(What’s Left of) Our Economy: New Fakeonomics on U.S.-Asia Manufacturing Trade

Tags

Asia, Bloomberg, China, competitiveness, Federal Reserve, Financial Crisis, Institute for Supply Management, Japan, Korea, manufactures exports, manufacturing, Mexico, recession, Singapore, Trade, Vietnam, {What's Left of) Our Economy

That was some set of claims in a Bloomberg.com article yesterday:

>”If you wanted to figure out where Asian exports were headed, U.S. manufacturing data used to be a logical place to start. Not anymore.”

>”The U.S. is buying more goods from neighbors such as Mexico instead of Asia, and the shale-gas boom has kept demand within the country….”

>”The recovery in the world’s biggest economy is also more services-oriented this time….”

>”Asia’s definitely lagging behind the U.S. recovery, and so if you’re talking about an export-led recovery, I’m afraid that’s not happening in Asia. It’s the structural shift in terms of the U.S. recovery where demand is now more domestic oriented.”

But is any of this true? While reading the piece, I had my doubts. In particular, these assertions didn’t seem to track with the reality of several consecutive years of record U.S. manufacturing trade deficits despite historically weak economic growth rates. Also fishy: the Australian bank study that was the basis of this article used Institute for Supply Management’s manufacturing gauge as a proxy for American manufacturing growth. My own examination of how this series compares with the official manufacturing growth statistics kept by the Federal Reserve indicated that this private sector survey was anything but reliable. Finally, the Australian bank didn’t even look at Asian manufactures exports to the U.S. Specifically. It examined those exports to the entire world.

So I decided to compare the best, most relevant data: the Fed manufacturing production statistics with U.S. industrial purchases from East Asia and their recent growth. And it became clear as a bell, that the Asia lag thesis holds zero water.

The Australian bank study focused on manufactures exports from China, Japan, Korea, and Singapore as a proxy for the entire East Asia region, which isn’t completely unreasonable. But here’s what the correct data show: Before the financial crisis kneecapped world trade, the growth of manufactures exports to the United States from these four countries combined regularly exceeded the growth of American manufacturing itself by healthy ratios. But during the pre-crisis years selected by the Australians – 2005-2006 through 2007-2008 – this ratio steadily fell: from 1.92:1 to 1.40:1.

During the following two crisis years, these Asian manufactures exports to the U.S. collapsed much faster than American domestic manufacturing itself – because global trade took such an outsized hit. But once the recovery began, the ratio of this Asian manufacturing export growth to U.S. manufacturing output growth became higher than ever, reaching 2.82:1 between 2011 and 2012. (Between 2009 and 2010, the ratio soared to 7.78:1, but that reflected its rubber band-like snapback from its nosedive in recessionary 2008-2009.

Over the last two years, this trend has reversed. As suggested by the Australian bank report, the gap between the “Asian Four’s” manufacturing export growth and domestic U.S. manufacturing’s output growth has closed dramatically. As of last year, it was only 1.25:1. But here’s where you both need to know something and to start using your noggin. Because however important the four countries chosen are, they’re not the whole of export-happy Asia. More important, since much of the region is a highly, increasingly integrated, and dynamic manufacturing complex, all the links in these supply chains need to be analyzed.

One of the Australians’ most conspicuous omissions in this regard is Vietnam. Although still relatively small, it’s growing almost exponentially, largely because it’s an ever more popular destination for companies seeking a combination of very low-wages, a complete absence of worker rights, and highly trainable and productive employees. Therefore, no one well versed in Asian economics should be surprised that, as some of the higher priced, more developed Asian exporters (like Japan, Korea, Singapore, and even in some sectors, China) have become less competitive, Vietnam has filled many resulting gaps and manufacturing niches.

The most reliable numbers bear out this observation. Since the growth of the “Asian Four’s” manufactures exports to the United States has decreased relative to U.S. manufacturing production, Vietnam’s has surged. Already high at 4.37:1 between 2011 and 2012, it climbed to 5.59:1 in 2014.

One trend the Australian bankers and the Bloomberg piece got right – Mexico has been making growing inroads into American domestic manufacturing markets, too. But its push not mainly at the expense of Asia, but at the expense of its U.S.-based competition. That’s of course the principal reason for the U.S. manufacturing trade deficit’s flight into record territory – and for continuing to recognize claims of growing domestic American industrial competitiveness as an ongoing flow of hopium.

Advertisement

(What’s Left of) Our Economy: New Obama Report (Unwittingly) Shows Why Trade Deals Need Currency Manipulation Bans

Tags

China, currency, currency manipulation, Eurozone, exchange rates, Financial Crisis, free trade agreements, Global Imbalances, gross domestic product, Japan, Korea, KORUS, Malaysia, New Normal, Obama, recovery, Singapore, Taiwan, TPP, Trans-Atlantic Trade and Investment Partnership, Trans-Pacific Partnership, Treasury Department, {What's Left of) Our Economy

U.S. leaders keep showing us that they remain “The Gang That Can’t Think Straight” when it comes to international economic policy. Just look at yesterday’s Treasury Department report on exchange rate policies around the world – the department’s biannual assessment of whether America’s trade competitors are artificially keeping their currencies low to reap trade advantages. No countries were officially accused of this form of protectionism, but several had a Treasury finger wagged their way, including recent free trade agreement partner South Korea.

According to the report, although the Koreans have made international promises to refrain from competitive devaluations, the “sustained” rise in Seoul’s reserves and the country’s net forward position “indicates that they have intervened on net to resist won appreciation.” For good measure, Treasury noted Korea’s rising goods trade surplus with the United States and a July, 2014 International Monetary Fund judgment that the won “remains undervalued.”

In other words, Korea isn’t manipulating, but it looks suspiciously close. As a result, “Treasury has intensified its engagement with Korea on these issues. We have made clear that the Korean authorities should reduce foreign exchange intervention, limiting it to the exceptional circumstance of disorderly market conditions, and allow the won to appreciate further.”

Of course, here’s the rub: Seoul is completely free for all intents and purposes to ignore this “engagement.” For Korea’s currency interventions may clash with the international obligations it’s assumed (as in the World Trade Organization and the International Monetary Fund). But they don’t flout the only such commitment that could plausibly be enforced – that trade deal (KORUS) with the United States. After all, consistent with Washington’s reigning bipartisan consensus (especially between the last two presidents, and apparently now including Fed chair Janet Yellen), that enforceable currency manipulation bans don’t belong in trade deals, KORUS ignored the issue.

This gaping and damaging (by Treasury’s own admission) disconnect has big future implications as well. The president also staunchly opposes including an enforceable currency manipulation ban in the Trans-Pacific Partnership (TPP) trade agreement he’s seeking. This deal would already include countries widely accused of past manipulation: Japan (chided in the new Treasury report for its heavy reliance on yen weakening monetary policies to boost growth), Malaysia, and Singapore. Among likely follow-on countries: leading exchange-rate protectionist China, Korea, and Taiwan (which also just came onto Treasury’s manipulation radar).

Nor is the problem confined to East Asia, in the administration’s own view. President Obama is pursuing a lower-profile trade agreement with the European Union – even though Treasury’s report charges the Eurozone with a Japan-like easy money-led growth policy.

To be sure, the new Obama Treasury Department report doesn’t flag these or any other foreign currency policies as significant direct threats to America’s welfare – even though the rising trade deficits to which they contribute subtract from the gross domestic product’s expansion at a time when the nation remains growth-starved. But it does emphasize the potential for major indirect harm, warning that the world economy is once more becoming overly reliant on the United States as an engine of demand, and that “Doing so will not lead to a pattern of strong, sustainable and balanced global growth….” It should have added “and indeed helped set the stage for the last financial crisis and sorely inadequate New Normal that’s emerged in its wake.”

At the same time, the administration keeps insisting that new trade deals with net export-led regions will not only help speed up the historically weak U.S. recovery, but spur greater world-wide growth, too. Instead, as its own new foreign currency report makes painfully clear, it’s much likelier that if this approach to globalization succeeds:

>The United States will be more closely integrated than ever with economies determined to grow at its expense.

>It will have virtually no internationally authorized way to respond effectively.

>Therefore, slow-growth, lousy wages, surging debts, and greater financial instability will mark its future – if it’s lucky enough to avoid a new crash.

(What’s Left of) Our Economy: All the TPP Talking Points Fit to Print

Tags

currency manipulation, Japan, labor standards, multinational companies, Singapore, TPP, Trade, trade agreements, trade enforcement, Vietnam, {What's Left of) Our Economy

Maybe I should always be grateful when a Mainstream Media figure deals with U.S. trade policy. Heck anything’s better than the neglect typically shown for this topic. I’d be even more grateful if the detailed look occasionally taken at this subject reflected some actual thought, rather than the repetition of talking points and slogans. That’s why Lydia DePillis’ long piece yesterday in the Washington Post on the Trans-Pacific Partnership (TPP) left me so dissatisfied.

Actually, DePillis deserves credit on several counts. Unlike, say, Washington Post editorial board members, she treated TPP critics’ calls for including provisions against currency manipulation and for stronger labor standards as something other than nefarious protectionist ploys. She also recognized that fixing America’s schools isn’t a remotely promising idea for offsetting the damage inflicted by trade deals on much of the workforce.

But given that the nation – and the Mainstream Media – now has nearly a quarter-century’s worth of experience with the current, post-Cold War phase of U.S. trade policy, what’s most striking is how many immensely important points DePillis, and so many of her colleagues, still routinely miss. For now, let’s just focus on currency and labor standards.

First, the author writes that currency manipulation by China, and by prospective first-round TPP signatories Japan and Singapore, has played a role in widening U.S. trade deficits, and that the new agreement should do something about this exchange-rate protectionism. She absolves trade liberalization as such for the problem. Yet when the U.S. government repeatedly signs liberalization deals with manipulating countries (not just the still-unfinished TPP, but numerous agreements with China over the years), then this strategy deserves blame for worsening the trade gap.  The same goes for continuing to sign trade deals with countries that engage in any of the other predatory trade practices so common in the global economy. 

Another currency manipulation fundamental overlooked by DePillis: It’s not just manipulating countries that want the practice kept out of the TPP. It’s also offshoring U.S. multinational companies. When foreign governments keep exchange rates artificially low, the products these firms make in those countries for export to the United States are kept artificially less expensive and thus more competitive versus American-made products. In other words, currency manipulation is a foreign subsidy from which the multinationals benefit.  That’s why they’re fighting tooth and nail to preserve the do-nothing currency status quo.  And that’s why no TPP currency manipulation language that’s ultimately acceptable either to manipulating countries or to the offshoring lobby could possibly shield domestic companies from its effects.  

Similarly, it’s good that DePillis recognizes that Washington’s record in enforcing labor provisions in trade deals has been “abysmal.” Step Two is to learn that even American governments that wanted to right by U.S. and foreign workers would face obstacles that look insurmountable. Chiefly, even in relatively small TPP countries, like Vietnam, national manufacturing complexes are enormous.

According to a 2013 World Bank report, the country boasted about 50,000 manufacturing companies in 2011. The number had roughly quintupled since 2000, and has doubtless grown since. How many American or other inspectors will be needed to inspect their factories on an ongoing basis to ensure that whatever labor standards become part of TPP are met? And what happens when the agreement admits Bangladesh? Or Indonesia? Or China?

But maybe I shouldn’t be so hard on DePillis. After all, many of these points in her article clearly reflect what she’s been told by the “progressive” TPP critics she’s interviewed. If most of the deal’s opponents in and out of Congress keep trafficking in the myth that the TPP would be fine if it simply included language that ostensibly addresses certain outstanding issues, and even sets up means of enforcing new rules, why shouldn’t reporters buy in as well?