Those Stubborn Facts: From the World’s New Champion of Free Trade

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China, free markets, free trade, investment, state-owned enterprises, Those Stubborn Facts

Annual investment growth by Chinese state-owned companies,

2016: + c. 25%

 

Annual investment growth by Chinese “private” companies,

2016: + c. 3%

 

(Source: “Beijing Revs Up State Inc.,” by Ian Talley, The Wall Street Journal, March 20, 2017, http://blogs.wsj.com/economics/2017/03/20/beijing-revs-up-state-inc/)

(What’s Left of) Our Economy: Obama’s TPP Case is Staler than Ever

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ADB, AIIB, APEC, Asia Pacific Economic Cooperation, Asian Development Bank, Asian Infrastructure Investment Bank, China, environmental standards, export-led growth, exports, Free Trade Area of the Asia Pacific, FTAAP, Japan, labor standards, NAFTA, North American Free Trade Agreement, Obama, RCEP, Regional Comprehensive Economic Partnership, SOEs, state-owned enterprises, TPP, Trade, Trans-Pacific Parternship, World Bank, {What's Left of) Our Economy

Maybe President Obama believes that repeating even the most laughably off-base contentions endlessly will make them true? Or convincing? It’s hard to look at his new Washington Post op-ed urging passage of his Pacific Rim trade deal and conclude anything else. The article makes clearer than ever that the Trans-Pacific Partnership (TPP) makes sense for the United States only if Americans ignore everything known about the agreement itself, about U.S. trade with the eleven other signatories, and about the region’s economics and commerce.

The President’s fraudulent case for TPP starts with his first claim – that “some of our greatest economic opportunities abroad are in the Asia-Pacific region.” Trouble is, as I’ve noted, the only truly fast growers on the list of TPP countries are economies like Vietnam and Malaysia, whose growth depends on not only exporting, but on amassing large trade surpluses. They lack both the capabilities and the intention of becoming significant net buyers of U.S.-origin goods and services. Compared with the United States, most of the other TPP countries are growth laggards.

Similarly, Mr. Obama’s description of the proposed TPP zone as representing a whopping 40 percent of the global economy ignores how the American economy represents more than 60 percent of total TPP area output. Moreover, the United States already has negotiated trade deals with many of the largest signatories, notably Australia, Canada, and Mexico. So Americans have long reaped nearly all of whatever benefits the President argues will result from this exercise in trade expansion.

No more credible is Mr. Obama’s insistence that the TPP will benefit America by enabling the United States to influence writing the rules that govern regional commerce rather than permitting Chinese-led arrangements shape this environment.

After all, as critics like Republican presidential front-runner Donald Trump has pointed out, China already stands to gain from the TPP, thanks to loose origin requirements that permit free or freer trade of goods with high levels of content from non-TPP countries. And since China for decades has been a key node in the multinational production chains that bind together so many Asian economies, much of this non-TPP content will obviously be Chinese.

Further, nothing could be clearer than the determination of the TPP countries to avoid making either-or choices when it comes to rule-writing exercises for East Asian commerce. No less than six TPP signatories – including Australia and New Zealand – have signed up to participate in the Asian Infrastructure Investment Bank (AIIB) that China set up recently in part as a TPP counterweight. And although the largest by far non-U.S. TPP signatory, Japan, has so far declined to bandwagon, the Asian Development Bank (ADB) that it has traditionally co-dominated has started working actively with the AIIB. So has the World Bank.

These last two developments, by the way, mean that the United States has also decided to work with the Chinese initiative rather than continuing to oppose it, since Washington plays a major role in both institutions.

And what about the Chinese-initiated regional trade agreements about which Mr. Obama expressed so much alarm? The Regional Comprehensive Economic Partnership singled out by the president has already attracted seven TPP signatories – including Japan, along with Australia and New Zealand.

Interestingly, Mr. Obama didn’t mention a second Chinese regional trade scheme – a Free Trade Area of the Asia Pacific (FTAAP). Maybe that’s because he’s decided to cooperate with Beijing on this front, too, at least to the extent that he approved a study of the proposal under the auspices of the Asia Pacific Economic Cooperation (APEC) process in which Washington participates.

Finally, the president’s belief that the TPP will greatly boost U.S. exports through enforceable new rules remains a monument to delusion. As I’ve explained, enforcing labor and environmental standards would require an army of American officials to inspect hundreds of thousands of facilities in low-income countries like Vietnam and Malaysia. Who’s going to pay for these personnel? And that’s not even including the vast manufacturing complex that’s been created in Mexico since it joined a North American Free Trade Agreement (NAFTA) more than twenty years ago, and in which evidence abounds such provisions remain overwhelmingly ineffective.  (Hence, largely, the president’s insistence that “this time, it will be different” in TPP.)  

As for the state-owned enterprises (SOEs) whose trade-distorting activities TPP will supposedly curb, how will U.S. officials gain access to these notoriously secretive constructs and their financial records? Moreover, since low (at best) labor and environmental standards along with opaque SOEs are keys to competitiveness throughout Asia, why would the region’s TPP signatories give Washington the power to weaken these arrangements through dispute-resolution hearings?

President Obama writes that the alternative to Congress passing the TPP is “building walls to isolate ourselves from the global economy.” That’s the most pernicious trade policy and TPP myth of all. The real alternative is developing trade policies based on global economic realities, not his own fantasies about the power of mere pen strokes.

(What’s Left of) Our Economy: Thomas Friedman’s Trump Trade Column Must be a Hack Job

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China, Donald Trump, environmental standards, labor standards, monitoring and enforcement, state-owned enterprises, The New York Times, Thomas Friedman, TPP, Trade, trade agreements, Trans-Pacific Partnership, {What's Left of) Our Economy

Thomas Friedman’s email account must have been hacked! Assuming the New York Times columnist doesn’t walk his offerings over to the paper’s editorial page office, what else could explain the appearance last night of an essay on trade under his byline so chock full of embarrassing mistakes and stale canards?

True, the column had a characteristically clever, Friedman-like premise: Republican presidential front-runner Donald Trump shouldn’t be criticizing President Obama’s Trans-Pacific Partnership (TPP) trade agreement because it contains exactly the kinds of tough-minded provisions that the champion deal-maker would insist on himself. Unfortunately, whoever really wrote the article revealed such ignorance that identity theft must have been committed.

To start, the impostor assumed that passages in a treaty’s text are remotely likely to change facts on the ground. But anyone as knowledgeable about trade policy as Friedman – who covered the beat for The Times in the 1990s – must realize that monitoring and enforcing rules on the books has never been a remotely strong suit of the U.S. government.

A big part of the reason is logistical.  As I’ve noted repeatedly, manufacturing complexes even in smallish developing countries like TPP signatory Vietnam are so vast that making provisions like new labor rights and environmental protections actually stick is impossible even for a superpower. Indeed, Washington struggles even to enforce such rules in the United States.

Another big reason has to do with the secretive nature of Asian governments like those in Vietnam and other TPP signatories such as Japan and Malaysia. Although the Pacific Rim trade pact does seek to curb the ways that these bureaucracies distort trade flows, anyone as familiar with the region as Friedman surely realizes that these regimes put few of their biggest decisions in writing, and make even fewer of them public. So as has long been the case, American officials will be hard-pressed even to identify violations of the new TPP provisions, let alone combat them effectively.

It’s also hard to imagine that the real Friedman would simply parrot the Obama administration talking point that TPP will greatly benefit Americans by eliminating tariffs in 18,000 product categories. How could he not have seen the documentation provided by Public Citizen (and refuted by exactly no one) that the United States doesn’t even sell overseas more than half of these products, and that its exports in most of the rest are miniscule?

And it’s positively inconceivable that the genuine Thomas Friedman would have claimed that “if we walk away from the TPP all our friends in the Pacific will just sign up for China’s R.C.E.P., or Regional Comprehensive Economic Partnership, which will set trade rules in Asia….” He obviously would have known that six of the ten other TPP countries are clearly hedging their bets by signing on to the Chinese initiative, too. These including the biggest by far (Japan and Australia), along with Malaysia, New Zealand, Singapore, Vietnam.

In other words, the real Thomas Friedman would never have written that a negotiator as good as Donald Trump would have okayed an agreement with this many gaping loopholes and other weaknesses. Let’s hope that the hacker(s) are caught before Friedman’s reputation takes on more water!

(What’s Left of) Our Economy: The Text Showcases TPP’s Real Flaws

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China, currency manipulation, dispute resolution, enforcement, environmental standards, exports, imports, labor standards, Obama, protectionism, rules of origin, state-owned enterprises, TPP, Trade, Trade Deficits, trade surpluses, Trans-Pacific Partnership, Treasury Department, World Trade Organization, WTO, {What's Left of) Our Economy

The release this morning of the Trans-Pacific Partnership trade deal (TPP) text means that the Obama administration has kept at least one of its promises in connection with the Pacific Rim agreement: The public has gained the ability to review every single provision in detail within a month of the deal’s signing in Atlanta, Georgia.

Nonetheless, when it comes to evaluating the TPP, the devil is not in the details, and never has been – for all the sweat expended by government officials and industry lobbyists from the 12 signatory countries on even the most arcane aspects of rules of origin, tariff rates and elimination schedules, copyright protections, labor and environmental standards, and the like. All the while, there have been only been two remotely possible exceptions – the agreement’s provisions for dispute resolution, and for determining which goods will actually be eligible for the agreement’s trade breaks.

Re dispute resolution, which is obviously crucial to any agreement’s effectiveness but which has been generally ignored in the TPP debate, the text’s release simply confirms what has always been utterly predictable: This system mirrors the kangaroo court arrangements of the World Trade Organization (WTO) – whose creation has done virtually nothing to prevent the U.S. economy’s victimization from predatory foreign trade practices. As a result, the claim of President Obama and other supporters that the agreement will create a huge, increasingly integrated market governed by U.S.-friendly, free-market-oriented rules should be recognized as the most naive imaginable fantasy.

Re rules of origin, the text confirms numerous press reports that the TPP’s benefits will extend to many products whose content comes from outside the new trade zone – which makes a mockery of the notions that currently excluded countries like China need to join in order to enjoy TPP’s benefits, and that the agreement’s conclusion therefore creates powerful incentives for such non-signatories to adopt the TPP’s high standards,

The TPP dispute-resolution process unveiled in the text demonstrates that the vast majority of member states, whose prosperity depends heavily on maximizing net exports and thus racking up trade surpluses, will gain major new guarantees of unfettered access to America’s much more open market. As with the WTO, a crucial effect of the TPP – and raison d’etre – is to narrow greatly the United States’ internationally accepted legal authority to respond unilaterally to the types of mercantilism in which most TPP countries, notably gigantic Japan, specialize.

Moreover, as with the WTO, despite the paramount importance of the U.S. market, the TPP’s dispute-resolution and rule-making systems grant no special role for America. Even though its economy represents nearly two-thirds of the new total TPP market, its influence under the agreement is simply equal to that of much smaller, and indeed tiny, economies.

Worse, just as with the WTO, the TPP’s one-country/one-vote arrangement will enable the majority of the signatories to game the system and work cooperatively to further their joint goal of ensuring that the U.S. market remains much wider open to their goods and services than the reverse. In other words, like the WTO, and all other international organizations, the TPP will be fundamentally a political organization, not a legal-juridical arrangement, and America’s negotiating strategy has in effect defined its inevitable politics out of existence.

Consequently, whatever market-opening and playing-field language the TPP text contains, turning these words into significantly new, more equitable trade realities is a chimera. For the vast majority of TPP members will be determined – and empowered through their ability to interpret rules and influence verdicts – to ensure the opposite. These countries will be working overtime, and successfully, to prevent TPP dispute-resolution panels from handing down decisions against one that could serve as precedents against all of the others, and the larger organization from writing rules, that could be used to undermine their mercantile national economic structures and strategies.

Understanding the TPP’s protectionist-friendly structure in particular debunks U.S. claims that it will foster meaningful progress toward ending or even disciplining currency manipulation. According to the U.S. Treasury Department, an agreement on this practice among the twelve signatories – which, revealingly, isn’t even in the actual TPP text – “sets a new high standard on exchange rate policies and unfair currency practices for trade agreements.”

But believing this proposition amounts to believing that countries with long protectionist histories, like Japan and Malaysia, are OK with launching efforts that eventually will forever prevent them from using a device for creating decisive price advantages for all the goods they trade in markets around the world. What is it that is known about such economies that convinces anyone that such changes of heart have taken place?

In addition, the rules of origin laid out in the final text make clear that nothing could be easier for non-signatories, like China, to enjoy many crucial advantages of TPP membership. After all, thousands of manufactured goods will be eligible for duty-free or duty-lighter treatment in TPP markets even if most of their content comes from non-TPP members. Given the pervasive global reality of industrial supply chains passing through many countries both in the TPP and outside, this is a Pacific-sized loophole.

The text’s release also should remind Congress, the public, and the media that even if the TPP’s deck wasn’t organizationally stacked against the United States, its measures to prevent abuses of workers and the environment, and the operations of state-owned enterprises, from being used for competitive advantage, are utterly unenforceable from a simple logistical and administrative standpoint.

As I have repeatedly pointed out, the factory complexes of even relatively small TPP economies dwarf the capacity of the U.S. government to monitor their labor and environmental practices systematically. And in many TPP economies, the lines between public and private sector are blurry enough, and bureaucracies opaque and skilled enough at concealing information, to render wishful thinking any confidence that these systems can be transformed.

It’s equally fanciful to suppose that even the TPP’s minimalist origin rules can be effectively enforced, either. How many million American bureaucrats would be required to open how many containers of goods coming into U.S. ports to ensure compliance? And how many more would be needed to find out whether boxes of Chinese-produced goods marked “Made in Malaysia” or “Made in Japan” really are?

All along, the effort to negotiate the TPP, and the debate generated by the deal, have reflected the American delusion that signatures on a piece of paper prove that economies that have been largely closed and centrally commanded for decades have genuinely decided to mend their ways. It’s been a delusion shared by both agreement supporters (who contend that they’ve accomplished this aim) and opponents (who insist that this goal can be achieved with better language).

As a result, even the TPP’s defeat in Congress may not guarantee that American trade policy will get off its failed, export- and negotiations-obsessed track, and focus on what the United States has much more control over – access to its own one-of-a-kind market and the leverage it creates to establish more equitable and sustainable terms of trade unilaterally. But the right kind of TPP debate could still provide an invaluable learning opportunity – and start the process of turning America’s approach to trade into an engine of domestic growth and job creation, rather than of offshoring, higher trade deficits, and (even) slower recovery.      

(What’s Left of) Our Economy: Why Fast Track Supporters are Either Fakers or Incompetents

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Congress, currency manipulation, fast track, free trade, free trade agreements, Obama, Pubilc Citizen, state-owned enterprises, TPA, TPP, Trade, Trade Promotion Authority, Trans-Pacific Partnership, {What's Left of) Our Economy

The long awaited new fast track trade bill has just been introduced in Congress, and it’s hard to conclude what’s worse about it: what its proponents say about it, or what the critics say. That is, if a detailed indictment by Public Citizen is true, then its avowed key innovation to strengthen lawmakers’ leverage over Executive Branch trade negotiators is a sham. But if supporters are right, then the bill is dominated by jaw-dropping contradictions between its specifics and the rationales and promises that they’ve made.

Although I’m skeptical of several Public Citizen critiques of American trade policy and legislation, the group has a proven track record of translating abstruse legislative language into plain English and identifying major and less-than-obvious implications. So everyone should take very seriously its contention that the draft law by no means empowers Congress to deny fast track treatment to agreements it judges haven’t met its specifications, and thus enable itself to make changes rather than settle for a straight yes-or-no vote. According to Public Citizen:

“Instead of establishing a new ‘exit ramp,’ the bill includes the same impossible conditions from past Fast Track bills that make the mechanism to remove an agreement from Fast Track unusable. The bill’s only new feature in this respect is a new procedure that would be usable only after an agreement was already signed and entered into and that would require approval by 60 senators to take a pact off Fast Track consideration, even though a simple majority “no” vote in the Senate would have the same effect on an agreement. In contrast, the 1988 Fast Track empowered either the House Ways and Means or the Senate Finance Committees to vote by simple majority to remove the pact from Fast Track consideration with no additional floor votes required, and such a disapproval action was authorized before a president could sign and enter into a trade agreement.”

Yet even if the exit ramp is not flagrantly phony, the legislation would have no chance of ensuring adequate legislative oversight of trade policy-making – as the Constitution plainly envisages. The reason: Enough of the bill’s most important negotiating instructions are so vague and/or simply optional that demonstrating a clear disregard for Congress’ will looks impossible.

Take the text on currency manipulation. A majority of both Senate and House members have endorsed including enforceable disciplines on this protectionist practice in the text of the Trans-Pacific Partnership (TPP) and other trade deals. But here’s what the fast track bill says:

“The principal negotiating objective of the United States with respect to currency practices is that parties to a trade agreement with the United States avoid manipulating exchange rates in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other parties to the agreement, such as through cooperative mechanisms, enforceable rules, reporting, monitoring, transparency or other means, as appropriate.

“Enforceable rules” are mentioned, but such teeth are not required. Seeking them is just one of several approaches that U.S. negotiators are permitted to choose.

A similar problem plagues an especially touted feature of President Obama’s supposed high standards trade deals. The fast track bill declares as another “principal negotiating objective” dealing with the trade distortions often created by the activities of enterprises owned or controlled by foreign governments. The instruction here amounts to mandating an effort of some kind. The Executive Branch is told

“to seek commitments that – (A) eliminate or prevent trade distortions and unfair competition favoring state-owned and state-controlled enterprises to the extent of their engagement in commercial activity, and (B) ensure that such engagement is based solely on commercial considerations, in particular through disciplines that eliminate or prevent discrimination and market-distorting subsidies and that promote transparency.

In other words, if U.S. diplomats seek this goal (or simply say they have?) but fail to achieve it, that meets the rock-bottom bar set by the fast track bill. Unless opponents are supposed to have to prove a negative?

Nor does the fast track bill say anything about the crucial matter of thresholds. In theory, even if all the draft’s negotiating objectives were clear-cut requirements, it would be easy for legislators to reject expedited voting for trade agreements if they failed on all counts. By the same token, lawmakers could reasonably be expected to accept fast track procedures if administration negotiators fell short only in one respect.

At the same time, not all trade deal provisions are created equal or considered equal. So the letter of the fast track law could authorize Senate and House members to fast track treaties that completely ignore one or a handful of major listed goals.

Yet these problems and uncertainties all badly undermine the claims of real exit ramps in the fast track bill. For any possibility of Congress allowing itself to amend trade deals clashes violently with claims that expedited voting is essential to ensure that other countries negotiate seriously with the United States.

Time and again, fast track supporters have warned that foreign governments would have no incentive to put their best offers on the table, or continue talking trade at all, American lawmakers could press for further changes. They typically add that trade agreements tend to be delicate compromises and trade-offs among numerous interests and governments that could unravel completely if Congress balks for even a single reason.

In fact, it was always laughable to suppose that foreign economies would pass on trade talks if the United States insisted on respecting its own Constitutional standards – for the U.S. market has always been the paramount prize in a world largely hooked on export-led growth. With the United States outgrowing most of the rest of the world nowadays, the fast-trackers’ argument has become even sillier.

In other words, if American leaders truly hold such views, they completely misunderstand the dynamics of trade diplomacy, and can’t even keep their fast track stories straight. If their stated opinions are ruses, then they deserve no trust from Congress or the public. Meaning that a vote for fast track can only reward either incompetence or fakery.

(What’s Left of Our Economy) Why Obama’s Trade Policies Need a Leash, not a Fast Track Blank Check

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Congress, environmental standards, fast track, labor standards, Obama, state capitalism, state-owned enterprises, TPA, TPP, Trade, trade law, Trade Promotion Authority, Trans-Pacific Partnership, World Trade Organization, {What's Left of) Our Economy

In his weekly radio address this past Saturday, President Obama finally made his first pitch to the general public since his State of the Union for his planned new trade deals and for new fast track authority to pursue them. Ironically, though, his remarks further weaken the case for Congress granting him sweeping powers to conduct the nation’s trade policy.

As in the State of the Union, Mr. Obama clearly hoped to burnish his trade policy credentials by acknowledging that “past trade deals haven’t always lived up to the hype.” But his insistence that “we’ve successfully gone after countries that break the rules at our workers’ expense” is simply inexcusable hype about the possibilities of the nation’s trade system, and about the World Trade Organization’s potential as an effective trade referee. And the claim that his trade diplomacy would “level the playing field for American workers” by holding “all countries to the same high labor and environmental standards to which we hold ourselves” betrays an alarming ignorance about the prospects of enforcing the most distinctive terms of his proposed agreements.

As I’ve previously documented, the Obama administration’s trade enforcement moves are pathetically dwarfed by the scale of foreign subsidies at which they’re aimed – not to mention other trade-distorting policies, like discriminatory value-added taxes, that are beyond the reach of world trade law and are ignored in the president’s trade initiatives. Trade law actions, however, can also be dismissed as meaningful correctives for poorly negotiated agreements because of their intrinsic limitations.

Like all legalistic measures, they are inevitably reactive and piecemeal. As a result, they are utterly incapable of effectively addressing the challenge of foreign economies that are nothing less than national systems of protection – and especially those run by bureaucracies whose secretiveness makes it painfully difficult even to identify trade transgression conclusively, much less combat them.

Just as fanciful is the idea that provisions in trade deals can produce higher labor and environmental standards abroad. Believers in this contention, for example, still need to explain how many U.S. government bureaucrats will be needed to monitor the industrial complexes of current Trans-Pacific Partnership (TPP) countries like Mexico and Vietnam and Malaysia, much less of likely future signatories like China.

Even sillier is the notion that significant disciplines will be imposed on state-owned enterprises, as the administration is seeking for the TPP. After all, in Asia in particular, the line between public and private sector is typically blurred at very best. And the pervasiveness of deeply mixed economies in the region ensures that any cases against these entities brought by Washington before the TPP’s dispute resolution system will be quickly swatted down – whatever the agreement’s text says.

In fact, this dispute-resolution problem ensures that none of the specifics in the president’s trade agreements has a prayer of defending or promoting America’s interests. For legal systems require broad and deep consensus on acceptable behavior to be effective. They codify realities rather than creating them. Until the president recognizes the fundamental differences on economic policy norms that continue to divide the United States from most of it main trade rivals in Asia and other regions, and their implications for America’s international economic strategy, he needs a leash from Congress on trade policy, not a blank check.