Our So-Called Foreign Policy: My Ukraine Peace Plan

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Russia, Ukraine, Our So-Called Foreign Policy, sanctions, diplomacy, NATO, energy, European Union, North Atlantic treaty Organization, EU, nuclear war, Ukraine War, World War 3

As I’ve repeatedly argued, every day the Ukraine war lasts, the United States runs an ever greater risk of the conflict going nuclear and the American homeland coming under attack. And as I’ve also argued, the creation of any such nuclear risk is completely unacceptable because despite all the military aid provided by Washington, the U.S government still hasn’t backed admitting Ukraine to the North Atlantic Treaty Organization (NATO). That alliance of course is made up of countries whose security the United States has officially designated as vital, and thus by definition worth incurring such risks.

So in order to ensure that U.S. leaders don’t continue exposing the American population to a catastrophe that would make the September 11 attacks look like a mosquito bite on behalf of a country Washington still doesn’t regard as worth that candle, the war needs to end ASAP. And here’s a plan (or as they like to say in the political and policy worlds, a “framework”) that might do the trick.

First, an immediate ceasefire is declared, and then enforced by troops from some of the large developing countries that have voted to condemn the Russian invasion but failed so far to provide Ukraine with any support (like India or Indonesia or Brazil).

Second, (and the sequencing of the following steps can take any number of forms), NATO announces that it will never admit Ukraine as a member, But  NATO and other countries reserve the right to provide Kyiv with as much in the way of conventional armaments (including systems considered as “offensive”) as they wish.

Third (Version A), Russia gets to keep the Crimea but agrees that the the two eastern Ukrainian provinces with the big ethnic Russian populations will decide their own fates in internationally supervised referenda. In addition, any inhabitants of all three regions who wish to leave either before or after such votes get relocation assistance (preferably to Ukraine, but other European countries should feel free to take them in, too). The funding would come partly from the West (mainly by the European members of NATO), and partly from a percentage of revenues earned by Russia from the dropping of sanctions on Russian energy exports.

Third (Version B), same as above but Russia simply gets to keep the two eastern provinces and Crimea outright. Again, however, emigration by any of their inhabitants is funded by the West and by those Russian energy revenues. For the record, I like version A best.

Fourth, Russia drops its objections to Ukraine joining the European Union (EU).

Fifth, in order to enable Ukraine to maximize the economic benefits of EU membership, the West (again, mainly the European members of NATO) commits to large economic aid and reconstruction packages dependent largely on Kyiv’s progress in rooting out corruption. I’d also be in favor of empowering the donors to bypass the Ukrainian government in financing worthy recipients directly, to ensure that Ukrainian officials don’t steal most of the assistance.

Sixth, non-energy sanctions on doing any kind of business with Russia are phased out contingent on the absence of Russian aggressive actions against Ukraine (including efforts by Russian-funded paramilitary groups to destabilize Ukrainian territory). That is, the longer Moscow behaves well toward Ukraine, the more sanctions get dropped.

Seventh, the West agrees not to prosecute any Russian officials (including military officers) for war crimes.

Eighth and last, Russia and NATO begin negotiations to explore ideas for new arrangements that longer term could further enhance the security both of Russia and its European neighbors, including the Balkans and Moldova. These initiatives should be led by the Europeans.

Because the above proposals are just a framework, and neither set in stone nor presented in any great degree of detail, I’m absolutely open to suggestion regarding modifications, refinements, and additions. But for anyone wishing to pony up their ideas, I hope they consider first and foremost the needs to (a) defuse an exceedingly dangerous current situation with frightening potential to damage the American homeland gravely; (b) give both Russia and Ukraine significant reasons to claim at least partial victories; and (c) realize how easy it is to make the perfect the enemy of the good.

And on that last point, I hope that Ukraine war hawks and others who stress the imperatives of punishing any and all aggressions, and/or forcing the Russians to pay serious penalties for their invasion, and ensuring that Russia in the future becomes to weak to endanger Ukraine or any other country ever again, would keep the following in mind: The current regime in Moscow is so mismanaging the country and wasting its considerable resources (especially human), that it’s doing a great job of diminishing its power and potential all by itself.

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Following Up: Why the U.S.-South Korea Summit Was Incredibly Weird I

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Alan Beattie, alliances, allies, Biden, China, deterrence, extended deterrence, Financial Times, Following Up, Indo-Pacific, North Korea, nuclear weapons, realism, reciprocity, sanctions, semiconductors, South Korea, technology, Yoon Suk Yeol

Consistent with cutting-edge astro-physicis – and the last few decades of Marvel comics story-telling – I’m sure that among all the infinite number of universes in a “multi-verse” comprising creation, there’s one in which South Korea somehow genuinely has no reason to believe it has any obligation to comply with U.S. wishes in exchange for protection against complete destruction or enslavement by fanatically totalitarian North Korea.

I’m also sure that that universe isn’t the one we inhabit. Which is why it’s so whacko that Financial Times columnist Alan Beattie begs to differ, and that his editors evidently had absolutely no problem with this argument. And that’s only the lesser of two jaw-dropping new developments related to last week’s summit between President Biden and his South Korean counterpart Yoon Suk Yeol, which I analyzed in this post. Nonetheless, that’s the focus of today’s post. Tomorrow’s will deal with the second.

To be clear, I’m not contending that the South Koreans should be grateful to Washington for anything.

As a self-styled foreign policy realist, I’ve long held that countries can be counted on to act first and foremost in their own self-interest, and indeed should – in fact, unapologetically. I’ve taken many of my cues here from the Founding Fathers, who also considered the world to be far too dangerous to ground strategy in considerations of sentiment. So that puts me in pretty good company IMO. 

Moreover, South Korea is emphatically no exception, first because it lives in an exceptionally dangerous neighborhood; and second, because as I explained last week, its semiconductor manufacturing prowess gives it some clout vis-a-vis the United States.

Nor am I arguing that the U.S. commitment to defend the South has ever stemmed from anything other than a regard for its own security or independence or prosperity – even though I’ve disagreed until very recently (because of semiconductor manufacturing-related national security issues) with this characteristically globalist definition of national interest.

Instead, I’m arguing that, given the decision by Washington to protect the South even though its strategy of extended deterrence has recently exposed the United States to the risk of nuclear attack on the American homeland, it’s entirely reasonable for America to seek some South Korean help in meeting a different challenge. In this case, it’s helping Washington limit the technological progress that could enable China to attain military parity – and at some point even superiority – over the United States, and thereby undercut declared vital U.S. national interests throughout the Indo-Pacific region and even beyond.

But Alan Beattie? He writes that it’s “galling when Washington expects you to take economic hits for geopolitical gains when it’s not always willing to do the same itself.”

One fatal flaw in Beattie’s argument is the claim that the United States is asking South Korea to sacrifice some earnings (resulting from the major revenues it earns by supplying semiconductors and other high-value inputs to China’s huge electronics industry) without offering to pay any price for containing China itself.

What he ignores is how the Biden administration tough’s curbs on the investment and operations of America’s own semiconductor and chip-making equipment companies are costing them economically, too. Instead, he focuses on the electric vehicle manufacturing provisions of the Inflation Reduction Act, which require South Korean auto companies to produce key components in the United States in order to qualify for subsidies.

Yet these provisions apply not only to all foreign auto-makers, but to America’s as well.  And even if they were being applied in a blatantly discriminatory manner, however, it’s not as if South Korea wouldn’t still be getting a heckuva deal from its alliance with the United States. Beattie blandly describes the benefits to the South as “maintaining relations with the US….” Of course, as I stated above, it’s really about its national freedom and very survival.

Again, as a realist, I respect South Korea’s right to define its own interests however it wishes, and to act accordingly. But should I – or anyone – agree with Beattie that Washington’s desire for some South Korean reciprocity is “galling,” or excessively steep? It sounds like Beattie’s actual position is that any U.S. effort to leverage its commitment to defend South Korea is unreasonable – especially if it might interfere with the decades of hyper-globalization that the author tends to lionize uncritically, even though they’ve unmistakably fueled the dangerous rise of Chinese power. Can that be a serious basis for conducting diplomacy?

But from Beattie’s scathing tone, it’s also apparent that he’s condemning this kind of transactional approach to foreign policy for deeply personal reasons as well – likely the transparently childish view that the United States, or maybe just the Anglo-phone countries, should be above this sort of crassness, and that even if international relations aren’t comparable to a sporting event, where the real world stakes are modest, they should act as if they are – whatever the risks.

Thankfully, the Biden administration is steadily (though not fast enough for my tastes) thinking in more adult terms and recognizing – like the Trump administration before it – that one-way-street alliances no longer make sense from America’s standpoint (if they ever did). In this instance, moreover, South Korea could easily conclude that containing the tech prowess of a gigantic totalitarian and increasingly aggressive neighbor serves its own interests quite handily, too.

Tomorrow’s post will describe that aforementioned even more befuddling – and possibly more worrisome – consequence of the Biden-Yoon summit.

P.S. Full disclosure:  Beattie has blocked me on Twitter because he believed that my stances on immigration policy partly reflected anti-Muslim prejudices. So clearly he’s not my favorite journalist.  

Glad I Didn’t Say That! A New Low Point for Biden Energy Policy

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Amos Hochstein, Biden administration, clean energy, climate change, energy, fossil fuels, Glad I Didn't Say That!, green energy, natural gas, oil, Russia, sanctions, shale, Ukraine, Ukraine War

“The White House’s chief energy adviser has described as ‘un-American’ the refusal of US shale investors to ramp up drilling, even as Moscow’s invasion of Ukraine causes havoc on global oil and gas markets.”                                                      – — — —

Financial Times, December 11, 2022

 

“The longer-term solution, [he said] was not to invest in more natural gas supply but to cut consumption of fossil fuels themselves….”             

Financial Times, December 11, 2022

 

(Source: “Biden adviser calls Wall Street opposition to shale drilling ‘un-American’,” by Derek Brower, Financial Times, December 11, 2022, Biden adviser calls Wall Street opposition to shale drilling ‘un-American’ | Financial Times (ft.com))

Our So-Called Foreign Policy: No U.S. Learning Curve on Denying China Vital Tech

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China, Commerce Department, export controls, innovation, Kate O'Keefe, national security, Our So-Called Foreign Policy, sanctions, tech, The Wall Street Journal

The biggest reason to be appalled by The Wall Street Journal‘s excellent report yesterday on America’s efforts to control exports of high tech goods and knowhow to China wasn’t the raw data it contained – which showed that the U.S. government almost never rejects requests by business to sell high tech goods and knowhow to China.

No – as disturbing and scary as these findings are, the biggest reason to be appalled by the article is how clearly it reveals that, after decades of dealing with China, and despite the recent U.S. decision to spend huge amounts of money to try to stay ahead of China technologically, Washington has learned absolutely nothing about the threat to America’s national security, independence, and prosperity posed by this increasingly hostile and dangerous adversary, or how to counter it effectively. And maybe it hasn’t wanted to learn?

In fact, the article, by Journal reporter Kate O’Keefe, adds to the evidence that U.S. officials don’t even view China as especially hostile – let alone dangerous – at all. The People’s Republic is evidently assumed to be a country and an economy that in key respects closely resembles most other major powers with which U.S. companies do business.

Sure, U.S. export controls policies put China in a special category, and subject it to special restrictions for goods like weapons and satellite and space equipment, whose transfer to China is banned outright. But when it comes to “dual use” products and tech – which have both civilian and military applications, and which comprise an enormous group of goods and services – the American approach in practice treats China

>as if it’s got an independent private sector that can be sharply distinguished from its government agencies;

>as if China’s civilian government agencies can be easily distinguished from its national security apparatus;

>as if virtually all these entities operate in reasonably transparent ways and can be “trusted” to act safely in their role as “end-users” of these purchases;

>as if America’s main export control or sanctions challenge is making sure that cutting edge products and tech aren’t provided either directly to the Chinese military or other branches of the Chinese bureaucracy that jeopardize U.S. interests (like the secret police), or indirectly – via a small handful of other actors that, for whatever reason (Corruption? Tragically misguided patriotism?), will pass them along to the Bad Guys; and

>as if the U.S. government has the ability to make sure that prohibited items are kept out of the wrong hands.

Just two examples from O’Keefe’s article of how patently inane this approach has been:

>”Kharon, a Washington, D.C.-based research and data-analytics firm, said it has identified tens of thousands of Chinese entities that may meet the U.S. criteria for military end-user export restrictions, even though there are only roughly 70 on the Commerce Department’s current list.” (Commerce is the lead export control agency.)

>The Commerce Department has added to its list of entities for which Americans need a license to do business the officially state-owned flagship Chinese semiconductor manufacturer SMIC – but only after a U.S. defense contractor “documented the chip maker’s military customers.”

Back in 2012, I wrote that China represents a systemic challenge requiring a completely different export control (and sanctions) approach. Nowadays, when China has grown so much stronger in large part because of this La-La-Land (to be charitable) U.S. strategy, a course change is more important than ever.

What this means is that, no matter how they’re classified by the Chinese regime or structured on paper, every single entity in the People’s Republic that’s in the tech or broader manufacturing sector must be recognized as being under Beijing’s actual or potential control. Therefore, they can be counted on to (a) make available to the authorities anything they acquire that can undermine U.S. interests and/or keep the leadership in power; and (b) do everything possible, including with the regime’s active help, to cover its tracks.

This doesn’t mean that difficult China export control and sanctions policy issues don’t lie ahead for Washington. For that, we can thank all the U.S. leaders before Donald Trump’s presidency who so recklessly turned the People’s Republic into such a powerhouse tech manufacturer and major tech market. (At the same time, the fundamentally moronic export control system remained largely intact during the Trump years.) But one critical reform can be put in place immediately – new regulations realizing that if a product or technology is deemed too dangerous to sell or transfer to any one China entity, it’s by definition too dangerous to sell or transfer to all Chinese entities. Because the China challenge is systemic.

Following Up: Podcast Now On-Line of National Radio Interview on Pelosi Taiwan Visit and U.S. Stagflation Prospects

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Asia-Pacific, China, decoupling, Following Up, geopolitics, Indo-Pacific, inflation, manufacturing, Market Wrap with Moe Ansari, Nancy Pelosi, national security, Pelosi, recession, sanctions, semiconductors, stagflation, Taiwan, tech, Trade, trade deficit

I’m pleased to announce that the podcast is now on-line of my interview last night on the nationally syndicated “Market Wrap with Moe Ansari.” Click here for a timely conversation on two headline issues:  how U.S. House Speaker Nancy Pelosi’s controversial visit to Taiwan could hit U.S.-China economic relations and America’s access to Taiwan’s world-class semiconductor manufacturing prowess; and why what’s in store for the U.S. economy could be even worse than the recession that’s now widely forecast.

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

(What’s Left of) Our Economy: Demonization and Double Standards on Gas Prices

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Biden, demand, Democrats, Elizabeth Warren, energy, gas prices, inflation, oil, oil prices, sanctions, supply, Ukraine-Russia war, Vladimir Putin, {What's Left of) Our Economy

According to the reasoning of President Biden, Massachusetts Senator Elizabeth Warren, and many other Democrats and progressives, Vladimir Putin, or Big Oil, or American gas station owners, or some combination of those three, have been getting nicer or less greedy and/or more patriotic (when speaking of the domestic actors). What’s the evidence? The average price of a gallon of gasoline in Anerica has fallen during this period.

After all, the President and his fellow Democrats have been saying since at least mid-spring March that prices at the pump had been soaring because the Russian dictator’s invasion of Ukraine (and resulting sanctions) has pushed up world oil prices, because the world’s oil companies have been earning “windfall profits,” and because U.S. gas station owners have been (unpatriotically) price-gouging.

Since mid-June, though, as Mr. Biden has just noted, gas prices are down. So the above culprits must have become less villainous. In fact, since several authoritative sources track these prices, it’s possible, depending on which one is considered most trustworthy, to know exactly how much less villainous.

Specifically, according to the GasBuddy.com website, national average pump prices are down 6.87 percent over the last month. So clearly, Putin, Big Oil, and gas station owners have collectively become 6.87 percent less heinous and/or avaricious and, in the case of U.S.-owned oil companies and the gas station owners, less unpatriotic.

The widely followed Lundberg survey says regular grade gasoline has become 4.14 percent cheaper during this period – so the Democrats’ culprits in its view haven’t become quite so benign.

They look better in Triple A’s eyes, though, since that organization calculates that pump prices are off by 6.74 percent.

Of course, the above analysis is the most childish and even self-serving form of nonsense. Gas prices, like prices of practically everything, depend on numerous interacting factors having nothing to do with foreign strongmen or corporate iniquity. World oil prices are the biggest single determinant, but these in turn are affected by national and global demand, which in turn results from the overall state of the economy, which in turn can be strengthened or weakened by fiscal policy (e.g., stimulus bills) and monetary policy (e.g., interest rates). Don’t, however, forget refining and pipeline availability, and even weather (as in bad hurricane seasons shutting down oil facilities in the Gulf of Mexico in particular).

Complicating matters further, these and other oil price determinants don’t affect retail gas prices all at once, as they understandably take varying amounts of time to work their way through a lengthy production and distribution system. Meanwhile, future supplies depend on private investors examining this multi-faceted and highly fluid landscape to judge whether committing capital to the oil industry is their best bet for maximum returns. And these calculations are inevitably highly uncertain given that any payoffs will inevitably be years off.

So it’s indeed childish to ignore the complicated and constantly interacting dynamics of an enormous industry that at bottom needs to keep wrestling with inevitably fluctuating supply and demand conditions. And it’s self-serving because for years the President and his party have clearly worked hard to reduce the role played by a fossil fuel like oil in the U.S. energy picture.

If you doubt that self-serving claim in particular, or any of the above analysis, ask yourself this: Are these oil industry critics remotely as likely to start praising the producers and the gas station owners (or Putin) for reducing prices as they’ve been to slam them for the price increases?

Our So-Called Foreign Policy: Could the West Blink First on the Anti-Russia Sanctions?

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energy, fossil fuels, G7 Summit, Group of 7, inflation, NATO, North Atlantic treaty Organization, Our So-Called Foreign Policy, Russia, sanctions, Ukraine, Ukraine-Russia war, Vladimir Putin

Quite a few years ago, I fretted here that one big obstacle could appear before too long to any U.S. government ambitions to squelch cyber attacks from rogue states with cyber retaliation of its own: Some of the main rogue states (like Iran and North Korea) and larger aggressors (like Russia and China) were likely to have a higher pain threshhold than America’s because they were so much poorer and their populations so much more used to hardship. So in any prolonged cyber duel, Washington could well be forced to cry “Uncle” before its adversaries.

Fast forward to today, and this very problem seems to be plaguing the U.S. and  overall free world/western policy of punishing Russia for its invasion of Ukraine with various kinds of economic sanctions.

It’s not that Russia’s economy hasn’t suffered from these measures. But headlines and news developments like this have become awfully common in recent weeks:

>”U.S.-Led Alliance Faces Frustration, and Pain of its Own, Over Russia Sanctions”;

>”Pressed by domestic economic challenges and a desire to see European nations contribute more to Ukraine’s defense, U.S. lawmakers appear more wary of committing further military aid for Ukraine or slapping new sanctions on Russia”;

>”French energy giants tell households to ration supplies ahead of looming winter shortage”; and

>”Japan tells business and public to save power to avert Tokyo blackout”

And accompanying these reports have been news items and findings like:

>”Russia’s economy is weathering sanctions, but tough times are ahead”;

>“Why Russia’s Economy Is Holding On”;

>”Russia’s ruble hit its strongest level in 7 years despite massive sanctions”; and

>Revenue from Russia’s fossil fuel exports “exceeded the cost of the Ukraine war during the first 100 days….”

As indicated, Russian stoicism isn’t all that’s at work. The country’s immense fossil fuel deposits, the world economy’s continued crying need for them (preventing the sanctions from being global in scope), and the high prices oil in particular has been fetching ironically because sanctions have crimped overall global supply, have enabled Moscow to keep its economy a going concern. Russian dictator Vladimir Putin, clearly certain that he’d antagonize many foreign powers with his expansionism plans, has also been working for years to insulate his country from just these punitive measures. (See, e.g., here.)

But by the same token, for many years, Putin’s imperial ambitions, the massive amounts of resources they’ve commanded, the curbs on personal spending required to build a fortress economy, and the pervasive corruption he’s needed to tolerate (and even encourage) to keep potential rivals placated (and of course feather his own nest) have produced a dismal failure of an economy by virtually every important non-security-related measure. (See here and here for two especially insightful analyses.) And yet there’s absolutely no sign that conditions that western populations would find completely unacceptable have remotely immiserated the Russian people enough to spark any kind of revolt.

Moreover, considering this situation in light of the recent statement by Jens Stoltenberg, head of the North Atlantic Treaty Organization (NATO) that the Ukraine conflict could last for “years,” it’s easy to see why the mounting energy shortages and historic inflation they’ve helped feed could tip the odds surrounding the current economic conflict of wills in Moscow’s favor.

And it’s no discredit to the American character to venture that U.S. resolve seems particularly vulnerable precisely because economic sacrifices continue to be demanded on behalf of a country whose fate has never been and is not now a vital security or economic interest.

To me, there’s an obvious message being sent by these trends and circumstances – along with the steady transformation of Eastern Europe into a genuine powderkeg that could all too easily explode into a nuclear World War Three: It’s becoming more important than ever to end this conflict and its clearly unforeseen, tremendous collateral damage ASAP, even if the outcome isn’t ideal from Ukraine’s standpoint.

But that’s not what the heads of government of the Group of Seven (G7) major industrial powers think.  They’ve just declared at their current summit in Germany, “We will continue to provide financial, humanitarian, military and diplomatic support and stand with Ukraine for as long as it takes” – even though before too long these leaders may start running out of followers.   

(What’s Left of) Our Economy: No More Baseline Excuses for U.S. Inflation

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baseline effect, CCP Virus, China, consumer price index, core inflation, coronavirus, cost of living, COVID 19, CPI, energy, Federal Reserve, food, inflation, lockdowns, prices, sanctions, supply chains, Ukraine-Russia war, Zero Covid, {What's Left of) Our Economy

As if the new monthly and yearly numbers for March per se weren’t high enough, they were far from the only bad news, or even the worst news, in today’s Labor Department report on its inflation measure – the Consumer Price Index or CPI.

The new data also made clear that the baseline effect is definitely gone — especially for the overall CPI — which means that prices in America are no longer rising at annual rates not seen in decades partly because they were rising so slowly in the pandemic period 2020 and very early 2021.

Now their year-on-year jumps are resulting from their more recent and current momentum. And with much more in the way of surging food and energy costs coming in the next few months due to Ukraine war-related global supply disruptions and anti-Russia sanctions, that means Americans will be contending with sky-high and even hotter inflation rates for the foreseeable future.

The rise and fall of the baseline effect becomes clearest from looking at the annual overall inflation rates by month starting in January, 2021, and comparing them with their counterparts from the year before. (Starting with the January, 2022 figures, the baseline year of course is 2021.)

The admittedly complicated table below shows (from left to right) the originally reported annual inflation figures by month for this period, the revised results, and the same annual figure for that month from the previous, CCP Virus-ridden year. Where only one inflation rate is presented, the original figure has remained unrevised:

Jan. 2021:       from 1.37 percent to 1.36       from 2.47 percent to 2.46

Feb: 2021:      1.68 percent                            from 2.31 percent to 2.32

March 2021:  from 2.64 percent to 2.66        from 1.51 percent to 1.53

April 2021:    from 4.16 percent to 4.15        from 0.34 percent to 0.36

May 2021:     from 4.93 percent to 4.94        from 0.22 percent to 0.24

June 2021:     from 5.32 percent to 5.34        0.73 percent

July 2021:      5.28 percent                            from 1.05 percent to 1.03

Aug 2021:     from 5.20 percent to 5.21        from 1.32 percent to 1.33

Sept 2021:     from 5.38 percent to 5.39        from 1.41 percent to 1.40

Oct 2021:      6.24 percent                             from 1.19 percent to 1.18

Nov 2021:     from 6.88 percent to 6.83        1.14 percent

Dec 2021:     from 7.12 percent to 7.10        from 1.31 percent to 1.28

Jan 2022:      7.53 percent                             from 1.37 percent to 1.36

Feb 2022:     7.91 percent                             1.68 percent

March 2022: 8.56 percent                            from 2.64 percent to 2.66

The baseline effect was strongest between March and July, 2021. That year, the annual overall (or “headline”) inflation rate went from 2.64 percent to 5.28 percent. But the annual rates for those months the year before dropped from 1.51 percent to 1.05 percent. Given that the Federal Reserve’s target rate for annual inflation (which helps determine how loose or tight it will keep the supply of credit to the economy and therefore – roughly – how much growth and job creation will be generated) is two percent (albeit for the slightly different gauge it uses), you can see how weakly prices were rising in deeply recessionary spring of 2020, and how those levels distorted the annual rates for the following year, as the economy returned — choppily — to normal growth. 

But a major baseline effect also shows up between September, 2021 at least through January, 2022. During that period, the annual inflation rates rose fom 5.38 percent to 7.53 percent. Yet their counterparts from the year before dipped from a still low 1.40 percent to 1.36 percent.

Starting in February, 2022, though, signs of a baseline fade began appearing, as the that month’s annual rate increased considerably over the January figure and its 2021 predecessor worsened to its highest level since the previous February – not so coincidentally, just before the virus’ arrival in force.

And last month’s big jump in the annual inflation rate came off a March, 2021 result that was significantly higher than the Fed target, and that also pierced that level for the first time since February, 2020.

The core inflation rate, which strips out food and energy because their price levels are supposed to be unusually volatile for reasons having little to do with the economy’s underlying vulnerability to inflation, shows a similar pattern, but with a recent wrinkle. The table below follows the same format as that for overall inflation, although as you’ll see, the absolute levels generally are somewhat lower.

Jan 2021:        from 1.40 percent to 1.39        2.26 percent

Feb 2021:       from 1.28 percent to 1.29        from 2.36 percent to 2.38

March 2021:  from 1.65 percent to 1.66        from 2.10 percent to 2.12

April 2021     from 2.96 percent to 2.97        from 1.44 percent to 1.46

May 2021:     from 3.80 percent to 3.81        from 1.24 percent to 1.25

June 2021:     4.45 percent                             1.20 percent

July 2021:      from 4.24 percent to 4.20        from 1.56 percent to 1.54

Aug 2021:      from 3.98 percent to 3.96        from 1.70 percent to 1.71

Sept 2021:      4.04 percent                            1.72 percent

Oct 2021:       from 4.58 percent to 4.59       1.63 percent

Nov 2021:      from 4.96 percent to 4.95       from 1.63 percent to 1.64

Dec 2021:      from 5.49 percent to 5.48       from 1.61 percent to 1.60

Jan 2022:       6.04 percent                            1.39 percent

Feb 2022:      6.42 percent                            1.29 percent

March 2022:  6.44 percent                            1.66 percent

Again, from March through July, 2021, the annual core inflation rate increased from 1.66 percent to 4.20 percent. But the comparable figures for the year before decreased for 2.12 percent to 1.54 percent. Also as with the headline inflation numbers, the baseline effect appeared later in the year, too. But it’s lasted longer. From September, 2021 through February, 2022, the yearly core inflation rate accelerated from 4.04 percent to 6.42 percent. For the same period from the year before, however, it sank from 1.72 percent to 1.29 percent.

Yet the new March, 2022 data indicate that the core’s baseline effects are numbered, as annual inflation inched up to a still very high 6.42 percent, but March, 2021’s version rose at a much faster clip – from that 1.29 percent to 1.66 percent. Yes, that’s still well below the Fed target, but the increase was the biggest in relative terms since July, and April, 2021’s annual rate had zoomed up to 2.96 percent – nearly doubling.

A glass-half-full result from the new CPI report came from the monthly change in the core figure. Not only did it tumble all the way from 0.51 percent in February to 0.32 percent. But the sequential decrease was the second straight, and the biggest in relative terms during the entire pandemic period and the level was the lowest for a single month since August’s 0.24 percent.

Unfortunately, Ukraine-related disruptions seem likely to reverse this trend, and this regression could well be reinforced by supply chain snags generated by China’s decision to lock down several enormous cities and industrial centers by responding to a recent rebound in CCP Virus cases with a return to its Zero Covid policies.

Moreover, since energy prices in particular eventually feed into price levels for every U.S. economic actor that uses energy, the headline-core inflation distinction will surely look more academic than ever in the months ahead.

Meanwhile, the red hot monthly headline CPI increase of 1.24 percent in March was the biggest such jump since 2005, and a huge speed-up over February’s 0.80 percent. For me, the big takeaway is that the U.S. economy now clearly faces a danger not only of the Federal Reserve creating a recession by tightening monetary policy enough to bring inflation under the control, but of such tightening producing that recession while still leaving inflation far too high.

(What’s Left of) Our Economy: Biden Makes Clear: Trump’s China Trade Strategy Sure Won Reelection

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Biden, Biden administration, Buy American, decoupling, Donald Trump, Katherine Tai, manufacturing, monitoring and enforcement, Phase One, sanctions, supply chains, tariffs, U.S. Trade Representative, USTR, {What's Left of) Our Economy

Meet the new U.S. China trade strategy. And now it’s all but official: Same as the old (Trump administation) China strategy. Further, as should be obvious to anyone with a realistic view of core U.S. interests when it comes to the People’s Republic, that’s decidedly great news for America.

Overlooked amid dramatic developments like the Ukraine war and surging inflation and Ketanji Jackson Brown winning a Supreme Court seat, U.S. Trade Representative (USTR) Katherine Tai revealed late last month that after years of dumping on the former President’s approach to the subject as unproductive and even counterproductive, Joe Biden has finally agreed that Donald Trump’s priorities on this front were right all along.

Specifically, rather than trying to change the predatory Chinese practices that for decades have victimized U.S. businesses and workers, Mr. Biden’s trade envoy indicated to Congress that this goal had become quixotic.  So the administration would pivot to the eminently feasible aim of using tariffs both to punish Beijing’s offenses and eliminate the advantages created by its subsidies and intellecual property theft and investment blackmail and host of import barriers.

Not that Trump ever explicitly stated that reforming China was pointless. In fact, the Phase One trade agreement he signed with Beijing in January, 2020 committed the Chinese to dismantle numerous protectionist policies. But for two reasons it should have been clear that his administration’s emphasis lay elsewhere. The first was Trump’s relatively early resort to towering and sweeping tariffs. The second was the lopsidedly pro-U.S. nature of Phase One’s dispute-resolution system.

By securing China’s agreement to enforcement procedures that on a de facto basis enabled the United States to tariff China for Phase One violations much more aggressively than vice versa, and that greatly reduced the odds of retaliatory levies, Trump and his trade chief, Robert Lighthizer, signaled deep skepticism that China would verifiably comply with the deal.

Candidate Biden, however, faulted Phase One for failing to address Chinese trade predation, and once elected, told a leading pundit that he’d differ from Trump on the issue by pursuing policies “that actually produce progress on China’s abusive practices.”

Last October, Tai was still complaining that Trump’s deal “did not meaningfully address the fundamental concerns that we have with China’s trade practices and their harmful impacts on the U.S. economy,” and her office repeated the charge just two months ago in the administration’s annual Report to Congress On China’s WTO Compliance. In that survey, moreover, the trade office added, “China is an important trading partner, and every avenue for obtaining real change in its economic and trade regime must be utilized.”

But in testimony to Congress at the end of last month (see here and here), Tai reported that this goal had been dramatically modified – and probably in effect abandoned. She stated that after decades of negotiations (including during the Biden term), “real change remains elusive” aside from instances in which China’s compliance with its trade obligations “fit its own interests.”

Therefore, the Biden team had decided to “turn the page on the old playbook with China, which focused on changing its behavior. Instead, our strategy must expand beyond only pressing China for change and include vigorously defending our values and economic interests from the negative impacts of the PRC’s unfair economic policies and practices.”

In terms of day-to-day policy, Tai’s revelation doesn’t change much. As I – and many others have noted – the Biden administration had decided from the get-go to keep in place nearly every single dollar of the Trump tariffs (see the New York Times interview linked above), and continued – and in numerous cases expanded (see, e.g., here) – its predecessors’ sanctions and export controls targeting Chinese tech entities.

Instead, the new strategy’s impact will mainly be felt going forward. With the last two American presidents now having determined that handling the China economic challenge through diplomacy has been futile, their successors will face enormous difficulties returning to engagement-heavy strategies without unmistakable – and enduring – evidence of greatly improved Chinese behavior. That is, Trump’s focus on punishment and protection are here to stay for the foreseeable future. And indeed, forgetting about changing China through a “Phase Two” agreement, and concentrating trade-wise on shielding the U.S. economy from Beijing’s predation using Phase One’s de facto tariff-ing authority, are exactly the courses I recommended in the mid-2020 article linked above.

The only major remaining uncertainty in U.S. economic policy toward China entails how far the decoupling of the two economies will go. Tai said a week ago that the administration’s goals didn’t include “stopping trade or trade divorce.” But that’s a straw man. The real question entails how far economic disengagement will proceed. And given the administration’s aforementioned tariff and sanctions moves, and related objectives both of creating more secure supply chains in economically and strategically important industries, and boosting domestic manufacturing output through increasing government procurement of U.S.-made products and investments to improve the competitiveness of U.S.-based industry, the answer — encouragingly — seems “pretty darned far.” 

(What’s Left of) Our Economy: Russia Sanctions May Be Sending a Crucial Message About U.S. China Policy

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Adam Posen, Antony J. Blinken, Biden, Biden administration, Bloomberg.com, Chad Bown, China, dollar, Donald Trump, finance, Foreign Affairs, foreign policy establishment, Mainstream Media, multilateralism, Qin Gang, reserve currency, Russia, sanctions, tariffs, Trade, trade war, Ukraine, Ukraine-Russia war, unilateralism, Wang Yi, {What's Left of) Our Economy

The Russian invasion of Ukraine has produced a genuinely strange – and potentially crucial – turn in the way American leaders and the political class of pundits and think tankers and the rest of the countrys influential chattering class are viewing and even conducting China policy. Because China could in theory significantly help Vladimir Putin’s never-impressive economy evade the full impact of global sanctions, they’re not only talking of only punishing the People’s Republic if it follows this course. They’re exuding confidence that Beijing could be cowed into backing down.

In other words, the conventional wisdom throughout the U.S. foreign policy,  economic policy, and media establishments now holds that Washington can bend China to its will because the Chinese ultimately need the United States much more economically than vice versa. Because this position looks like such a total reversal of what these folks insisted during the trade war supposedly started by Donald Trump with China, it raises these questions: If America’s leverage is great enough to change Chinese behavior that would mainly threaten another country’s security, isn’t it also great enough to change Chinese behavior that for decades has increasingly damaged America’s own economy, and also to pursue decoupling from the Chinese economy more energetically?

The Biden administration certainly is acting like it holds all the cards over China on anti-Russia sanctions. As a “senior administration official” told reporters in an – official – White House briefing last Friday, the President in his virtual meeting with Chinese dictator Xi Jinping that morning “made clear the implication and consequences of China providing material support — if China were to provide material support — to Russia as it prosecutes its brutal war in Ukraine, not just for China’s relationship with the United States but for the wider world.”

The day before, previewing the Biden-Xi call, Secretary of State Antony J. Blinken said  “President Biden will be speaking to President Xi tomorrow and will make clear that China will bear responsibility for any actions it takes to support Russia’s aggression, and we will not hesitate to impose costs.”

And the national policy establishments are giving these statements their Good Housekeeping Seal of Approval. According to Chad Bown of the Peterson Institute for International Economics, who emerged as the Mainstream Media’s go-to critic of the Trump trade wars, “On the pure economic question, if China were to have to make the choice – Russia versus everyone else – I mean, it’s a no-brainer for China because it’s so integrated with all of these Western economies,”

His views, moreover, came in a Reuters article whose main thrust was “China’s economic interests remain heavily skewed to Western democracies….”

A Bloomberg.com analysis posted a week ago similarly asserted that China “needs good relations with the U.S. and its partners to meet its economic goals, particularly as growth slows to the slowest pace in in more than three decades.”

And although that point was keyed to the current state of China’s economic health – as opposed to the situation during the Trump years, the article also noted that Beijing has “resisted taking retaliatory measures that would hurt its own economy even when the U.S. has directly targeted Beijing. During the height of the trade war, China threatened but never implemented an ‘unreliable entities’ list, and even state-run banks have complied with U.S. sanctions on Hong Kong. It also delayed imposing an anti-sanctions law on the financial hub after businesses expressed concern.”

In all, it’s a stark contrast with the days during that Trump period when the Mainstream Media – relying heavily on analysts like Bown, who work for think tanks heavily funded by Offshoring Lobby interests – routinely ran stories headlined “Why the US would never win a trade war with China.”

Now sharp-eyed readers will notice one big difference between then and now: The Trump China and other tariffs were unilateral. It’s assumed – quite reasonably – that any Biden China sanctions would be undertaken jointly, along with many and possibly most other major national economies.

At the same time, no less than Peterson Institute President Adam Posen has just written in (no less than) Foreign Affairs that it’s the strength of the West’s financial services industries that “are what has truly advantaged the West over Russia in implementing effective sanctions, and what has deterred Chinese businesses from bailing Russia out.”

But these advantages are overwhelmingly the product of the dollar’s reserve currency status and the dominance of U.S. finance in that dominant Western finance sector. So even he’s indirectly admitted that U.S. power specifically has been the key. As a result, wielding the finance cudgel could have pushed the Europeans and Japanese to join in with the Trump China tariffs.

Some other consequential conclusions could flow from this new confidence about China. Maybe even without putting other big economies in the finance cross-hairs, Trump should have threatened – and if need be, imposed – the same kinds of financial sanctions on China instead of tariffs to try to force Beijing to end its predatory trade practices, and/or to press China to accept more U.S. imports. Or maybe a combination of the two would have been best. Maybe President Biden should add the finance sanctions to his decision to maintain most of the Trump tariffs. And if the United States enjoys this kind of leverage over China, wouldn’t the same hold for other troublesome trade partners, even big economies?

But perhaps the most convincing signs of the U.S.’ paramount leverage are coming from China itself. Last Tuesday, Foreign Minister Wang Yi asserted that Beijing would “safeguard its legitimate rights and interests” if hit by punitive U.S. and broader measures. But this language was pretty vague – and he also expressed China’s hope that it would avoid these sanctions to begin with. Moreover, yesterday, Beijing’s ambassador to Washington Qin Gang made clear that Beijing had rejected the option of sending Russia military aid – though he added that China would maintain its “normal trade, economic, financial, energy cooperation with Russia.”

Moreover, there’s no need to go all-in on the tariff, or other China specific sanctions (e.g., on tech entities) fronts yet.  Especially since China is facing mounting economic troubles at home (notably in its gigantic and thoroughly bubble-ized real estate sector) a string of increasingly aggressive “poke the dragon” measures could yield lots of useful information about how Beijing perceives its vulnerabilities without risking noteworthy countermeasures – and about the real extent of America’s capacity to deal with the China challenge.