(What’s Left of) Our Economy: Is Trump Finally Getting It on NAFTA?

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automotive, Bill Clinton, Canada, Inside U.S. Trade, Mexico, NAFTA, North American Free Trade Agreement, Politico, Ronald Reagan, rules of origin, tariffs, Trade, Trump, World Trade Organization, WTO, {What's Left of) Our Economy

It’s still unconfirmed, but if true, a development reported in the (usually reliable) newsletter Inside U.S. Trade would reveal that the Trump administration is finally recognizing a major weakness in its approach to revising the North American Free Trade Agreement (NAFTA). And special bonus – the proposal in question would also go far toward solving the trade problems with China and most of the rest of the world that have been rightly identified by the administration.

Here’s a good summary of the scoop provided Tuesday by Politico:

“Three sources close to the [NAFTA] talks said the U.S. has demanded that Mexico, and possibly Canada, accept a higher tariff rate for autos that don’t meet the pact’s new content rules. That would essentially force companies that build cars in Mexico to agree to have exports to the U.S. that don’t conform to the rule be subject to a tariff beyond the 2.5 percent rate Washington bound itself to at the World Trade Organization. USTR [the Office of the U.S. Trade Representative] also declined to confirm this development….”

The key here is the point about higher tariffs. The three NAFTA signatories have now come to agree that the treaty’s regional content rules need to be made more strict. So far, in order to qualify for tariff-free treatment anywhere inside North America, autos and light trucks (which comprise an outsized share of intra-North American trade, and have attracted the most attention in the talks) need to be made of 62.5 percent North American parts and components. The aim, at least ostensibly, has been to encourage producers outside North America to relocate production and jobs inside the free trade zone.

The Trump administration has been pressing to raise the content levels needed for such tariff-free treatment to at least 70 percent for passenger vehicles, and reportedly Mexico is now on board in principle (though the exact number has yet to be agreed on). But so far, the administration has not demonstrated much, if any, awareness that higher mandated local content levels alone won’t bring many new factories or jobs to the signatory countries – and have under-performed on this front so far – for a very simple reason. As I’ve noted repeatedly, the penalty that non-North American producers need to pay for non-compliance is only 2.5 percent – an extra cost they can easily absorb.

The Inside U.S. Trade item suggests that this point has been taken, which would be great news for all three NAFTA countries if the eternal tariff is raised high enough to foster North American production and discourage imports. Even better, this proposal – which would essentially turn North America into a genuine trade bloc if extended to all traded goods and services – would by definition limit American imports from all the countries long regarded in Washington as troublesome trade partners (like China, Germany, and Japan). For they would all find it much more difficult to supply the United States – along with Canada and Mexico – with exports, and would face great pressure to serve North American customers instead with products overwhelmingly made in the free trade zone by North American workers.

It’s true that an increase in the external NAFTA tariff would violate WTO rules and would therefore expose all three North American economies to retaliation from outside the continent. But all three countries have run chronic trade deficits with the rest of the world, so they stand to come out ahead if a full-fledged trade conflict actually resulted. And as former President Ronald Reagan emphasized when he originally broached the subject (back in 1979), North America is self-sufficient, or could easily become so, in every significant product or service used by a prosperous economy.

Indeed, Reagan subsequently and explicitly contended that NAFTA was needed as a trade bloc to fend off the challenges posed by regional consolidation in Europe and East Asia. (The Wall Street Journal article in which this argument was made is now behind a pay wall, but the quote is found in my Marketwatch.com op-ed linked above.)  So did former President Bill Clinton. Both were known – and rightly so – as free trade supporters. Donald Trump, a decided free trade skeptic, should settle for no less.

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(What’s Left of) Our Economy: The Post’s (Unwitting) Case for Tariffs

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competition, foreign direct investment, free trade, Jobs, manufacturing, manufacturing trade deficit, Ronald Reagan, tariffs automotive, The Race to the Bottom, Trade, transplants, Trump, {What's Left of) Our Economy

On the surface, this was just another thoroughly predictable Washington Post editorial attack on President Trump’s trade policies and defense of the freest possible global commerce – a conclusion I think fair-minded people would support even if they oppose its proximate target, the possibility of new U.S. auto tariffs. But the distinctive nature of American and global automotive production and trade patterns on the one hand rendered one of these predictable trade arguments puzzling at best and downright bizarre at worst for anyone caring to think about it even momentarily: the claim that such tariffs would spur a “fall off” of the automotive quality enjoyed by American consumers because existing U.S.-based producers would face “less healthy competition.”

Let’s assume that the Post – and supporters of the longstanding trade policy status quo – are right in arguing that the least-fettered trade generally forces businesses to offer better and cheaper products in order to maintain and increase sales and profits. Does this maxim really apply to the automotive industry any more?

As widely noted, this industry is one of the world’s most globalized, and nowhere is this truer than in the United States. The Post recognized this reality as well – but in a way that casts major doubt on the relationship at least in this case between trade and the benefits of cross-border competition.

In the editorial’s words, “No doubt U.S. manufacturers, both U.S.-headquartered and Asian and German ‘transplants,’ and their workers would reap a windfall” from Trump-ian tariffs. By my recollection, this is the first time a commentary on trade policy has acknowledged that foreign-owned companies producing in the United States would benefit from American trade barriers as surely as their domestically owned counterparts.

More important, this observation leads logically to a game-changing conclusion: Trade barriers – in at least such instances – can generate a win-win outcome for Americans. The benefits of foreign competition (like better quality and lower prices) can be preserved for American consumers – since the foreign-owned firms producing domestically inevitably bring to their U.S. operations their distinctive management approaches and other strengths.

Yet because these operations have been transplanted to U.S. soil, the employment-related gains will flow mainly to American workers. The broader manufacturing-related gains (i.e., high production multipliers, strong productivity growth – at least for much of the nation’s recent history – and robust innovation activity), can mainly remain inside the U.S. economy.

Even more revealing: These foreign auto transplants initially set up shop in America partly because of trade curbs imposed by the Reagan administration. And American trade barriers in that era played a role in drawing foreign steel-makers to the United States as well. (The desire to hedge against exchange-rate risks also figured prominently in such investment decisions, along with the gains from producing abroad versus exporting predicted by the product cycle theory.)

Nor is there any reason to believe that tariffs and quotas won’t achieve similar successes today – unless you want to argue that America’s gargantuan market doesn’t give its leaders equally gargantuan leverage. In fact, as my book The Race to the Bottom reported in 2000, such restrictions have been so successful even for much smaller economies (along with China) that they’ve become standard operating procedure around the world. Here’s just one recent example of their effectiveness.

Since not all industries are the same, tariffs surely are no panacea for solving America’s intertwined problems in trade and manufacturing. (For those doubting their existence and relationship, consider that domestic manufacturing production is still down in real terms since the late-2007 outbreak of the last recession, and that this year’s U.S. manufacturing trade deficit is on course to top $1 trillion.) But the Post’s unwitting insight unmistakably reveals how and why trade curbs can help make major contributions to the American domestic economy. Time for the Trump administration to start thinking more carefully and strategically about how to accomplish these goals. And for free trade ideologues in the American chattering class to start opening their eyes.

(What’s Left of) Our Economy: RealClearAmateurism on Steel Tariffs

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AK Steel, Armco, autos, foreign direct investment, Japan, Japan Economic Institute, Kawasaki, Michael Cannivet, RealClearMarkets.com, Ronald Reagan, steel, tariffs, The Japan Times, Trade, Trump, {What's Left of) Our Economy

One of my favorite sayings holds that “A little knowledge is a dangerous thing,” and a recent column on the RealClearMarkets.com website on steel tariffs does a splendid job of showing why.

According to author Michael Cannivet, who heads an investment company “serving high net worth private clients,” President Trump’s decision to impose tariffs on steel imports from a wide (but still to be determined precisely) group of U.S. trade partners are “not a real long-term solution” for “cities reliant on American steel and aluminum production” because they’re certain to harm U.S. companies in the sector that are “working hard to reinvent themselves by innovating.” And he chooses as a prime example a steel firm close to his heart – AK Steel, which has a plant in his wife’s hometown of Middletown, Ohio that has employed “generations of her family.”

But in Cannivet’s eyes, AK’s experiences are also important because (quoting another author):

“AK Steel is the result of a 1989 merger between Armco Steel and Kawasaki. The Kawasaki merger represented an inconvenient truth: Manufacturing in America as a tough business since the post-globalization world. If companies like Armco were going to survive, they would have to retool. Kawasaki gave Armco a chance, and Middletown’s flagship company probably would not have survived it.”

This analysis is absolutely right – except it omits one crucial point. Kawasaki – a Japanese steel company – didn’t merge with Armco out of the goodness of its heart, or simply because it viewed the Armco operations in question as unusually promising assets. It also merged with – and transferred state-of-the-art production technologies – to Armco in large measure because Reagan-era trade restrictions severely limited its opportunities to supply the lucrative American market via exporting from Japan. Here’s some evidence from none other than the Japan government-run Japan Economic Institute of America (an often useful source of information and analysis that unfortunately closed its doors in the very early 2000s):

“By the mid-1980s NKK and Japan’s other major steelmakers were beginning to eye onshore U.S. operations. Such a presence would give them a way around the trade restrictions that by then had become a fixture so that they could service the automotive and other Japanese manufacturers that were setting up plants in this country.”

And P.S. – why were so many other Japanese manufacturers (like automotive firms) setting up plants in America? Again, in large measure due to those same Reagan-era trade curbs, as explained by this recent column in The Japan Times:

“The Reagan administration forced the Japanese auto industry into accepting a voluntary restraint on their exports to the U.S., under which the annual shipments from Japan was limited to 1,680,000 vehicles. The Japanese automakers responded by launching production in the U.S. one after another to evade the trade restrictions — Honda was the first by building its long-planned auto plant in Ohio, and was followed by Nissan and Toyota.”

None of this should be surprising to anyone with more than a little knowledge of trade or the globalization in manufacturing in particular. My book, The Race to the Bottom, cited an immense number of examples of national economies much smaller than the United States using tariffs or other trade barriers to lure foreign manufacturing to their shores. As a result, there’s every reason to believe that a U.S. resort to these measures would work spectacularly – and instances of precisely such successes keep emerging. 

And that’s of course the point of this post: Cannivet clearly doesn’t know more than a little about trade or the globalization of manufacturing. What he knows for sure is that he doesn’t like tariffs – possibly because he learned not to like them in a college freshman economics course. But apparently that was all that RealClearMarkets needed to justify showcasing his views. Maybe the site should change its name to RealClearAmateurism.

(What’s Left of) Our Economy: The Republican Tax Plans’ Biggest Flaw

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Alan Greenspan, Barack Obama, Bill Clinton, budget deficits, business spending, capital gains, corporate taxes, dividends, Federal Reserve, fiscal policy, George W. Bush, House, income taxes, monetary policy, multinationals, non-residential fixed investment, Paul Volcker, repatriation, Republican tax bills, Ronald Reagan, Senate, tax cuts, taxes, {What's Left of) Our Economy

The tax bills passed by the Republican-controlled House and Senate and strongly supported by President Trump (despite some important differences between them) can be fairly criticized for any number of big reasons: the mess of a drafting process in the Senate, the impact on already bloated federal budget deficits and the national debt, the cavalier treatment of healthcare reform, the seemingly cruel hits to graduate students and to teachers who buy some of their students’ school supplies.

My main concern is different, though. I could see an argument for the main thrust of the bills – even taking into account most of the above flaws – if they boasted the potential to achieve its most important stated aim. In Mr. Trump’s words, “We’re going to lower our tax rate to the very competitive number of 20 percent, as I said. And we’re going to create jobs and factories will be pouring into this country….” Put less Trump-ishly and more precisely, the idea is that by slashing tax rates for corporations and so-called pass-though entities, along with full-expensing of various types of capital investment, American businesses will build more factories, labs, and other productive facilities; buy more equipment, materials and software; hire more workers and increase their pay (since the demand for labor will soar).

Actually, since automation will surely keep steadily reducing the direct hiring generated by all this promised productive investment, let’s focus less on the jobs promise (keeping in mind that manufacturing in particular generates lots of indirect jobs per each direct hire), and more on the business spending that will boost output – since faster growth is the ultimate key to robust employment and wage levels going forward.

Unfortunately, after spending the last few days crunching some relevant numbers, I can’t see the GOP tax plans living up to their billing – which makes their flaws all the more damning.

What I’ve done, essentially, is look at inflation-adjusted business spending during American economic recoveries (to ensure apples-to-apples data by comparing similar stages of the business cycle) going back to the Reagan years of the 1980s, and examine whether or not individual and especially business tax cuts have set off a factory etc building spree. And I didn’t see anything of the kind, except possibly over the very short term. Moreover, even these increases may have had less to do with the tax cuts than with other influences on such investments – like the overall state of the economy and the monetary policies carried out by the Federal Reserve (which help determine the cost of credit).

Let’s start with the expansion that dominated former President Ronald Reagan’s two terms in office – lasting officially from the fourth quarter of 1982 through the second quarter of 1990 (by which time he had been succeeded by George H.W. Bush). The signature Reagan tax cuts, which focused on individuals, went into effect in August, 1981 – when a deep recession was still underway.

Interestingly, business investment kept falling dramatically through the middle of 1983 – when an even stronger rebound kicked in through the end of 1984. Indeed, that year, corporate spending (known officially as private non-residential fixed investment surged by 16.66 percent. But this growth rate then began slowing dramatically – and through 1987 actually dropped in absolute terms.

A major tax reform act was signed into law by the president in October, 1986, and individuals were its focus as well. Two provisions did affect business, but appeared to be at least somewhat offsetting in their effects, in line with the law’s overall aim of eliminating incentives and disincentives for specific kinds of economic activity. They were a reduction in the corporate rate and a repeal of the investment tax credit – whose objective was precisely to foster capital spending. Other provisions had major effects on business but principally by encouraging more companies to change over to so-called pass-through entities, not (at least directly) on investment levels. Business spending recovered, but its peak for the rest of the decade (5.67 percent of real GDP in 1989) never approached the earlier highs.

Arguably, fiscal and monetary policy were much more influential determinants of business spending, along with the recovery’s dynamics. The depth of the early 1980s recession practically ensured that the rebound would be strong, as did the massive swelling of federal budget deficits, which strengthened the economy’s overall demand levels, and their subsequent reduction.

Perhaps most important of all, the Federal Reserve under Chairman Paul Volcker cut interest rates dramatically from the stratospheric levels to which he drove them in order to tame double-digit inflation. And yet for most of 1984, when business spending soared, the federal funds rate (FFR) was rising steeply. Capex also strengthened between 1987 and mid-1989, which also witnessed a scary stock market crash (in October, 1987).

The story of the long 1990s expansion, which mainly unfolded during Bill Clinton’s presidency, was simultaneously simpler and more mysterious from the standpoint of business taxes – and macroeconomic policy. Following a shallow recession, Clinton raised both personal and corporate tax rates while government spending was so restrained that the big budget deficits he inherited actually turned into surpluses by the late-1990s. For good measure, the FFR began rising in late 1993, from 2.86 percent, and between early 1995 and mid-2000, stayed between just under six percent and just under 6.5 percent.

And what happened to capital spending? In late 1993, right after the tax-hiking, spending- cutting, deficit-shrinking Omnibus Budget Reconciliation Act was passed, and the Fed was tightening, businesses went on a capex spending spree began that saw such investment reach annual double-digit growth rates in 1997 and stay in that elevated neighborhood for the next three years.

It’s true that Clinton and the Republican-controlled Congress passed tax cut legislation in August, 1997, that among other measures lowered the capital gains rate. But the acceleration of business spending began years before that. And although we now know that much of this capital spending went to internet-centered technology hardware for which hardly any demand existed then at all, from a tax policy perspective, the key point is that this category of spending rose strongly – not whether the funds were spent wisely or not.

The expansion of the previous decade casts major doubt on whether any policy moves can significantly juice business spending. Just look at all the stimulative measures put into effect, tax-related and otherwise. The recovery lasted from the end of 2001 to the end of 2007, and during this period, on the tax front, former President George W. Bush in June, 2001 signed a bill featuring big cuts for individuals, and in May, 2003 legislation that sped up the phase-in of those personal cuts and added reductions in capital gains and dividends levies. For good measure, in October, 2004, the “Homeland Investment Act” became law. It aimed to use a tax “holiday” (i.e., a one-time dramatically slashed corporate rate) to bring back (i.e., “repatriate“) to the U.S. economy for productive investment hundreds of billions of dollars in profits earned by American companies from their overseas operations.

In addition, under Bush, the federal budget balance experienced its biggest peacetime deterioration on record, and starting in the fall of 2000, the Federal Reserve under Alan Greenspan cut the FFR to multi-decade peacetime lows, and didn’t begin raising until mid-2004.

The business investment results underwhelmed, to put it mildly. Such expenditures fell significantly throughout 2001 and 2002, and grew in real terms by only 1.88 percent the following year. Thereafter, their growth rate did quicken – to 5.20 percent rate in 2004, 6.98 percent in 2005, and 7.12 percent in 2006. But they never achieved the increases of the 1990s and by 2007, that expansion’s final year, business investment growth had slowed to 5.91 percent.

There’s no doubt that something needs to be done to boost business spending nowadays, which has lagged for most of the current recovery and turned negative last year – even though the federal funds rate remained near zero for most of that time and the Federal Reserve’s resort to unconventional stimulus measures like quantitative easing as well, despite unprecedented budget deficits (though they began shrinking dramatically in 2013), and despite the continuation of all the Bush tax cuts (except the repatriation holiday, and the imposition of a small surcharge on all investment income to help pay for Obamacare). Business investment’s record during the current recovery has been even less impressive considering a Great Recession collapse that was the worst in U.S. history going back to the early 1940s, and that should have generated a robust bounceback.

But if history seems to teach that tax cuts and even other macroeconomic stimulus policies haven’t been the answer, what is? Two possibilities seem well worth exploring. First, place productive investment conditions on any tax cuts and repatriation (the 2004 tax holiday act did contain them) and then actually monitor and enforce them (an imperative the Bush administration neglected). And second, put into effect some measures that can boost incomes in some sustainable way – and thus convince business that new, financially healthy customers will emerge for the new output from their new facilities. To me, that means focusing less on ideas like raising the national minimum wage to $15 per hour (though the rate should, at long last, be linked to inflation), and more on ideas like trade policies that require business to make their products in the United States if they want to sell to Americans, and immigration policies that tighten labor markets and force companies to start competing more vigorously for available workers by offering higher pay.

In that latter vein, the 20 percent excise tax on multinational supply chains contained until recently in the House Republican tax plan could have made a big, positive difference. Sadly, it looks like it’s been watered down to the point of uselessness, and the original has little support in the Senate. The House Republican tax plan also had included a border adjustment tax that would have amounted to an across-the-board tariff on U.S. imports (and a comparable subsidy for American exports), but the provision was removed from the legislation partly due to (puzzling) Trump administration opposition.

Mr. Trump clearly has acted more forcefully to relieve immigration-related wage pressures on the U.S. workforce, but it’s unclear how quickly they’ll translate into faster growing pay.  If such results don’t appear soon, and barring Trump trade breakthroughs, expect opponents of the Republican tax plan to keep insisting that it’s simply a budget-busting giveaway to the rich, and expect these attacks to keep resonating as the off-year 2018 elections approach.   

 

Our So-Called Foreign Policy: More Childish Attacks on Trump

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alliances, allies, Council on Foreign Relations, foreign policy establishment, George H.W. Bush, Greece, IMF, International Monetary Fund, international organizations, internationalism, Iran deal, JCPOA, Joint Comprehensive Plan of Action, journalists, Mainstream Media, media, military bases, NAFTA, New Zealand, North American Free Trade Agreement, Our So-Called Foreign Policy, Paris climate accord, Philippines, Richard N. Haass, Ronald Reagan, TPP, Trans-Pacific Partnership, Trump, UN, UNESCO, United Nations, Withdrawal Doctrine, World Bank, World Trade Organization, WTO

I’m getting to think that in an important way it’s good that establishment journalists and foreign policy think tank hacks still dominate America’s debate on world affairs. It means that for the foreseeable future, we’ll never run out of evidence of how hidebound, juvenile, and astonishingly ignorant these worshipers of the status quo tend to be. Just consider the latest fad in their ranks: the narrative that the only theme conferring any coherence on President Trump’s foreign policy is his impulse to pull the United States out of alliances and international organizations, or at least rewrite them substantially.

This meme was apparently brewed up at the heart of the country’s foreign policy establishment – the Council on Foreign Relations. Its president, former aide to Republican presidents Richard N. Haass, tweeted on October 12, “Trump foreign policy has found its theme: The Withdrawal Doctrine. US has left/threatening to leave TPP, Paris accord, Unesco, NAFTA, JCPOA.” [He’s referring here to the Trans-Pacific Partnership trade deal that aimed to link the U.S. economy more tightly to East Asian and Western Hemisphere countries bordering the world’s largest ocean; the global deal to slow down climate change; the United Nations Educational, Scientific and Cultural Organization; the North American Free Trade Agreement, and the Joint Comprehensive Plan of Action – the official name of the agreement seeking to deny Iran nuclear weapons.]

In a classic instance of group-think, this one little 140-character sentence was all it took to spur the claim’s propagation by The Washington Post, The Atlantic, Marketwatch.com, Vice.com, The Los Angeles Times, and Britain’s Financial Times (which publishes a widely read U.S. edition).  For good measure, the idea showed up in The New Republic, too – albeit without mentioning Haass.

You’d have to read far into (only some of) these reports to see any mention that American presidents taking similar decisions is anything but unprecedented. Indeed, none of them reminded readers of one of the most striking examples of alliance disruption from the White House: former President Ronald Reagan’s decision to withdraw American defense guarantees to New Zealand because of a nuclear weapons policy dispute. Moreover, the administrations of Reagan and George H.W. Bush engaged in long, testy negotiations with long-time allies the Philippines and Greece on renewing basing agreements that involved major U.S. cash payments.

Just as important, you could spend hours on Google without finding any sense in these reports that President Trump has decided to remain in America’s major security alliances in Europe and Asia, as well as in the United Nations, the International Monetary Fund, the World Bank, and the World Trade Organization (along with a series of multilateral regional development banks).

More important, you’d also fail to find on Google to find any indication that any of the arrangements opposed by Mr. Trump might have less than a roaring success. The apparent feeling in establishment ranks is that it’s not legitimate for American leaders to decide that some international arrangements serve U.S. interests well, some need to be recast, and some are such failures or are so unpromising that they need to be ditched or avoided in the first place.

And the reason that such discrimination is so doggedly opposed is that, the internationalist world affairs strategy pursued for decades by Presidents and Congresses across the political spectrum (until, possibly, now) is far from a pragmatic formula for dealing with a highly variegated, dynamic world. Instead, it’s the kind of rigid dogma that’s most often (and correctly) associated with know-it-all adolescents and equally callow academics. What else but an utterly utopian ideology could move a writer from a venerable pillar of opinion journalism (the aforementioned Atlantic) to traffick in such otherworldly drivel as

“A foreign-policy doctrine of withdrawal also casts profound doubt on America’s commitment to the intricate international system that the United States helped create and nurture after World War II so that countries could collaborate on issues that transcend any one nation.”

Without putting too fine a point on it, does that sound like the planet you live on?

I have no idea whether whatever changes President Trump is mulling in foreign policy will prove effective or disastrous, or turn out to be much ado about very little. I do feel confident in believing that the mere fact of rethinking some foreign policy fundamentals makes his approach infinitely more promising than one that views international alliances and other arrangements in all-or-nothing terms; that evidently can’t distinguish the means chosen to advance U.S. objectives from the objectives themselves; and that seems oblivious to the reality that the international sphere lacks the characteristic that makes prioritizing institution’s creation and maintenance not only possible in the domestic sphere, but indispensable – a strong consensus on defining acceptable and unacceptable behavior.

One of the most widely (and deservedly) quoted adages about international relations is the observation, attributed to a 19^th century British foreign minister, that his nation had “no eternal allies, and we have no perpetual enemies. Our interests are eternal and perpetual, and those interests it is our duty to follow.” Until America’s foreign policy establishment and its media mouthpieces recognize that this advice applies to international institutions, too, and start understanding the implications, they’ll keep losing influence among their compatriots. And rightly so.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

Im-Politic: The Meaning of Trump-ism

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Our So-Called Foreign Policy: Why Robert Gates is a Flawed National Security Guru

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2016 election, Bill Clinton, border security, China, Crimea, debt, Donald Trump, export controls, George W. Bush, Hillary Clinton, Iran-Contra, Middle East, NATO, NATO expansion, Obama, Our So-Called Foreign Policy, Putin, Robert M. Gates, Ronald Reagan, Russia, terrorism, The Wall Street Journal, TPP, Trans-Pacific Partnership, Ukraine

The Wall Street Journal op-ed staff’s decision to publish Robert M. Gates’ article last Friday on how he sizes up the two major presidential candidates’ qualifications for the Oval Office makes sense only by the degraded and often mindless standards of the American political, policy, and media establishments.

Sure, as the tag line ostentatiously noted, “Mr. Gates served eight presidents over 50 years, most recently as secretary of defense under Presidents George W. Bush and Barack Obama.” As a result, I’m certainly interested to know his views – and especially that, although Democratic nominee Hillary Clinton has a deeply flawed record, Republican Donald Trump is “beyond repair.” You should be, too. But should anyone regard Gates as the last word? I’m not convinced – nor should you be.

For starters, one of the presidents Gates served was Ronald Reagan – as a big player in that administration’s reckless and downright looney scheme (the so-called Iran-Contra affair) to evade Congress’ ban on supplying anti-communist Nicaraguan rebels with profits made secretly by selling arms to Iran’s terrorism-sponsoring, hostage-taking ayatollahs. Gates also seems to regard George W. Bush’s disastrous foreign policy presidency as standing within the bounds of acceptability. Hello?

At least as unimpressive, though, is Gates’ judgment regarding current foreign policy issues. Here are three examples. First, the former Bush and Obama Secretary of Defense warned that:

“Every aspect of our relationship with China is becoming more challenging. In addition to Chinese cyberspying and theft of intellectual property, many American businesses in China are encountering an increasingly hostile environment. China’s nationalist determination unilaterally to assert sovereignty over disputed waters and islands in the East and South China Seas is steadily increasing the risk of military confrontation.

“Most worrying, given their historic bad blood, escalation of a confrontation between China and Japan could be very dangerous. As a treaty partner of Japan, we would be obligated to help Tokyo. China intends to challenge the U.S. for regional dominance in East Asia over the long term, but the new president could quickly face a Chinese military challenge over disputed islands and freedom of navigation.”

True indeed. But then he upbraids both Trump and Clinton for opposing President Obama’s Pacific rim trade agreement, a position that he argues (despite presenting no evidence) “would hand China an easy political and economic win.” Indeed, Gates dredges up the know-nothing specter of China responding to Trump-ian tariffs with a trade war against America that it could well win because of all the U.S. debt it holds and because it’s “the largest market for many U.S. companies.”

Apparently he’s unaware that China’s debt holdings are a small fraction of the outstanding U.S. total, that the PRC remains much more important to American multinational firms as an offshore production platform than a final customer (which explains why the United States runs a huge trade deficit with Beijing), and that without adequate access to the American market, China’s export-focused economy and political stability would face mortal danger.

Worse, as chief of Mr. Obama’s Pentagon, Gates pioneered a relaxation of American export controls that greatly expanded China’s access to America’s best commercially produced defense-related knowhow. Talk about feeding the beast!

Gates’ critique of the Clinton, and especially Trump, Russia stances should inspire no more confidence. According to this supposed national security guru, “neither Mrs. Clinton nor Mr. Trump has expressed any views on how they would deal with Mr. Putin (although Mr. Trump’s expressions of admiration for the man and his authoritarian regime are naive and irresponsible).”

As Gates notes, under Putin, “Russia [is] now routinely challenging the U.S. and its allies. How to count the ways. There was the armed seizure of Ukraine’s Crimea; Moscow’s military support of the separatist movement in eastern Ukraine; overt and covert intimidation of the Baltic states; the dispatch of fighter and bomber aircraft to avert the defeat of Syria’s Assad; sales of sophisticated weaponry to Iran.

“There is Russia’s luring the U.S. secretary of state into believing that a cease-fire in Syria is just around the corner—if only the U.S. would do more, or less, depending on the issue; the cyberattacks on the U.S., including possible attempts to influence the U.S. presidential election; and covert efforts to aggravate division and weakness with the European Union and inside European countries. And there is the dangerously close buzzing of U.S. Navy ships in the Baltic Sea and close encounters with U.S. military aircraft in international airspace.”

But actually it’s Gates who’s leaving the biggest questions unanswered. Does he now view the targets of Putin’s aggression as vital U.S. interests that merit a defense guarantee that could expose the United States itself to nuclear attack? When exactly did Crimea and Ukraine, which are so close to Russia that they cannot possibly be defended by Western conventional forces, attain this status? Why were American presidents going back to 1945 wrong to take exactly this position (including all of those he served)?

Indeed, what’s changed since Gates himself recognized this reality, and warned former President George W. Bush that the NATO expansion pushed by him and his predecessor, Bill Clinton, would needlessly provoke the kind of Russian push-back now underway? And if Gates hasn’t reversed himself on Russia, why is he so scornful of Trump’s evident interest in cutting a deal with Putin?

Gates is non-partisan, but no better, when it comes to the Middle East. He accuses the two candidates or failing to define “what the broader U.S. strategy should be toward a Middle East in flames….” But his critique of Trump is especially off base. According to Gates, the Republican candidate has “suggested we should walk away from the region and hope for the best. This is a dangerous approach oblivious to the reality that what happens in the Middle East doesn’t stay in the Middle East.”

But he misses the essence of Trump’s position, which is defending America from threats emanating from the region at America’s borders – which are relatively controllable – versus in that terminally dysfunctional, faraway region – which is completely uncontrollable. Gates can legitimately disagree with this approach (which I have repeatedly endorsed), but he can’t legitimately claim that it doesn’t exist.

Gates’ critique extends to several other current flashpoints, but what’s especially revealing to me is how this supposed diplomatic sage completely mis-identifies the biggest foreign policy question facing America’s leaders and the public. It’s not, per his formulation “how [the next president] thinks about the military, the use of military force, the criteria they would apply before sending that force into battle, or broader questions of peace and war.”

As I’ve been writing since the mid-1980s, that kind of thinking puts the cart before the horse. (Here’s a good summary of my first lengthy article on the subject, which unfortunately is not available in full on-line.) America’s main foreign policy challenge is figuring out its principal overseas interests, and basing its decisions on using force on the importance of those goals. Otherwise, debates on going to war and other uses of military power will be conducted in a strategic vacuum – which already too often has been the case.

Given Gates’ wealth of experience, it’s fine for The Wall Street Journal – or any other news organization – to grant him a prominent forum from time to time. How much better it would be, however, for editors and reporters and pundits to ask him, and themselves, if he’s ever displayed any learning curve.

Im-Politic: Meet the Real Trade and Jobs Know-Nothings

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2016 election, Bernie Sanders, Clyde V. Prestowitz, Donald Trump, Im-Politic, Jr., manufacturing, manufacturing jobs, Morris Chang, Ronald Reagan, Taiwan Semiconductor Manufacturing Company, The Race to the Bottom, Trade, transplants

Nothing during this wildly unconventional presidential campaign has anchored the economic conventional wisdom more strongly than the claim that only know-nothings like presidential candidates Donald Trump and Bernie Sanders could possibly think that better U.S. trade policies can bring back lots of high-paying manufacturing jobs from countries like China to the United States. And nothing during this same campaign has revealed more Establishment ignorance than this attack on these White House hopefuls.

An excellent recent op-ed in USA Today by former U.S. trade negotiator Clyde V. Prestowitz, Jr. explains why. As Prestowitz (with whom I worked in the early 1990s at the Economic Strategy Institute think tank he founded) writes, anyone thinking that free market forces have turned China, for example, into a major producer of advanced manufactured goods needs to get a clue. China’s natural manufacturing advantage lies in labor-intensive products like apparel and toys, because its workforce is so gargantuan and its technological development still has a long way to go.

But Beijing wasn’t content to keep making such low-value products an instant longer than necessary. So it’s used a raft of active policy carrots and sticks to lure even information technology manufacturing to its shores. My book on globalization, The Race to the Bottom, has exhaustively documented how these policies have long been standard operating procedure for governments all over the world – except America’s. And the supposedly all-powerful multinational companies they’ve mainly targeted? Instead of standing on their high horses, and refusing to jump, they’ve simply asked “How high?”

If you still doubt any of this, forget about what Prestowitz and I have reported. Listen to Morris Chang. He started up and still chairs the Taiwan Semiconductor Manufacturing Company (TSMC), which is the world’s largest contract manufacturer of computer chips, and in fact, pioneered the “foundry” model for the industry.

Chang’s company just announced that it’s building a $3 billion semiconductor fab in China, where it will produce advanced (if not leading-edge) semiconductors. How come? There’s no question that part of the reason is that so many of TSMC’s customers – in the information technology products industry – now manufacture so many of their goods in China. But as Chang also admitted, “We say that with some degree of assurance from the authorities, some degree of assurance that building a plant there will indeed enhance our access to the Chinese market. And reversely, not building a plant there will not enhance.”

That is, China’s policy is “Pay to play” – because it wants to develop its own semiconductor sector, regardless of what economic theory says it should be doing. And Chang doesn’t think he can afford to Just Say No.

Revealingly, no one is more aware than the Chinese that the United States is capable of playing this game effectively, too. As a Chinese company told Bloomberg last year, it chose Alabama as the site of a new factory both “to bring it closer to clients in the South and avoid anti-dumping tariffs on copper products.”

Also revealingly, American leaders haven’t always been brain-dead on this score. In 1981, for example, President Ronald Reagan successfully pressed Japan’s auto makers to curb their exports to the United States “voluntarily.” The following year, Honda began assembling cars in Ohio. By 1990, all the major Japanese auto makers had gone the transplant route.

Can using America’s market power bring back all production and jobs lost to trade? Of course not. Can it bring back or create lots? Of course it can, especially in high-value sectors where a technologically advanced country with well developed capital markets like the United States should be fully competitive. The actual trade know-nothings are those unfamiliar with the historic record and current global realities. Assuming of course that any of them really want to know.

(What’s Left of) Our Economy: The Times’ History of Free Trade is Bunk

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Adam Smith, Binyamin Appelbaum, Donald Trump, Douglas A. Irwin, economics, economists, free trade, I.M. Destler, Jagdish Bhagwati, John Maynard Keynes, John Stuart Mill, mercantilism, protectionism, Republicans, Richard Nixon, Robert Torrens, Ronald Reagan, Smoot-Hawley Tariff, strategic trade theory, tariffs, The New York Times, Trade, {What's Left of) Our Economy

It’s easy to imagine the thought processes responsible for The New York Times running last week’s article describing Donald Trump’s views on trade policy as “Breaking with 200 Years of Economic Orthodoxy”:

“We are the newspaper of record.”

“The public needs vital context to make intelligent decisions.”

“We can flaunt our matchless knowledge of history.”

What a shame, then, that economic correspondent Binyamin Appelbaum’s piece failed so badly on so many counts.

Let’s be charitable and start off by accentuating the positive. Appelbaum deserves credit for characterizing trade concerns as “among his oldest and steadiest public positions.” That’s a healthy corrective to media-wide reporting portraying the Republican presidential front-runner as motivated solely or mainly by – nativist and even racist – hostility to immigration.

It was also encouraging that Appelbaum acknowledged (though in an excessively narrow way, as will be demonstrated below) that “economists have oversold their case.” And he helpfully quoting a leading voice in the profession as noting not only that foreign protectionist practices are all too common, but that “It might be that the threat of tariffs or other trade sanctions could cause American trading partners to open up their markets or drop their barriers to trade.”

Unfortunately, nothing else Appelbaum wrote met standards of current or historic accuracy. First, although he correctly described mercantilism’s focus on amassing trade surpluses, he never pointed to a Trump statement endorsing such a goal. Conversely, the author errs when he contends that the orthodoxy calls for maximizing international trade flows. Instead, it calls for permitting global trade to reflect patterns of comparative advantage to the greatest extent possible.

As for Appelbaum’s brief history of American trade politics, it omits crucial facts. Specifically, he quotes as gospel the view of the University of Maryland’s I.M. Destler that “For most of the last century…skepticism about trade had been relegated to the fringes of the Republican Party.” But no significant Republican shift toward trade liberalization took place until after World War II. Indeed, legislators Reed Smoot and Willis Hawley, sponsors of the 1930 tariff, were both Republicans.

And even after most of the party warmed toward freer trade positions, major tariffs were imposed in 1971 by President Richard M. Nixon and throughout the 1980s by President Ronald Reagan – hardly fringe figures.

Finally, Appelbaum also seriously distorts the economics profession’s position on trade liberalization. Why, for example, didn’t he point out that, like one of the contemporary he cited, Adam Smith himself endorsed the threat and use of tariffs to open foreign markets. He also left out all the major loopholes in standard free trade theory pointed out by some of the biggest names in economic history. This history of the idea of free trade by Dartmouth’s Douglas A. Irwin makes clear how significant they have been. Here’s a summary drawn from my (New York Times) review of Irwin’s 1996 study – which unfortunately has not been digitized:

“Robert Torrens and John Stuart Mill explained how countries could use tariffs to enhance national wealth by stimulating the production of more profitable exports. Mill showed that tariffs protecting ‘infant’ industries could help them survive competition with more established rivals and eventually become self-supporting — without exacting larger costs from that country’s consumers or other economic sectors.

“During the 1920’s, Frank Graham of Princeton theorized that tariffs could provide permanent help for national economies by encouraging a shift from agriculture into manufacturing, thereby increasing a country’s total wealth. In the wake of the Great Depression, John Maynard Keynes insisted that free trade policies could impoverish individual countries during periods of already high unemployment, deflation and fixed exchange rates, particularly when the deflation was caused by a central bank’s determination to keep interest rates up. And in the 1980’s, a school of ”strategic trade” theorists contended that the special characteristics of certain industries (particularly those dominated by a few producers) could allow governments in some instances to use export subsidies to create national advantage.”

Irwin was correct in noting that “these arguments simply represent exceptions to a still-enthroned free trade rule — not new rules themselves (my paraphrase).” But it’s also true that these exceptions are so substantial that they call the theory’s validity into question.

In fact, Columbia University economist Jagdish Bhagwati, a leading free trade champion for decades, put it best when he observed, ”One cannot assert that free trade is ‘the policy that economic theory tells us is always right’ . . . certain developments make the case for free trade more robust whereas others make it less so . . . the latter are subject to many difficulties as one passes from the classroom to the corridors of policy making.”

I suppose that Appelbaum and The Times should be praised to trying to convey the idea that a high profile current campaign issue has deep roots in the past. But is it so unreasonable to hope that they could do the story anything close to justice?