least the pre-China currency version) has been termed a trade policy disrupter. If he wants to re-earn that label, getting the nation’s Japan and South Korea trade right after decades of frightful losses would be a great place to start.

(What’s Left of) Our Economy: Why Trump’s Budget Proposal is a Win for Trade Policy Realism

Tags

border adjustment, budget, Commerce Department, enforcement, exports, imports, Robert Lighthizer, tax reform, Trade, trade law, Trump, U.S. Trade Representative, Wilbur Ross, {What's Left of) Our Economy

Certainly since Donald Trump has been elected president, there’s been a tension even among his most supposedly hawkish trade policy advisers over basic objectives: Should the United States seek to solve its major trade-related problems mainly by promoting exports, or mainly by curbing imports? Of course, the two goals aren’t mutually exclusive. But the first suggests that the nation’s approach to trade will essentially be more of the same (albeit executed more competently), while the latter suggests a significant shift and is vigorously put into effect.

That’s one trade-related reason why Mr. Trump’s new budget proposal is so interesting and potentially important. If you believe that “money talks,” or “deeds count more than words” or any homilies to that effect, then it looks like that the tension has been resolved in favor of import limits – which would be good news indeed if it remains intact.

The reasons, as I’ve long written, are pretty simple, and should be much more obvious than they’ve been. First, for all its problems, the U.S. economy has been growing faster recently than most major world economies. And unlike the faster growers (mainly in the developing world), America’s growth isn’t export-led or -heavy. For that reason alone, its domestic market continues to be the world’s paramount emerging market.

Second, that relatively fast growth, combined with the ongoing export-heavy nature of most foreign economies means, and the huge and chronic American trade deficit, means that the size of the U.S. domestic market into which domestic producers can sell is enormous in absolute terms and indeed much bigger relative to foreign markets than widely realized. After all, this American market includes not only whatever growth the United States can generate going forward, but the large chunks of its market currently controlled by foreign competition.

Third, however much leverage the United States enjoys in global trade, and over foreign countries, its influence over its own market will always be much greater. And that goes double for countries with long records of sweeping protectionism.

Fourth, the domestic market is the market that domestic American producers should know best. Therefore, despite its undeniably impressive dynamism, these domestic producers have less to learn about customer preferences than is the case with foreign market.

For examples of the administration’s apparent ambivalence, simply check out statements made in the confirmation hearings of Commerce Secretary Wilbur Ross and U.S. Trade Representative-designate Robert Lighthizer. Indeed, it’s easy to conclude that their stated bottom line endorses the export-focused approach.

But the new Trump budget document is sending the opposite message – and its declared spending priorities arguably matter more than even sworn testimony. Specifically, according to the Commerce Department section, the final budget

“Strengthens the International Trade Administration’s trade enforcement and compliance functions, including the anti-dumping and countervailing duty investigations, while rescaling the agency’s export promotion and trade analysis activities.”

Not that this text is the end of the story, or even close. As widely recognized, the new budget statement is the first step in a lengthy process in which Congress will be heavily involved. Moreover, because so much of it is so controversial, and because the nation is so far from a consensus on official spending priorities, it’s entirely likely that the current budget priorities will simply wind up being carried over for the time being.

And as for trade policy specifically, Commerce Department funding will be far from the only determinant as to where the administration will put most of its energies. Just one example: the structure of whatever new or revised trade agreements it seeks will matter greatly as well. So will the fate of the border adjustability feature of the House Republican leadership’s tax reform proposals – which would both in effect penalize imports and subsidize exports. Moreover, because the U.S. trade law system is so (inevitably) slow-moving, episodic and reactive, relying exclusively or even mainly on this traditional trade enforcement tool will become a recipe for trade policy failure.    

But the Commerce budget priorities appear to be a straw in the wind that’s unmistakable – and because realistic, unmistakably welcome.

Making News: Thom Hartmann Interview on Trump and Trade Now On-Line

Tags

China, Commerce Department, Making News, NAFTA, National Trade Council, North American Free Trade Agreement, Peter Navarro, Robert Lighthizer, RT America, The Big Picture with Thom Hartmann, Thom Hartmann, Trade, U.S. Trade Representative, Wilbur Ross

I’m pleased to announce that the video of my appearance last night on RT America’s The Big Picture with Thom Hartmann is on-line!  Click on this link to hear in full a great discussion of President-elect Trump’s plans for U.S. trade policy and how they promise to shake up American politics.  The segment starts at about the 15:30 mark.

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