(What’s Left of) Our Economy: The Real Deal with the U.S.-Canada Trade Balance

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aerospace, Canada, China, crude oil, dairy, energy, Justin Trudeau, lumber, natural gas, subsidies, tariffs, Trade, trade deficit, Trump, {What's Left of) Our Economy

Extra! Extra! Read all about it! The nation’s globalist political and media classes have gotten it right on a major U.S. trade policy issue!

I’m talking about the numerous complaints issuing from American politicians, journalists, talking heads, and purported academic and think tank experts about President Trump’s decision to make Canada the focus of so much of his trade-related ire.

Mr. Trump is right about Canada maintaining sky-high tariffs and lavish subsidies in certain sectors of its economy, like dairy and lumber. (I’d add aerospace to this list.) But the idea that Canada represents one of America’s biggest trade headaches, and has been taking advantage of the U.S. economy left and right due to poorly negotiated trade deals, is completely belied by the numbers. And P.S. – it’s not even necessary to point to America’s services trade surplus with its northern neighbor to debunk the numbers.

The keys are recognizing the immense role played by energy in bilateral goods trade. Commerce in crude oil and natural gas is almost never the subject of the U.S. trade deals and broader trade policy decisions that the President – for the most part – has correctly lambasted.

Energy’s predominance is most apparent when U.S.-Canada trade in goods is calculated according to the measures used most prominently by the American government – total exports, and general imports. In fact, these headline data show that the U.S. oil and gas shortfall has typically been twice the size of the overall American merchandise trade deficit with Canada – meaning that when it comes to other goods (like manufactures) the United States has been running a surplus.

For example, in 2009 (the year the current U.S. economic recovery began), according to these figures, the United States ran an overall $20.18 billion goods trade deficit with Canada, a $45.75 billion deficit in crude oil and natural gas, and a $30.02 billion surplus in manufacturing.

Last year, the overall U.S. merchandise deficit with Canada had fallen to $17.50 billion – largely because the energy deficit had sunk to $16.45 billion. And the American manufacturing surplus reached $41.07 billion.

As many trade policy critics have rightly pointed out, the total exports and general imports numbers aren’t the best data for measuring U.S. bilateral trade balances. (They’re fine for America’s global trade balances, though, as the discrepancies that emerge in the bilateral accounts cancel each other out on a worldwide scale.) Instead, the most accurate picture is provided by looking at domestic exports and imports for consumption – i.e., the trade flows that concentrate on exports that are actually made in America (as opposed to being transshipped through the United States from countries where they originated), and on imports that Americans actually purchase for their own use (as opposed to products being transported through the United States to their final destinations).

But although these statistics reveal a much larger U.S. merchandise gap, along with deficits in manufacturing, oil and gas predominate in these figures as well. In 2009, the domestic exports etc numbers show a total American goods trade deficit with Canada of $52.89 billion – nearly 87 percent of which was in oil and gas. The manufacturing shortfall, moreover, was tiny – only $200 million.

By 2017, according to this measure, the annual U.S. goods deficit had risen to $64.84 billion. But the oil and gas deficit – which had shrunk dramatically in absolute terms due to the U.S. energy production revolution – still comprised a little over 73 percent of this total. And the manufacturing deficit was only $4.28 billion (out of a U.S. global total of more than $937 billion).

I can understand why President Trump views Canadian Prime Minister Justin Trudeau as a pro-globalist showboat. I agree. But when it comes to trade, and turning it into an engine of growth and domestic job creation, Mr. Trump has much bigger fish to fry – starting with the thoroughly and increasingly predatory trade policies pursued by his “good friend,” Chinese leader Xi Jinping.

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(What’s Left of) Our Economy: On Those Latest Trump Tariffs

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aluminum, border adjustment tax, China, European Union, FDI, foreign direct investment, intellectual property theft, Made in China 2025, metals, overcapacity, steel, subsidies, tariffs, tax reform, Trade, Trump, value-added tax, {What's Left of) Our Economy

Never let a good set of talking points go to waste! Earlier this morning, one of the broadcast networks asked if I was available for a segment on the latest Trump administration tariff announcements, and wanted to get an idea of where I came down. Even as I was typing up the following, though, I was told that the plan had changed, and that the program in question had decided to go with a Member of Congress instead.

Yet since they’re still relevant to this latest phase of U.S. trade policy, I thought you might find them useful in this slightly edited form.

1.  If the Europeans and other major economies retaliate vs the new U.S. steel and aluminum tariffs, they’ll make clear their indifference to the government-subsidized Chinese output has flooded global markets with both these metals, and seriously distorted trade flows.  In recent years, these foreign governments have paid lip service to the need to curb Chinese overcapacity, but many have enabled it by transshipping Chinese metals (mainly steel) to the US market or stepping up their own exports to the US to relieve the pressure China has put on their own producers.

2.  As a result, (as I’ve previously documented) during the current global economic recovery, the US is the only major steel producing country that has seen its share of world output fall significantly. 

3. Moreover, (as I’ve also shown), the higher input costs resulting from the new metals and other tariffs pale beside the benefits recently received by U.S.-based businesses (including metals users) due to tax reform and regulatory relief.

4. Re both the steel and China tariffs, I wish that Trump had backed a superior alternative:  the Border Adjustment Tax contained in the original version of the House GOP tax bill.

The BAT would have functioned like a value-added tax (a levy imposed by virtually every other country) — imposing a tax on imports heading for the U.S. market, and providing a subsidy for U.S. exports.  Since the BAT would have been across-the-board, no U.S. industry (e.g., metals-using manufacturers) could have argued that it was going to be disadvantaged because its products would have received the same benefits.

Moreover, the BAT was backed not only by House GOP leaders with staunch pro-free trade records.  It was also supported by many major multinational manufacturers.  In addition, it would have been perfectly legal under the WTO, since it so closely resembles the value-added taxes so many other countries have had in place for decades.  But President Trump – for reasons that remain unclear – never came on board.

5. In the absence of the BAT, though, the metals tariffs are essential for correcting major distortions in global trade flows caused by Chinese overcapacity, and the China-specific tariffs are essential for offsetting the impact of Chinese trade predation (including rampant intellectual property theft and extortion) on high tech industries, exemplified by the “Made in China 2025” program.

6. Nonetheless, re China specifically, I have criticized some of the Trump response as being internally inconsistent.  If for example the United States convinces the Chinese to treat U.S. companies operating in China more equitably, U.S. corporate investment in the PRC could well increase, and the trade deficit that Mr. Trump wants to shrink is likely to grow, as much US investment in China creates products exported to the US.

7. More generally, I’m deeply skeptical that any Chinese promises to halt or reduce these forms of protectionism can be verified — because the Chinese bureaucracy operates so secretively, the Chinese national manufacturing complex is so vast, and because the United States will never be able to send over to China enough officials to monitor compliance effectively.

8. As a result, rather than seeking to improve Chinese behavior, I believe U.S. policy toward the PRC should aim first and foremost to reduce the extensive linkages between the two economies.  In this vein, ever more sweeping U.S. moves and proposals to curb Chinese direct investment in key industries in America is a good first step.

(What’s Left of) Our Economy: A New China Bill – & Trade Policy Realist? – Worth Watching

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China, currency manipulation, economic nationalism, Fair Trade with China Enforcement Act, foreign direct investment, Gang of Eight, Immigration, Made in China 2025, Marco Rubio, national security, Populism, Republicans, subsidies, tech transfer, Trade, trade law, Trump, {What's Left of) Our Economy

One of the biggest questions surrounding the future of the Republican Party, and in turn of American politics, is how many leading GOP politicians learn the main lessons of the Trump victory in 2016. In my view, these include the political appeal and real-world imperative of a nationalist approach to American economic policy, especially in the realms of international trade and immigration.

President Trump’s capture of even most of his party’s establishment on the latter could not be clearer. But signs of populism’s growing appeal are also emerging in the former, and one of the biggest has just come courtesy of Marco Rubio. In fact, legislation recently introduced by the Florida Republican and Trump rival for the 2016 GOP presidential nomination strongly indicates that, when it comes to the crucial issue of China, Rubio is out-Trumping Mr. Trump.

Rubio’s journey has been a far as it has been high-speed. His voting record on trade policy overall has been awful – at least from an economic nationalist/populist standpoint. In fact, according to the libertarian Cato Institute, the only blemishes on his record so far have come from his support for federal subsidies for sugar – a crop grown in his home state. As a result, in the fall of 2015, I dismissed him as a typical Republican pseudo-hawk on China.

That is, he talked tough about the need to confront China’s expansionism in the East Asia/Pacific region. But he seemed oblivious to how decades of American trade policy had showered the People’s Republic with literally trillions of dollars worth of hard currency, along with cutting-edge technology voluntarily transferred by, and extorted with impunity from, American companies. In other words, he did and said nothing about U.S. decisions that unmistakably had helped China become a formidable military as well as economic power.

Fast forward to this year, and what a change – at least on China. In addition to criticizing President Trump for backing away from his own Commerce Department’s initial decision to all-but shut down the Chinese telecoms firm ZTE for (repeat) sanctions busting, he’s just introduced legislation that represents the most comprehensive effort I’ve yet seen to deal holistically with the intertwined Chinese threats to America’s economy and national security.

Rubio’s “Fair Trade with China Enforcement Act” contains numerous important measures to staunch the flow of money and defense-related tech to China. (Here’s a summary from his office.) Provisions that represent major and needed advancements in America’s strategy are:

> a prohibition on the the voluntary corporate transfer of technology to a wide range of explicitly named technologies subsidized by the Chinese government, including in the Made in China 2025 program aiming to achieve Chinese predominance in numerous economically and militarily critical technologies. That is, Rubio recognizes that tech extortion (conditioning access to the Chinese market on a company’s willingness to share knowhow with Chinese partners) isn’t the only way that Beijing has been closing the tech gap with the United States. American companies seeking to curry favor with China on their own, or simply recognizing the importance of locating R&D and related activities in close proximity to their manufacturing, have also fueled China’s power.

> a requirement that U.S. trade law recognize that any Chinese product headed for the American market that’s from an industry mentioned in any Chinese document even related to the Made in China 2025 plan is ipso facto receiving subsidies the kinds of subsidies that these statutes consider illegal; and that this same body of trade law just as automatically assume that such goods are actually injuring or threatening to injure U.S.-based competitors when they enter the American market. Translation into plain English: Rubio’s bill would dramatically lower the bar for imposing tariffs on imports from China deemed to be unfairly traded. Which would be one heckuva lot of imports from China.

> a ban on investors from China owning more than fifty percent of any American company producing goods targeted by Made in China 2025 – which would restrict another major channel of tech transfer to China;

> and a new tax on Chinese investments in the United States – including levies on Chinese purchases of American Treasury debt. The latter measure, in particular, would discourage China from buying excessive levels of U.S. government debt, which keeps China’s yuan weak versus the American dollar and therefore helps to put U.S.-made goods at price disadvantages versus their Chinese made counterparts wherever they compete.

Incidentally, a proposal along these lines was first made, to my knowledge, by Raymond, Howard, and Jesse Richman in their 2008 book Trading Away our Future. So they deserve a big shout-out.

Rubio’s bill isn’t perfect. For example, it should be clear by now that any Chinese entity permitted to bid for American assets is tightly controlled by the Chinese government. Therefore, I would favor banning all such takeovers. Even if existing acquisitions were permitted, Washington would at least be freezing the Chinese state’s economic footprint in the United States, and thereby preventing ever more American businesses from having to compete with rivals whose operations have nothing to do with the free market values the nation rightly values.

In addition, Rubio’s bill says nothing about American tech companies’ growing predilection for investing in Chinese tech “start-ups” and similar entities. Some of these investments are surely extorted, but others seem to be voluntary. But since all of them can help strengthen China’s tech capabilities, they should be banned as well if the recipients have any connection with Made in China 2025.

Finally, Rubio still seems pretty comfortable with the rest of America’s longstanding trade liberalization policies except for the impact of the North American Free Trade Agreement (NAFTA) on Florida produce growers. 

At the same time, China policy inevitably shapes so much of trade policy that Rubio’s single-minded focus to date can’t reasonably be criticized. Further, he seems to understand that it’s not enough simply to introduce a bill. Rubio’s been taking it the next step by lobbying for it, and for related China policy changes, actively in the media – both broadcast and print. He still needs to show a willingness to buttonhole his colleagues actively – the most important form of Capitol Hill lobbying. But (paradoxically) his leadership on 2013’s decidedly non-nationalist or populist Gang of Eight immigration bill at least indicates he recognizes the importance of this test. 

I’ve often wondered whether American politics can produce a leader with both the populist leanings of an outsider and the insider-type institutional expertise and contacts needed to turn these impulses into actual change. Rubio’s China bill and the policy migration it represents looks like major grounds for optimism.       

(What’s Left of) Our Economy: Trump’s China Trade Deal May be Even Worse Than it Looks

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China, Financial Times, intellectual property, intellectual property theft, Lucy Hornby, Made in China 2025, manufacturing, national security, subsidies, tech transfer, Trade, trade deficit, Trump, {What's Left of) Our Economy

So much is so obviously wrong so far with the trade agreement just reached by the Trump administration and China that even Mainstream Media reporters have correctly identified many major flaws. As the joint statement released by the U.S. and Chinese governments made embarrassingly clear, Beijing has not made a single commitment that’s comprised of any specifics, that creates any time-frames for compliance, or that entails any penalties for non-compliance (although the United States considers the tariffs threatened to punish China for intellectual property theft to have only been “suspended”).

Despite the importance placed by almost everyone involved in America’s China policy inside or outside the government on doing something about that intellectual property theft, and about the Made in China 2025 program aimed at creating Chinese global dominance in numerous high tech industries crucial to prosperity and national security, Beijing pledged exactly nothing concrete on the former, and the only possible reference to the latter was a pledge by both countries “to strive to create a fair, level playing field for competition.”

And the sectoral priorities were discouraging from a U.S. standpoint – at least if you believe (as you should) that manufacturing actually or potentially creates outsized economic (not to mention national security) benefits for the nation in terms of productivity growth, jobs and output multipliers, and capital and technological intensiveness. For whereas “Both sides agreed on meaningful increases in United States agriculture and energy exports,” they simply “discussed expanding trade in manufactured goods and services.”

Possibly worse still: For all the references to “[working] out the details” and “[continuing] to engage at high levels on these issues,” the economic engagement between the two countries is not even being called a “negotiation.” Instead, it’s been termed a “consultation.”

But perhaps most troubling of all about the Trump approach is that even if the President’s core aims remained intact, and tariffs were imposed in order to halt China’s intellectual property theft, combat the Made in China 2025 program, and slash the trade imbalance, it’s unclear at best how effective they would be.

Leave aside the question of whether President Trump could convince affected chunks of the American economy ranging from agriculture to high tech to support any tariffs, and accept any short-term costs and disruptions in order to achieve China trade-related goals that all these industries consider crucially important. In the case of intellectual property and China 2025, how would Beijing’s concessions, or even outright capitulation, be measured? And what difference would actually be made?

For instance, would the tech companies whose knowhow is being stolen or extorted (via threats to cut off their access to the Chinese market if they don’t cooperate) really start pointing publicly to ongoing Chinese transgressions, after decades of lying low and hoping against all reason that the problem would simply go away or at least not worsen?

Even if they did grow spines and/or believe that the Trump or successor administrations would back them up by imposing prompt and severe punishments, would these companies suddenly become more careful about the technology that they transfer voluntarily? That sounds far-fetched because it would involve these firms backing away substantially from their longstanding strategy of supplying the world with their increasingly sophisticated products and services from China – and sacrificing the immense sunk costs they have already incurred in developing the Chinese supply chains needed to accomplish this goal.

Acquiring cutting edge intellectual property by hook or by crook is also central to the Made in China 2025 program. However unlikely in practice, smart and tough enough U.S. policies can in principle overcome the above obstacles to halting tech theft and extortion. But what about another aspect of this Chinese program – massive government subsidies for the industries involved? Is it the slightest bit realistic to believe that Washington will even be able to track these funds as they make their way from China’s secretive bureaucracies to its equally opaque production entities (which don’t really deserve to be called “companies” or “businesses” because they’re all to varying degrees arms of the state)? How on earth would that work? And when has the United States succeeded in halting subsidization in other Asian countries where the government’s role is equally pervasive?

Moreover, as the Financial Times‘ Lucy Hornby has just pointed out, ending yet another objectionable feature of the Made in China 2025 program – strong preferences for Chinese participants and various forms of harassment and discrimination for their foreign-owned rivals – would kneecap two other major and related Trump administration China goals: reducing the bilateral trade deficit and curbing the offshoring of American production and jobs to the PRC.

For if China becomes an easier place to do business, U.S.- and other foreign-owned multinationals would become that much more likely to use China as their global production bases.

President Trump correctly understood that a critical mass of U.S. voters were fed up with his predecessors’ Offshoring Lobby-dominated China policies and hankering for a strategy that put domestic production and employment first. He was also right in insisting that such a course change would strengthen the nation’s long run economy and its national security. But the latest trade agreement he’s reached with China, however tentative, makes painfully clear either that the President and his main advisers don’t yet know how to achieve these vital goals, or that he hasn’t yet been able to choose between competing approaches with which he’s been presented.

(What’s Left of) Our Economy: Why Trump was Still Right to Nix Obama’s TPP Trade Deal

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Asia, Barack Obama, bilateral trade agreements, China, export-led growth, mercantilism, multilateral trade agreements, non-tariff barriers, rules of origin, subsidies, tariffs, tech transfer, TPP, trade surpluses, Trans-Pacific Partnership, Trump, {What's Left of) Our Economy

At first I was irritated with President Trump for his expressions of interest this year in reviving U.S. efforts to join the Trans-Pacific Partnership (TPP) – the Pacific Rim-wide trade agreement that former President Barack Obama couldn’t persuade Congress to ratify, and that Mr. Trump removed from America’s policy agenda during his first week in office.

I still wish the President had kept the TPP consigned to the proverbial ash heap of history. But I do see one silver lining in his apparent about-face: the new opportunity it creates to remind how awful the Obama TPP was, and in particular how cynical the case that it represented a masterful ploy to contain the rise of Chinese power regionally and globally, and even shape it to serve America’s goals of sustaining an open world trading system.

In fact, it’s entirely possible that Mr. Trump’s apparent new openness to TPP results at least partly from widespread claims from mainstream politicians and analysts that its multilateral nature endowed the deal with much more potential to curb China’s trade predation than the unilateral tariffs he’s announced.

Yet this contention is the one that’s most easily refuted. First, the version of the treaty signed by Obama contained a wide open back door for many Chinese exports by allowing goods that contained high levels of content produced outside the TPP zone to be traded freely within the zone. Given how central China is to Asia-wide production chains, these loose rules of origin were bound to enable China to enjoy crucial benefits created by the TPP without incurring any of the obligations.

Second, until the eve of its departure from office, neither the Obama administration nor any TPP supporters in Congress or the mainstream media or the think tank world lifted anything more than the occasional pinky even to protest perhaps the principal source of China’s rising economic and military power – the massive transfer of cutting edge knowhow, along with capital, from U.S. tech companies to Chinese business partners or other institutions, either voluntarily (including through shortsighted training programs and investments in Chinese entities) or involuntarily (due to Beijing’s widespread practice of linking access to the China market to the handover of critical technology).

The sudden transformation of these corporate panda-huggers and their hired American guns into China skeptics and even hawks has demonstrated nothing more than that national security is the last refuge of a trade policy scoundrel – especially since by all accounts, U.S. technology and investment continue pouring into China – including defense-related tech. (See here and here for some evidence.)

Third, there’s no reason to believe that most of the other key TPP members have any interest in turning China into a free-trading economy. Quite the contrary. Whether it’s Japan or Singapore or Vietnam or Malaysia, most of the treaty’s most important countries have followed China-style economic development models (except when they’ve borrowed from Japan’s somewhat different but of course much earlier blueprint). And economic openness emphatically isn’t in the recipe. What’s central to these strategies is amassing trade surpluses with the United States and the rest of the world to help generate adequate levels of growth and employment.

The bottom line: Most TPP countries knew that effective disciplines on the trade predation largely responsible for China’s surpluses could be used against their own subsidies and non-tariff barriers. Conversely, it’s surely the reason that these economies accepted the paper curbs on mercantilism that are mandated by TPP. They’re rightly confident that thanks to the secretive bureaucracies that keep their economies effectively closed – and their barriers difficult for outsiders even to identify, much less litigate – none of these curbs is remotely enforceable.

Even better for TPP’s mercantile majority, the treaty’s dispute-resolution system ensured that the United States would be repeatedly outvoted when it sought to advance or defend its interests.

That’s why the TPP was so likely to supercharge America’s already enormous and economically damaging trade deficits. The TPP mercantilists’ liberalization promises would do nothing substantial to open their markets and increase U.S. export opportunities. But America’s TPP commitments, carried out by a government characterized by transparency, would be very effective guarantees that the American market would remain wide open to the TPP majority’s products.

President Trump has demonstrated that he recognizes many of these fatal flaws in the Obama TPP. His stated preference for bilateral over multilateral trade deals suggests an understanding that the former give the United States much more legal authority in dispute resolution. Moreover, he has explicitly tweeted that he’d only back rejoining the TPP if major fixes were made.

Precisely because he’s the only American President in recent memory to show any interest in changing the nation’s ill-considered trade status quo, and any awareness that the United States retains ample leverage to achieve its trade objectives unilaterally, I can’t rule out the possibility that Mr. Trump might turn TPP into a winner for the U.S. domestic economy (as opposed to the importing and offshoring lobbies).

But the main lesson that should be taken from decades of American trade diplomacy with Asia is that economies structured to promote exports and limit imports are going to stay substantially closed no matter what promises they make. Therefore the best course for the United States to make is to expend its energy and resources on reducing its economic engagement with Asia, rather than trying to remake the region in anything like its own image.

(What’s Left of) Our Economy: So You Think There’s Free Trade in Steel?

Tags

China, overcapacity, steel, subsidies, tariffs, Trade, transshipment, Trump, U.S. Commerce Department, U.S. International Trade Commission, World Steel Association, World Trade Organization, WTO, {What's Left of) Our Economy

If there’s anyone out there who honestly believes that global steel trade has anything to do with free trade or free markets, and that many of America’s leading trade partners other than China are directly or indirectly complicit in rigging this commerce against the United States, here’s some data you need to see.

And P.S. – notwithstanding their own efforts to keep government- subsidized Chinese metals out of their markets, and the lip service they pay to the idea of cooperating to cut China’s massive overcapacity, the number of countries whose steel industries in particular have been doing just fine all the same should make clear why World Trade Organization (WTO) and other multilateral actions can’t possibly address the underlying problem of the Chinese state-sponsored glut. At least not until via tariffs or similar measures, Washington makes clear that the economies, who comprise the vast majority of WTO members, can no longer abet the Chinese with impunity.

First, let’s look at the percentage of world steel output by country (or political grouping, in the case of the European Union), and how it’s changed recently. These are volume figures from the World Steel Association for the world’s leading steel producers:

         2010                                                   January, 2018

US:    7.46                                                           4.89

China:   42.62                                                    48.05

EU 27: 12.18                                                    10.32*

Japan:   7.73                                                        6.48

South Korea:   4.12                                             4.39

India:   4.82                                                         6.47

Vietnam:   0.30                                                    0.76

Taiwan:   1.39                                                      1.41

Turkey:   2.06                                                      2.28

Brazil:   2.32                                                        2.06

Russia:   4.48                                                       4.09

Thailand:   0.29                                                    0.30

Canada:   0.92                                                      0.82

Mexico:   1.18                                                      1.16

Argentina:   0.36                                                  0.25

South Africa:   0.54                                             0.41

Egypt:   0.47                                                        0.47

Australia:   0.51                                                   0.35

* The January, 2018 figures are for 28 European Union countries.

What leaps out from these statistics: Except for Australia, the country that has lost the greatest percentage of global output share by far during this period has been the United States. And everyone else has either gained or pretty much held their own. Anyone care to explain this development by arguing that the United States has the world’s least competitive major steel sector? By a mile?

Next let’s take a look at changes in steel-producing countries’ exports to the United States over the last year. In and of themselves, they don’t prove that these economies are transshipping steel to the American market to help Beijing evade recent U.S. tariffs on Chinese steel, or that they have been responding to their own China steel problems by ramping up their exports to the United States. But the size and suddenness of these export increases is certainly noteworthy. In particular, it’s kind of amazing how much surge capability these figures make clear is apparently possessed by smallish countries.

Here’s how America’s steel imports have increased by volume in percentage terms from some important steel producers between the third quarter of 2016 and the third quarter of 2017, according to the U.S. Commerce Department’s latest figures:

global total: +19.56

China: -5.0

India: +209.0

Russia: +64

Taiwan: +36

Thailand: +274

South Africa +68

United Arab Emirates +98

Many of the value figures, drawn from the U.S. International Trade Commission, are even more striking. (These numbers cover iron and steel products and their percentage increases between full-year, 2016 and full-year, 2017.) Some of these percentage increases reflect the “law of small numbers” – the ease with which modest increases in absolute terms can generate big relative increases when the baseline is low.

But all of the below countries sold at least $13 million worth of iron and steel products to the United States in 2017. Also, all of the below increases followed sizable, and some cases enormous, decreases between 2015 and 2016, when overall U.S. imports fell by 25.7 percent. And this list leaves out countries whose iron and steel exports to the United States grew in both years, but ramped up rapidly in 2017. The main examples are Indonesia, the Dominican Republic, Kazakhstan, and Peru.

World: 35.6

China: 15.2

EU 28: 19.4

Japan: 1.6

South Korea: 21.2

India: 88.8

Taiwan: 33.1

Brazil: 51.8

Russia: 98.1

Australia: 65.4

Thailand: 213.7

Canada: 26.6

Mexico: 27.4

Argentina: 198.6

Albania: 583.5

Bahrain: 26,148.1

Belarus: 116.9

Colombia: 96.6

Georgia: 57.0

Guatemala: 430.1

New Caledonia: 70.7

New Zealand: 64.8

Oman: 81.1

Pakistan: 41.1

Peru: 127.4

Philippines: 147.1

Saudi Arabia: 794.5

Ukraine :111.1

United Arab Emirates: 123.7

Zimbabwe: 376.1

These data paint a compelling picture of the world’s leading steel producers complaining endlessly about the distortions created by China’s state-created global steel glut – to the point of creating a special multilateral forum for addressing the issue – but playing footsie with the Chinese behind the scenes at American steel producers’ expense. Which places a heavy burden of proof on opponents of President Trump’s response to explain how this situation bears any resemblance to free trade, and why broad-based tariffs aren’t an absolutely essential response.

(What’s Left of) Our Economy: The Case for Trump’s New Metals Tariffs

Tags

alliances, allies, aluminum, China, inflation, manufacturing, overcapacity, steel, subsidies, tariffs, Trade, trade law, Trump, World Steel Association, World Trade Organization, WTO, {What's Left of) Our Economy

President Trump has announced his decision to impose tariffs on U.S. imports of steel and aluminum – cue the trade war hysteria. And the national security hysteria. And the inflation hysteria. Here are some talking points I hope the administration will feel free to steal as it defends the decision in the days leading up to the release of the final tariff plan:

>Many countries have declared their intention to retaliate against the American tariffs with higher barriers to U.S. exports. Curiously, they are overlooking the Chinese government-subsidized overcapacity at the root of the long-time distortions in world steel and aluminum markets.

>Many of these countries want the problem tackled multilaterally. But the World Trade Organization (WTO) has failed to stem this overcapacity (or deal effectively with many other forms of Chinese trade and broader economic predation), and a G20 forum specifically addressing the steel issue has produced nothing since its founding in December, 2016.

>Although major steel-producing powers like the European Union have imposed their own steep tariffs on shipments from China, the global glut has continued. One reason may be that, since the global economic recovery took hold in 2010, according to World Steel Association data. the United States has been the major steel producer that has suffered by far the greatest loss of global production share by volume. (See this post of mine for the 2010 figures and the Steel Association’s latest report for the most recent – January, 2018 – figures.) And as of the most current World Steel Association data (2016), the United States is also the steel producer with the highest steel trade deficit by volume (21.7 million tons). 

>As a result, charges that American steel tariffs in particular will jeopardize the rules-based global trade system seem to be arguing that this system requires the United States to remain as the world’s dumping ground for government-subsidized steel.

>A much more constructive response from America’s trade partners would be finally getting serious about shutting down China’s overcapacity and placing market forces back in the saddle for global steel pricing. The Trump tariffs should be seen as a signal that the United States will no longer accept world steel trade patterns that treat the United States as the fall guy, and should therefore act as a spur to achieve genuinely meaningful multilateral results.

>The above gaming of global steel trade by so many American trade partners also explains the need for the kinds of sweeping measures made possible by the national security-oriented Section 232 of U.S. trade law, rather than the narrower curbs required by, say, the countervailing duty statutes.

>Fears have been expressed in the U.S. foreign policy community, and by the Trump administration’s Defense Department, that certain tariff schemes may needlessly harm America’s relationships with key security allies. Those voicing such concerns should also explain why countries that would permit these U.S. measures to undermine alliance relationships should be seen as reliable partners when overseas crises erupt.

>Tariff opponents contend that America’s use of an allegedly bogus national security rationale for the curbs will open the doors for other members of the WTO to use equally specious justifications for their own tariffs on numerous products. These opponents seem to forget that most of the world’s major economies, which rely heavily on export-led growth resulting from large trade surpluses, so far have encountered little difficulty in protecting their own domestic markets via a wide range of both tariff and non-tariff trade barriers.

>New national security rationales for new tariffs will be especially suspicious if used by the numerous American security allies that have been free-riding on U.S. defense guarantees for decades – and skimping on their own defense spending. These allies include Germany, Japan, South Korea, and Canada.

>Tariff critics also insist that the American economy will suffer major harm from foreign retaliation. They seem – oddly – convinced that U.S. trade partners that rely heavily on net exporting to the United States for their growth have nothing to fear from further the American trade restrictions that may result. Will these countries really launch trade attacks on one of their best customers?

>Tariff opponents focusing on economic impacts argue that the measures will increase the cost of a key American manufacturing input, and reduce the competitiveness of domestic steel-and aluminum-using industries. They seem to fear that these industries cannot become or remain globally competitive if such inputs are priced via free market mechanisms, rather than kept artificially cheap due to foreign government decisions.

>These economically focused tariff opponents also seem to believe that the current U.S. economy is one characterized by companies that enjoy considerable pricing power. Given inflation that has long undershot the Federal Reserve’s target, that’s a difficult argument to understand.

>In addition, those with an economic focus appear unconcerned about the prevalence and spread of government interventions in trade flows not only in steel, but in a wide variety of traded goods. If foreign governments conclude that they can subsidize and dump two key American industries out of existence, why would they stop with steel and aluminum? How can a growing presence of foreign government-subsidized goods (and services) help strengthen free markets in the United States and enable Americans to reap their maximum gains? And how can such growing foreign intervention help the global economy as a whole progress toward reaping the maximum gains of unfettered trade?

Over to you, Mr. President!

(What’s Left of) Our Economy: Can We Get Real About China’s Trade Dumping?

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China, consumers, dumping, free markets, Martin Feldstein, prices, steel, subsidies, Trade, Trump, {What's Left of) Our Economy

In the spirit of the holiday season, rather than slam noted economist Martin Feldstein for producing yet another stale though dangerously misleading blanket warning against the horrors of trade protectionism, I’ll note that he’s just (unwittingly, to be sure) created a teachable moment about instances in which erecting trade barriers is absolutely necessary. Those instances concern a practice called dumping, and in particular when the culprit is a country like China.

In U.S. and world trade law, dumping consists of selling a product or service in a foreign market at prices deemed to be excessively low. (Their specific definitions differ – see here and here for how.) For someone not steeped in these subjects, it’s entirely reasonable to ask, “What’s the problem?” After all, if a producer wants to provide a major price break for his or her foreign customers, why should those customers look a gift horse in the mouth? But for a leading economic light like Feldstein – who has been a top presidential economic adviser (in the Reagan years), it’s hard to excuse his use of the term.

The reason is that the decision to dump can result from dramatically different circumstances with dramatically different stakes for the future of the kind of U.S. economy most of us presumably want to ensure. Feldstein suggests that dumping is basically no different from the kind of price drops businesses can put in effect when they’re so technologically advanced or otherwise efficient that they can undersell less competent rivals. But this example is completely irrelevant to dumping law.  Neither the U.S. nor World Trade Organization versions penalizes this kind of progress.

Feldstein might have added a common claim that, even when these international price differentials do exist, they’re no different than when producers (or service providers) decide to put their wares on sale in certain parts of the United States but not others – maybe as a special deal to jump-start business in a region they’re entering, or to energize business in a region where they’re lagging.

But although this argument against sanctioning foreign producers for dumping is more on target, it still misses the mark in a crucial respect: The dumping engaged in by countries like China is fundamentally different. And the reason is that it’s typically subsidized by foreign governments.

Such subsidized dumping is objectionable, and downright dangerous to the American economy, for several reasons that have somehow eluded Feldstein – and most of his fellow economists. Principally, it forces companies that operate in a free market setting, with all the constraints that imposes on pricing policies, to compete against companies that face no such constraints – or tend to enjoy the freedom to under-price for long periods of time.

If you’re fine (like Feldstein and other conventional wisdom-mongers?) with government-dependent entities (I hesitate to call them “businesses”) gaining the upper hand in the United States, then logically this isn’t a problem. If you believe that the American economy works best for all concerned when free market principles and practices are encouraged to the greatest extent possible, then you should be deeply concerned.

As a result, it should be easy to distinguish between bargain-basement pricing from companies that have either very patient founders or other shareholders, or lots of cash on their balance sheets, or both, from such pricing from entities that can keep drawing on foreign treasuries. The former, after all, stems from actors that are trying to judge the fundamentals of a market place, that “put their money where their mouths are,” and who will eventually be rewarded for being correct or punished for getting it wrong. The latter is a function of the decisions and priorities of foreign governments. And with a country like China, where the government maintains a whip hand over the economy, there can be no reasonable doubt which kind of pricing we’re dealing with.

All believers in free markets by definition agree on the superiority of the free market incentive system. But as often seems to be the case, they easily forget free market values, and the need to safeguard them, when it comes to international trade. (Monopoly and competition issues represent another example of this selective capitalism syndrome.)

That’s not to say that all government subsidies should be opposed. Many (like America’s minority- and women-owned business “set asides”) seek to promote important goals that societies have every right to prize. Others seek to promote important goals that societies literally can’t do without (like government support for defense industries). And even these wrinkles can have wrinkles. For example, many manufactured goods can be crucial for national defense even though they’re not weapons themselves, or even though they have many uses other than military. Steel, to which the Trump administration is considering extending major protection for just these reasons, is a newsy example.

So many dumping allegations and cases can be genuinely complicated, and understandably controversial. But even if you believe that systems of trade law can ultimately resolve these disputes in acceptable ways (I don’t), it should be clear that government-fostered dumping simply doesn’t belong in this category, and that government-run economies like China’s don’t deserve the standard legal protections (like presumption of innocence) when put in the dock.

What should be even clearer: Anyone not recognizing this basic dumping distinction should never gain the ear of those officially responsible for America’s well-being. But because it’s the holiday season, I won’t specifically recommend blackballing Martin Feldstein. At least not right now.

(What’s Left of) Our Economy: The Real Promise – & Pitfalls – of Foxconn’s New US Manufacturing Plan

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assembly, Carrier, components, flat panel displays, Foxconn, incentives, innovation, Jobs, manufacturing, Paul Ryan, productivity, regulatory reform, Scott Walker, subsidies, tariffs, tax breaks, tax reform, Terry Gou, Trade, trade policy, Trump, Wisconsin, {What's Left of) Our Economy

Sorry for the recent absence – and during an incredibly newsworthy period!  There’s been lots of important economic data released recently, which I’ll be reporting on in upcoming days.  So what to focus on in this return offering?  One recent story that seems to reflect many of the biggest developments and trends of the Trump administration’s first six months is the announcement this past week that the Taiwanese electronics giant Foxconn will be spending $10 billion to build a new factory for flat panel displays in southeastern Wisconsin. 

Think this is a stretch?  Then consider this:

The announcement, which could become a big win for the American economy – and a big feather in the president’s cap –was completely upstaged by a series of White House personnel shakeups orchestrated by Mr. Trump himself.

Moreover, the Mainstream Media accounts invariably combined their longstanding hostility to the president with their instinctive rejection of the possibility that unconventional economic ideas and policies can have any merit. 

For instance, they uniformly focused on the job-creation effects of the new factory – which, as typical for capital-intensive products and industries, will be relatively modest – to portray the news as ruse by the president to convince voters that he was keeping his campaign promise to revive manufacturing employment.  Their main evidence?  The tax breaks and other subsidies the project would receive, which came to many thousands of dollars per position, which were easy to depict as a first class boondoggle.

Further, the media uniformly depicted employment as the only possible upside to strengthening the nation’s high value manufacturing.  Its major contributions to the economy’s productivity growth – which could use a major helping hand – and to its innovative capacities, were completely ignored. 

At the same time, the reporting overlooked crucial questions that need to be answered to assess whether the new Foxconn factory will live up to its promise.  Principally, will it be engaged in components production – where so much of manufacturing’s value-added comes from?  Or will it simply be assembling final products from imported components, as has been the case with other recent foreign electronics investments?  If the latter, the subsidies it’s garnered will be much more difficult to justify.  And in this vein, have either federal or Wisconsin authorities imposed any conditions that would encourage genuine manufacturing?   

Not that the Foxconn announcement completely vindicates globalization policy critics, either – or at least not those who, like me, have insisted that manufacturing revival that matters will require a thorough recasting of American trade policy.  I’ve been especially skeptical of the idea that jaw-boning a la Trump plus some subsidies could make a real difference – though I’ve insisted since Mr. Trump as president-elect intervened in the Carrier company’s decision to offshore Indiana manufacturing jobs that his use of the bully pulpit could greatly aid the welcome transformation of America’s approach to manufacturing that he seemed to have in mind.  And for the record, I’ve been skeptical that subsidies can be decisive, either – because America’s financial support for manufacturing was so unlikely even to approach the scale of, say, China’s. Finally, I’ve never thought that the kinds of regulatory reform efforts Mr. Trump has launched would matter much, either, given that so many potent American trade rivals are practically regulation-free.  

At this early stage, the jury is still out.  But since the Foxconn announcement has hardly been unique, and no significant changes have taken place in U.S. trade policy other than a withdrawal from the Trans-Pacific Partnership trade agreement, the president so far is doing a pretty good job of proving me wrong.

Nonetheless, I’m still confident that, sooner rather than later, the manufacturing needle won’t be moved without imposing trade curbs of some kind.  Although avowed fiscal conservatives like House Speaker Paul Ryan (of Wisconsin) and his state’s governor, Scott Walker, enthusiastically supported the Foxconn incentives package, their appetite for such measures – even when reduced taxes are involved — is likely to be limited for other parts of the country because of their budget-busting effects.  Indeed, it looks like Ryan may wind up accepting a smaller corporate tax cut in Congress’ tax reform package for precisely this reason.  Moreover, these breaks could easily be offset by similar moves by foreign governments – and added to existing predatory practices like currency manipulation and tariffs of their own.  And I remain convinced that a high-income country, first world country like the United States can never rely heavily on deregulation to compete better against very low-income, largely regulation-free third world countries like China or Mexico. Nor should it want to. But no initiatives could match the power of policies that would limit or close off access to the world’s greatest economic and commercial prize by far, the American market.

In fact, as Foxconn’s CEO has strongly suggested, the threat of U.S. tariffs helped persuade him to promise to manufacture much more in America.  And he’s hardly alone in the corporate world, as I’ve reported.  That’s why I’m somewhat worried about the administration’s reluctance actually to impose tariffs, as opposed to threatening them.  If Mr. Trump keeps hemming and hawing about steel tariffs, and if he keeps opposing ideas like the border adjustment tax, which has just been stripped from Congress’ tax reform package, America’s competitors could easily conclude that his trade policy is largely bluff, and that they can keep using Americans as customers and not workers after all.

(What’s Left of) Our Economy: New Fed Figures Support Case for U.S. Steel and Aluminum Tariffs

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aluminum, capacity utilization, Federal Reserve, Great Recession, imports, industrial production, inflation-adjusted output, iron and steel products, manufacturing, primary aluminum products, recovery, steel, subsidies, tariffs, Trade, {What's Left of) Our Economy

Today’s Federal Reserve industrial production figures contain data supporting claims that the American domestic steel and aluminum industries face heavy global competitive pressures rooted in predatory trade practices that require vigorous responses.

According to the new data, which update the U.S. manufacturing picture through June on a preliminary basis, inflation-adjusted output for all American factories rose by 0.19 percent month-to-month, and by 1.36 percent year-on-year.

Real production of iron and steel products fell by 0.51 percent sequentially in June, and are up by just 0.47 percent on year. For primary aluminum products, the figures are better: monthly after-inflation output improved by 0.26 percent, and it advanced by 1.79 percent over the June, 2016 levels.

Longer term, though, the trends in these two sectors, and in U.S. domestic industry as a whole, have diverged sharply. Since the Great Recession officially broke out, the Federal Reserve data show that American manufacturing’s constant dollar output still hasn’t fully recovered. Indeed, it’s still down by 4.03 percent.

But real iron and steel products production is still 18.55 percent lower than at the recession’s onset – more than nine years ago. Inflation-adjusted primary aluminum production stands at less than half its December, 2007 levels, having plummeted by 53.01 percent.

The plight of steel and aluminum is also apparent from the capacity utilization figures. For all of domestic American manufacturing, utilization rates were 75.88 percent. That’s 3.72 percent below the last pre-recession level of 78.81 percent.

For iron and steel products, the drop has been much steeper – capacity utilization is down 21.47 percent from its December, 2007 level of 92.11 percent. And although the latter level looks unusually high, it had been achieved regularly by these producers during previous decades.

The Fed doesn’t keep capacity utilization figures for aluminum. But statistics for the broader primary metals sector indicate that its fate has been nearly as bad. Capacity utilization since the end of 2007 has sunk from 83.52 percent to 68.24 percent – an 18.30 percent plunge.

As widely reported, this deterioration has coincided – at the very least – with an explosion in the production and export of subsidized steel and aluminum from China. As has been much less widely reported, U.S.-based producers have borne the brunt of the costs. Although comparable numbers are not available for aluminum, the American share of the global steel market has fallen by considerably more during the current economic recovery than the shares of other steel-production countries and regions. In addition, the United State runs by far the world’s biggest steel trade deficit.

It’s still unclear whether or not President Trump will decide to impose any national security-related tariffs on steel imports, which countries’ shipments will or won’t be hit, or what other measures he might approve if the tariff route is rejected. But it’s all too clear that without significant action from Washington, two more important American manufacturing sectors could needlessly fall victim to foreign trade and broader economic policies having nothing to do with either free trade or free markets.