(What’s Left of) Our Economy: Will Trump Take Ford’s New China Trade Hint?

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(What's Left of) Our Economy Trump, automotive, border adjustment tax, China, Ford Motor Company, imports, Jobs, manufacturing, Mexico, NAFTA, North American Free Trade Agreement, offshoring, tariffs, trade agreements, trade balances, Trade Deficits

President Trump and his administration have certainly been active on the trade front in their first months in office, both in word and deed. The question remains whether they’ve been effective, and a breaking news story has just added powerfully to the doubters’ case.

The news has to do with Ford Motor Company’s announcement that it will scrap plans to relocate its remaining small car production from the United States to Mexico and supply the American market from an existing plant in Hermosillo, and instead import the vehicles from a retooled factory in China. The initial Ford production decision came under fire from Mr. Trump, and the company’s reaction – a rejiggered Mexico plan – looked chancy for two main reasons:

First, the president had declared his intention to renegotiate the North American Free Trade Agreement (NAFTA) in large measure to stop such production offshoring. Second, the staunchly pro-trade Republican leaders of the GOP-controlled House of Representatives had been pushing a border adjustment tax proposal that would have imposed new costs on imports from anywhere.

Ford has now underscored why both opponents and supporters of a transformed, less import-friendly U.S. trade policy have been right in one of their major criticisms of Mr. Trump’s emerging strategy: A tight focus on bilateral trade issues and balances overlooks the ability of multinational companies to shift export-oriented production in order to evade country-specific tariffs or other trade curbs.

Not that business’ ability to hopscotch is unlimited. The massive level of sunk corporate costs in export-focused production in China, for example, won’t always be easy to walk away from. And not all countries offer comparable advantages to manufacturers. So given, for example, that China accounts for more than 43 percent of the American merchandise trade deficit, or that Mexico’s geography makes it such an unusually attractive base for selling to U.S. customers, focusing on individual-country or regional priorities often makes good sense.

It’s also legitimate in principle to base trade preferences on non-economic aims, like national security (e.g., rewarding allies or strengthening third world economies against the appeal of terrorism) – though Mr. Trump has expressed strong skepticism for this approach, notably in his Inaugural Address. And of course, prioritization is often the key to any successful public policy.

But what’s especially strange about the Trump trade strategy so far is the president’s indifference – at best – to the border adjustment tax idea. On top of undercutting corporate tariff arbitrage strategies by levying a tax on all imports (and encouraging exports), the measure would also bring in revenue needed to finance crucial domestic needs like infrastructure and healthcare reform without completely busting the federal budget. And its passage would by no means preclude addressing special trade priorities of all kinds with additional restrictions.

Ford’s new production announcement is just the latest in a series of comments from Corporate America that bear out one of President Trump’s central insights: that trade policy changes can decisively influence corporate sourcing decisions to America’s benefit. Now, however, he needs to recognize that his essential goal of using trade restrictions to lure valuable manufacturing production and jobs back to the United States requires policies with global scope. The half- (at best) measures he’s favored so far are just too easily gamed.

(What’s Left of) Our Economy: Why Trump’s China Trade Deal is Fatally Flawed

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2018 elections, 2020 elections, biotechnology, China, exports, financial services, GMO products, imports, mercantilism, non-tariff barriers, protectionism, tariffs, Trade, Trump, Wilbur Ross, {What's Left of) Our Economy

If you (like me) haven’t been happy with America’s China trade policy for the last few decades, here’s the sunniest spin you can put on President Trump’s new trade deal with the People’s Republic: Most of the 100 days set by Washington and Beijing for reaching an agreement to resolve major bilateral issues still haven’t passed. So the two governments – and especially the American demandeur – still have ample time in theory to meet their own proclaimed standard for success.

At the same time, there’s evidence that, despite having won the White House in part on promises to stop China’s “rape” of the U.S. economy and its workers, Mr. Trump is ready to give the Chinese a lot more time to produce genuinely boast-worthy results. Principally, Commerce Secretary Wilbur Ross, the American point man for implementing the 100-day plan, told Fox Business News yesterday:

“The strategy here was to get a few quick kills; a few tangible, deliverable items that could be done quickly—make sure that there was actual performance on them … assuming that those are delivered, then we’ll go into a one-year program of negotiations. If that produces more deliverables, we’ll go into a longer-term period of negotiations.”

More indications from Ross that the agreement dealt with only the tip of the iceberg of U.S.-China trade issues: “[T]his addresses 10 items. There are probably 500 items that you could potentially discuss; maybe more than 500.”

And don’t forget the quid pro quo created by President Trump with China between trade and North Korea-related issues. As I’ve written, his decision to promise China a “far better” trade deal with the United States “if they solve the North Korean problem” could let Beijing string the United States along on trade for months with fake promises of imminent progress with Pyongyang.

The specifics of the new agreement have been analyzed in detail, so there’s no point duplicating these exercises. Ditto for the lack of penalties for non-compliance, or even enforcement mechanisms. But it is worth noting how many of the provisions are “soft” – i.e., leaving China literally square miles of wiggle room to keep blocking American exports with no reason to fear any consequences.

For instance, in biotechnology (including genetically modified grains and other crops), Beijing is merely obliged to conduct “science-based evaluations” of U.S. products seeking entry into the Chinese market, and from now on operate its safety certification system more expeditiously and more.

China has agreed to “allow wholly foreign-owned financial services firms” provide credit-rating services in the People’s Republic by July 16, but they will still need to satisfy a “licensing process for credit investigation” whose standards apparently need to meet no specific criteria whatever.

All that was won by electronic payment services was a Chinese commitment to “issue any necessary further guidelines” – again, unspecified – by July 16 and to permit U.S. firms to “begin the licensing process.” The stated aim is to provide these finance companies with “full and prompt” market access, but the agreement contains no means of judging how success will be judged.

More fundamentally, however, the Trump administration’s China agreement suffers exactly the same fatal flaw as those reached by its predecessors: It rests on the assumption that the markets of determinedly mercantile countries can be genuinely opened with skillfully enough worded documents. Sadly, nothing in the history of American trade diplomacy can justify such optimism about conventional trade diplomacy.

After all, these economies understandably view their protectionist approaches as successes and see no need for significant change. The most important trade barriers they maintain are non-tariff barriers that are developed and put into effect by powerful, highly secretive bureaucracies that make identifying these practices – much less litigating against them – excruciatingly difficult. Largely as a result, protectionist systems have grown quite adept at agreeing to dismantle various barriers while generating the same results with new mercantile practices.

Think of it this way: Any economy that, as Ross indicated, could still be presenting more than 500 market access problems to foreign competitors after decades of market-opening promises is clearly an economy that’s been thoroughly exposed to the case for much freer trade – and that has emphatically rejected it.

As Adam Smith recognized, a country can hope to penetrate such rivals by threatening to impose its own barriers to the protectionist country’s exports or actually erecting them. And Mr. Trump has repeatedly expressed his willingness to head down this road both as candidate and as president. Perhaps he believes that the Chinese have taken these statements to heart, and that the 100-day exercise – and whatever other talks might be necessary – will simply iron out the details.

But if so, genuine negotiations – in the sense of give and take – shouldn’t even be necessary to begin with. China should have been informed that it’s time to explain how it’s going to import more American goods and services, how many more it will buy, and by when. Team Trump should have also let the Chinese know that it will be judge, jury, and court of appeals in terms of disputes and verification, and that stiff, escalating tariffs on Chinese products will be applied until deadlines are met and targets are reached – for an extended period of time. The same approach should be used for other predatory Chinese practices that disadvantage U.S.-based producers.

For assuming Mr. Trump wants to keep control of Congress, and avoid lame-duck status, he faces some China and trade-related deadlines of his own that are approaching faster than he may realize. They’re called the 2018 and 2020 elections.

(What’s Left of) Our Economy: Laughable NAFTA Defenses from the New York Fed

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Canada, competitiveness, Federal Reserve, intermediate goods, intra-industry trade, Mexico, NAFTA, New York Fed, North America, North American Free Trade Agreement, rules of origin, supply chains, tariffs, The Race to the Bottom, Trade, Trump, {What's Left of) Our Economy

Although the Federal Reserve Bank of New York says that posts on its Liberty Street Economics blog “do not necessarily reflect the position” of either this branch of the federal reserve system or the system itself, it’s hard to avoid the conclusion that the bank has gone to war against President Trump’s announced plans to renegotiate NAFTA (the North American Free Trade Agreement). Why else would it have run items critical of these plans on consecutive days last week?

Even more important, it’s hard to avoid the conclusion that these posts aren’t vetted seriously for basic knowledge of America’s international trade situation, or even common sense. Key examples from each of these posts should suffice to establish the New York Fed’s combination of bias and ineptitude here.

The first post, by a New York Fed official and an economist from the offshoring interests-funded Institute for International Economics, purported to show that “An underappreciated benefit of … (NAFTA) is the protection it offers U.S. exporters from extreme tariff uncertainty in Mexico….Without NAFTA, there is a risk that tariffs on U.S. exports to Mexico could reach their bound rates, which average 35 percent. In contrast, U.S. bound rates average only 4 percent. At the very least, U.S. exporters would be subject to a higher level of policy uncertainty without the trade agreement.”

But it quickly becomes clear that even the authors are skeptical about this outcome. Their main stated reason hints at one main reason: “”Given the large and well-documented benefits from low trade barriers, particularly those stemming from access to a wider variety of imported intermediate inputs and lower prices of intermediate inputs, it would not be in Mexico’s interest to raise all of its MFN tariffs to their bound rates.”

This argument is only a hint, however, because it jaw-droppingly softpedals some of the main characteristics of U.S.-Mexico trade – specifically, the hugely outsized role played in this commerce by intra-industry trade. As I first described at length in The Race to the Bottom, a large share of U.S.-Mexico trade has little to do with the exchange of finished goods that dominates the textbook models. Instead, it consists of parts and components and other inputs of finished goods that travel through international production chains until they’re turned into final products.

And because there’s so little consumer purchasing power in Mexico, and so much in the United States, the lion’s share of this bilateral intra-industry trade in turn consists of intermediates being sent from U.S. factories to Mexican facilities, where they’re assembled into final products for export back to America.

Sure, in principle, a U.S. scrapping of NAFTA (which of course is not the Trump administration’s stated intention) could enable Mexico to substitute non-U.S. parts and components etc for the American-made intermediates that current make up so many of its exports. But without NAFTA, Mexico would also lose much and probably most of its current, unconditional access to the U.S. market. And since that market currently buys nearly 80 percent of Mexico’s exports, and since Mexico’s economy relies so heavily on those exports, it should quickly becomes obvious how self-defeating such a Mexican effort at hardball playing would be.

How bizarre that neither the article’s authors, nor anyone else involved in producing Liberty Street Economics, recognized these longstanding realities. Even weirder: The importance of this intra-industry trade in U.S.-Mexico trade was the major theme of another post from the same authors (plus a third) on this same blog that appeared the very next day.

Yet the NAFTA-related follies of the authors and of Liberty Street Economics hardly end there. In that second post, readers are warned that stricter rules of origin (ROO) for NAFTA could “disrupt supply chains” and in particular backfire on U.S.-based businesses by increasing the costs of their imported inputs and undermining the competitiveness of their exports outside North America.

To which someone who actually knows something current U.S. NAFTA renegotiating plans can only reply, “Seriously?”

For what the authors and the rest of the Liberty Street crowd seem to miss is that the only ROO revamping that would make any sense from a U.S. standpoint is also precisely the kind of revamping that the Trump administration seems to be considering: not only tightening the ROO (to confine duty-free treatment for goods traded inside the NAFTA zone to goods with higher levels of content produced inside the zone), but increasing the tariff penalties imposed on goods with relatively low levels of non-North American content.

In other words, the North American supply chains created by NAFTA wouldn’t be weakened. They’d be strengthened and greatly expanded.

Now the authors could still be right in arguing that such measures would raise the prices of goods made inside North America and thereby undermine their competitiveness outside North America. But they completely neglect two counter-arguments.

First, because the (U.S.-dominated) North American market is already so vast, and because intermediate goods industries in the three NAFTA countries are already so enormous, external tariffs that encourage North American businesses to use even more North American content could well bring gains inside the NAFTA zone that exceed whatever non-NAFTA losses are incurred.

Second, NAFTA as it currently exists was touted as a major boost to U.S. and North American global competitiveness, but there’s no evidence that this goal was achieved. Quite the contrary, at least according to World Trade Organization data.

They show that in 1993, the year before NAFTA went into effect, North America’s share of global goods exports was 17.9 percent. By 2015, it had shrunk to 14.4 percent. The U.S. share during this period fell from 12.6 percent to 9.4 percent, and the Canadian share decreased even faster – from 3.9 percent to 2.6 percent (no doubt, however, largely due to falling prices for the oil it exports so abundantly).

Mexico’s share of global exports did increase – from 1.4 percent to 2.4 percent. But surely that improvement stemmed mainly from selling to the United States, not to any non-North American customers.

The North American share of world merchandise imports did decrease during this period as well. But the decline was much smaller, and one quick look at the U.S. trend makes clear that the lion’s share of this improvement has resulted from the recent, dramatic turnaround in American energy trade patterns – which have nothing to do with NAFTA or any other supply chains.

The Federal Reserve system, and especially its crucially important New York branch, have long been renowned for employing premier economists and sponsoring first-rate economic analysis. But these Liberty Street Economics posts indicate that, at least when it comes to NAFTA, the New York Fed is better described as the Gang that Can’t Shoot Straight.

(What’s Left of) Our Economy: How Trump Can Get His Trade Chops Back

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bilateral trade agreements, China, dispute resolution, free trade agreements, Government Accountability Office, Japan, managed trade, Mike Pence, multilateral trade agreements, North Korea, Robert Lighthizer, semiconductors, South Korea, tariffs, Trade, Trump, U.S. Trade Representative, U.S.-Japan semiconductor agreement, {What's Left of) Our Economy

Comments made by Vice President Pence on his Asia trip concerning America’s trade relations with Japan and South Korea show both the promise and peril of the Trump administration’s approach to international commerce and globalization. Major gains for the economy are possible from negotiating a bilateral trade agreement with Japan and revamping what Mr. Pence described as a failed deal with South Korea. But first, the president and his aides must show more awareness than to date of why accords with countries like these keep failing.

According to candidate Trump, and President Trump, the main problems with such measures have been, variously, incompetent U.S. negotiators, dominance of the policy process by offshoring and similar interests, and a mistaken preference for multilateral arrangements over bilateral deals where America’s leverage is less likely to be watered down.

The second reason for failure cited above has certainly shaped U.S. trade agreements with super low-cost countries that have been tempting locations for production and job offshoring, and that have revealingly comprised the vast majority of trade deals initiated and signed by Washington since the early 1990s. But footloose multinationals have played a much smaller role when it comes to higher income countries like Japan and South Korea. There, achieving better results for the American domestic economy has faced two leading obstacles.

The first has been widely noted: the longstanding tendency of the U.S. leaders to elevate geopolitical aims like strengthening security alliances over economic aims like removing distortions to trade flows. Here, strangely, the administration has been giving off mixed signals lately. The president is now clearly treating the security-related objective of gaining more Chinese cooperation in resolving the North Korea nuclear weapons crisis as a higher priority than combating the numerous predatory Chinese trade policies that have hurt domestic employers and their workers. But he blasted such priorities as recently as last month. And the Pence statements indicate that trade and security issues will be handled on separate tracks for Japan and South Korea.

The second obstacle has been less widely noted – although it’s been a major theme of mine: Opening markets in highly protectionist countries like those Asian powers is fiendishly difficult, at best. As I’ve written, these economies are most accurately seen as nation-wide systems of protection and mercantilism. The particular form taken by any of their trade barriers or subsidies at any given moment matters much less than the underlying intent to manage trade flows to their advantage. In addition, these protectionist systems are run by powerful bureaucracies whose secretiveness and agility makes even identifying problematic practices – much less combating them – excruciatingly difficult.

The bottom line is that trade agreements with such countries are virtually impossible to monitor and enforce effectively, and because their governments know this, the provisions are violated routinely.

By contrast, because the U.S. government is so transparent, almost of America’s trade barriers and subsidies are easy to identify and attack, and American compliance with trade agreements is easy to measure. So it’s easy to see how these agreements strongly tend to create more (and more strongly guaranteed) access to the U.S. market than vice versa. This new report from the U.S. Government Accountability Office shows how these damaging results can stem from multilateral agreements, but the Korea deal spotlighted by Spence and a long string of agreements with Japan show the similarly dismal record of bilateral arrangements.

That’s not to say that worthwhile trade deals with Japan and South Korea are impossible. But they’ll require thinking that’s much further outside the box than the administration seems to be engaged in. The best possibility would be going the managed trade route. That is, rather than accept unverifiable promises to dismantle trade barriers or end subsidies, America’s interlocutors would commit to allot specific shares of their domestic markets to specific U.S.-origin goods and services. There’s even a precedent for this practice – the 1986 semiconductor trade agreement reached between Washington and Tokyo.

Managed trade of course isn’t free trade. But little about Japanese and South Korean policies fits the definition, either. And the history of the semiconductor deal is well known by President Trump’s choice to head the U.S. Trade Representative’s office, Robert Lighthizer, because he was personally and deeply involved.

Another possibility would be to expand one of the few modestly worthwhile leafs from former President Obama’s 2012 trade agreement with South Korea. Precisely because Seoul’s predatory practices in the automobile sector specifically were so difficult to combat via the standard, legalistic procedures used in the dispute-resolution systems in most American free trade agreements (and the international counterpart run by the World Trade Organization), Mr. Obama secured South Korean acceptance of provisions that are especially appropriate in dealings with opaque bureaucracies that prevent significant evidence gathering.

Specifically, if a dispute-resolution panel convened under the agreement decides that Seoul is violating the auto provisions, and the United States restores pre-agreement tariffs on Korean products, it’s up to the Koreans to prove that they’re back in compliance with the treaty before the new tariffs are removed. Even better, however, would be to impose the burden of proof on South Korea, Japan, and similar countries as soon as a complaint is filed.

Yet there’s a strong argument that the very structure of dispute-resolution mechanisms is fatally flawed. Whether the trade agreement in question is bilateral or multilateral, these arrangements treat the United States as an equal party. But given the huge size of the U.S. economy relative to any other trade agreement signatories, and therefore given its status as the paramount prize in any such agreement, this “one country-one vote” set-up is as absurd as it is detrimental to American interests.

Rather than agree to such standard dispute-resolution systems – which invariably result in deadlocks that penalize open economies like America’s – Washington should insist that dispute-resolution votes be allotted more realistically. Basing them on the sizes of the various signatory economies is one obvious formula.

And don’t forget the ultimate America-First trade policy: Dispense with negotiations altogether, or for the most part, and start imposing tariffs on the imports of predatory trading powers, or on all imports (in order to prevent offshore exporters from switching production sites). Of course, that universalism is a big virtue of the border adjustment tax proposed by the House’s Republican leaders. In return, Mr. Trump could offer greater U.S. market access to those countries that prove (after years of good behavior according to exclusively American judgments) that they’re giving American exports a fair shake. This form of unilateralism should have special political appeal for an administration that’s increasingly in need of some big early economic wins.

President Trump (at least the pre-China currency version) has been termed a trade policy disrupter. If he wants to re-earn that label, getting the nation’s Japan and South Korea trade right after decades of frightful losses would be a great place to start.

(What’s Left of) Our Economy: Let’s Get Real About Tariffs and Consumer Prices

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Arthur Taylor, automotive, Black Dog Manufacturing, Carlos Ghosn, consumers, economists, Fox Business, Maria Bartiromo, markets, Mitsubishi, Nissan, prices, Renault, tariffs, Trade, Trump, {What's Left of) Our Economy

Surely the most politically powerful argument against any American trade policies that involve tariff-ing imports holds that such moves will raise the prices consumers pay for goods and services directly and indirectly, imported and U.S.-made alike. That’s why the claim is made constantly both by domestic interests who favor the trade status quo (like offshoring-happy multinationals and retailers), and by American trade partners whose growth heavily depends on exporting to the United States. And let’s not forget most of the world’s economists. 

But now an admission has just come from a major multinational manufacturer that the real pricing impact of tariffs would surely be much less dramatic – to say the least.

The source is no less than Carlos Ghosn, who chairs both Japan’s Mitsubishi Motors and Nissan Motor Co., as well as France’s Renault. On a Fox Business program last Friday, Ghosn expressed his expectation that the global automotive sector would “adjust” to any new trade restrictions put in place by President Trump.

That’s not terribly newsworthy. After all, per the tariff critics, that could simply mean that Ghosn’s companies will raise consumer prices in order to compensate. Nor, given the corporate rush to curry favor with Mr. Trump, was it particularly newsworthy that Ghosn told anchor Maria Bartiromo that “All car makers today are paying attention to what the president is saying” (his words) and that “companies are looking at adding capacity and hiring more workers in the U.S. as a result of Trump’s plans” (as an accompanying Fox Business post put it).

What was terribly newsworthy was Ghosn’s prediction that “I don’t think anybody can sit comfortably with a price hike.” In other words, the head of an enormous worldwide automotive “alliance” has just made clear that new tariffs probably won’t lead to higher consumer prices – at least not on any sustained basis.

Ghosn didn’t specify why the industry would likely hold the line, but leading reasons aren’t tough to imagine. In particular, the U.S. automotive playing field would remain filled with players and therefore highly competitive, and American consumers these days don’t have access to infinite amounts of money, either in the form of paychecks or credit. If he’s right, then there’s no reason to suspect that these limits on pricing power are restricted to the auto industry.

Another business voice has just offered some other insights into why automatic price hikes can’t be assumed to result from tariff hikes. Arthur Taylor founded and runs Black Dog Manufacturing in Hyde Park, Utah, a producer of custom wood and metal fixtures and other products used by retailers and other vendors in malls and stores. He’s also one of the sharpest observers of the globalization and manufacturing scene I’ve met.

As Taylor reminded me in a Facebook message over the weekend, automatic price hikes can’t be assumed after tariffs because, contrary to what’s apparently believed by most economists (and argued by those business and other interests with big stakes in preserving the trade status quo), there is no pat formula businesses employ to determine the prices they charge. More specifically, they don’t use any of their costs – whether of labor, or of any domestic or foreign inputs – in any predetermined way to calculate what they charge to customers (whether individual consumers or other businesses).

Instead, “price is determined by what the buyer will pay and in business, the majority of our efforts are dedicated to getting the highest price we can for the volume we’ll accept.” In this vein, “Businesses always start with ‘how much can we get for this?’”

Of course, costs always factor significantly into pricing decisions. But they generally are not seen or treated by producers as considerations that either justify giving customers a break when they are low or falling, or entitle them to pass-throughs when they are high or rising. Rather, sellers make judgments about what buyers will pay. If necessary, they try to make the adjustments needed to produce revenues and profits that they and/or their investors consider acceptable. If their performance is unsatisfactory, sellers either try to make further changes in pricing or production techniques, or in their sales and promotional efforts; or they modify their revenue and profit expectations; or they conclude that their business is not viable and abandon the venture.

In other words, prices are produced by the functioning of an ultimately psychological system of value identification by both buyers and sellers that’s called a market. And one of the key elements of value identification for a seller has always been what a market will bear. Executives like Ghosn and Taylor recognize markets’ complexity and subjectivity, as well as their inescapability (that is, if markets are indeed viewed as the best basis for organizing economic activity).  Is it too much to ask that economists – and the politicians, journalists, and think tank hacks they influence – develop and/or purvey equally realistic views?

(What’s Left of) Our Economy: The Multinationals Debunk a Major Free Trade Claim

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2016 election, BAT, border adjustment tax, Congress, exports, free trade, GE, General Electric, House of Representatives, imports, Jeffrey Immelt, Kevin Brady, multinational companies, Paul Ryan, Republicans, retailers, tariffs, tax reform, Trade, Trump, value-added tax, VAT, {What's Left of) Our Economy

President Trump has been slow so far to launch the major trade policy transformation he promised during his campaign – in part because most of his trade policy team has taken so long to be confirmed by Congress, and in part because (especially in the case of Japan), he seems so far to be listening too closely to national security advisers who clearly prioritize alliance relationships over economics. But his election has already triggered major upheaval in America’s trade politics, and in the process fatally weakened one of the leading arguments advanced against curbing imports.

The trade politics earthquake has three major related sources. First, Republican Congressional leaders like House Speaker Paul Ryan and especially Ways and Means Committee Chair Kevin Brady, who have long strongly supported jobs-killing trade deals and related policies, have become major champions of a measure that would create one of the biggest trade barriers in American history – the so-called Border Adjustment Tax (BAT). Their proposal, which is part of the House Republicans’ larger tax reform package, would offset the discriminatory effects of foreign value-added taxes (VATs) by imposing levies on imports – as well as by supporting exports by exempting them from taxes.

Their change of heart in turn surely stems at least partly from the second big change in trade politics – a major shift among Republican voters on trade policy. As I’ve reported previously, whereas for decades, they tended to support freer trade, and the policies that have ostensibly sought to further liberalize global commerce, more recent polls show that the GOP base has turned against the idea. (Democrats, however, have become much more positive on trade’s impact on the American economy.) And the evidence goes far beyond polls – as made clear by Mr. Trump’s capture of the GOP presidential nomination over numerous free-trading rivals and his November triumph.

But it’s the final trade politics shift that has really floored me. Many of the big multinational manufacturing companies that have also strongly pushed for those same deficit-boosting trade deals – because they made it easier to source products from abroad and supply the U.S. market from foreign production sites – support the BAT, too. In fact, they’ve created a lobbying coalition to turn the idea into law.

And it’s their BAT stance that has weakened a longstanding pillar of free-trade thinking: the insistence that any sweeping tariff measures (like the BAT) would actually backfire on domestic U.S. manufacturers and other producers by raising the cost of imported inputs they use – like parts, components, and materials. Here’s the latest example of this claim – from a former bigwig at the World Bank and International Monetary Fund, no less.

I’ve presented the evidence revealing that this argument completely ignores the immense existing scale of American inputs manufacturing – and the huge markets, new growth, and jobs gains that would result by replacing foreign-made goods with these U.S.-made products. But at least as important is how the multinational practitioners themselves are refuting the theorists by endorsing the BAT.

Incidentally, the multinationals’ BAT position could indicate that I’ve been wrong about their trade performance and about the principal rationale for their backing of offshoring-friendly trade agreements – data I’ve seen showing that they import much more than they export. For if they were indeed big contributors to America’s trade deficits (that is, big net importers), then you’d think they’d be much more concerned about potentially more expensive imports than about any export boost possible from the BAT. The companies themselves, as I’ve repeatedly stated, know the definitive answer – at least regarding their own trade performance. But as long as they’re not required to disclose their import and export figures – as opposed to releasing cherry-picked numbers – we can’t be sure.

But this business enthusiasm for the BAT could also stem from an “if you can’t beat ’em, join ’em” mentality – as General Electric chief Jeffrey Immelt has signaled. In other words, perhaps they’ve decided that more localized production everywhere is an irresistible wave of the future – at least for the time being. Alternatively, the multinationals could believe that they themselves could enter the aforementioned new BAT-created domestic input manufacturing markets. If these businesses believe that the rest of that tax reform package along with the regulatory relief President Trump has promised will lower domestic American business costs further, domestic sourcing could become all the more attractive. Another possibility – precisely because America’s and their own export performance has been so relatively weak, they view foreign markets as an especially exciting growth opportunity that the BAT tax breaks could open wide. And the likeliest possibility? The answer for most of these companies is a mix of some or all of the above.

What is certain, however, is that we’re now hearing, “No thanks” from the companies that economists keep telling us are among the biggest beneficiaries of cheap imports furnished by wide open trade policies. Of course, the retailers – which relay so heavily for their profits on cheap consumer goods imports – are campaigning just as hard against the BAT. The plan’s verdict will speak volumes about whether Americans, and their political system, assign more value to making stuff or to buying it.

(What’s Left of) Our Economy: Why Trade’s Best Champions Really Need to Raise Their Game

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Brad Setser, China, Council on Foreign Relations, Financial Times, George W. Bush, Global Imbalances, manufacturing, Martin Wolf, non-tariff barriers, offshoring, offshoring lobby, tariffs, Trade, Trump, World Trade Organization, WTO, {What's Left of) Our Economy

When you’ve been in the trade policy trenches as long as I have, it’s important these days to look up from time to time and pinch or otherwise remind yourself how dramatically Donald Trump’s election a president has changed the policy landscape. And I’m of course someone who broadly supports his stated objectives in this field.

Weirdly, however, folks who oppose Mr. Trump’s views keep showing that their need to wake up is even greater, and this goes double for backers of the general trade status quo intellectually honest enough to acknowledge many of its serious problems. The biggest adjustment they need to make? Demonstrating that they can develop approaches to solving these problems that are realistic alternatives to the tariff-centered measures that the president is apparently contemplating. Recent offerings from the Financial Times‘ Martin Wolf and the Council on Foreign Relations’ Brad Setser reveal how much more progress is needed.

In Wolf’s latest column, he heaps scorn on the Trump-ian claim that expanding trade with China (or with any country) has played a “significant” role in causing any of U.S. manufacturing’s problems. And he declares that “Nothing [President Trump] does will reinstate manufacturing to its lost role as the dominant provider of “good jobs”.

But Wolf continues to see a different – and arguably more important – danger stemming from preserving the global trade status quo:

“[H]uge current account surpluses in some countries forced deficit countries into financial excesses as an (ultimately unsustainable) way to maintain demand in line with potential output. The [2007-08 financial] crisis vindicated the concern of John Maynard Keynes about the potentially malign role of surplus countries in the global economy.”

So logically, Wolf is telling readers that if better balance doesn’t come to global trade, Financial Crisis 2.0 could easily result – echoing a warning made both by me and by many eminent economists.

What does he recommend to stave off such a catastrophe? A “proactive, not defensive” approach that includes a drive to “open global markets” (as if this hasn’t been tried before?) and – most interesting in light of his opposition to U.S. trade barriers – “forcing” chronic trade surplus countries like China “to rely more on domestic and less on external demand.” It’s somewhat encouraging that Wolf recognizes that the surplus countries (read “protectionists”) won’t take these steps voluntarily. But what could he possibly mean by “forcing” if no “defensive,” or even punitive, measures like tariffs are permissable? Maybe he’ll tell us in his next column?

The gap between diagnosis and prognosis is at least as wide in Setser’s January 18 post on “China’s WTO Entry, 15 Years On.” The essay is worth reading in its entirety, for it decimates the arguments made by the entire bipartisan U.S. globalization cheerleading policy establishment (not to mention the corporate Offshoring Lobby) about the unprecedented benefits that would flow from admitting China into the global trade rule-making and enforcement body – and thereby shielding it legally from most American unilateral economic power and leverage. Here, though, are a few key examples:

>”It now seems clear that the magnitude of the post-WTO China shock to manufacturing was significantly larger than was expected at the time of China’s entry into the WTO. China already had ‘most-favored-nation” (MFN)/“normal trade’ access to the U.S. Market….But China’s pre-WTO access to the U.S. came with an annual Congressional review, and the resulting uncertainty seems to have deterred some firms from moving production to China.”

>”Moving final assembly of electronic goods to Asia created pressures for the full supply chain [i.e., the much more valuable and innovative production of parts and components, as well as the research and development and engineering work] to move to Asia….Even if the currency issue is taken off the table, I suspect that the trade gains—or really the export gains— from integrating China into the WTO’s “rules” were overestimated.”

>“It is now clear that WTO accession was not enough to make China into an easy market for foreign firms to supply from outside China.

“Here is a point that I think should get a bit more emphasis. China’s imports of manufactures, net of its imports of imported components, peaked as a share of Chinese GDP in 2003—and have fallen steadily since then. There is no ‘WTO’ effect on China’s imports of manufactures, properly measured (i.e. leaving out imports for re-export).”

>”Some firms have succeeded in China, but generally by producing in China for the Chinese market, not by selling to China. Successful challenges to some specific Chinese practices in the WTO have yet to alter this pattern….The WTO rules aren’t all that constraining in a country like China—thanks to state control of commanding heights enterprises and banks, and institutions, such as the National Development and Reform Commission (NRDC), that assure party control of major state firms and large investment projects.”

>Many WTO-legal remedies that might have worked were not used “because U.S. and European firms benefited from making use of Chinese production to meet global demand” – and because George W. Bush’s administration danced to their tune.

But Setser’s policy recommendations seem no more realistic than Wolf’s, especially if significant, unilateral tariffs are ruled out:

“The correct fight right now is against the domestic policies that keep China’s savings so high, against a surge in capital outflows that leads to a yuan depreciation that then becomes entrenched (if China’s currency goes down, I worry it won’t go back up), and against Chinese import-substituting industrial policies that aim to displace major exports to China.”

In the pre-Trump period, the diagnosis-prognosis gap unaddressed by intellectually honest supporters of the trade status quo didn’t matter much, since American presidents were so determined to preserve that status quo. But this time, it seems to be different.  And if these trade advocates hope to prevent what they tend to describe as a counterproductive – and maybe worse – shift in American policy, they’ll need to do a much better job of showing that no major course change is needed at all.

(What’s Left of) Our Economy: Foxconn’s U.S. Plans Debunk China-Related Manufacturing Defeatism

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Apple, China, electronics, flat panels, Foxconn, General Electric, Jeffrey Immelt, Jobs, manufacturing, Obama, supply chains, tariffs, Terry Gou, Trade, transportation, Trump, {What's Left of) Our Economy

Another day, another big corporate announcement about job-creation in the United States in the wake of Donald Trump’s election as president – this time from Taiwanese electronics giant Foxconn, which makes so many iPhones and other products in China.

All the usual skeptical responses have been marshaled – or will be. Some of these have already been made by Foxconn’s chairman, like “We were already thinking of this” and “Trump’s tariff threats had nothing to do with these plans.” (Those aren’t direct quotes – just paraphrases.) An unusual skeptical response is out there, too – that the very large (and growing) flat panel displays Foxconn is thinking of producing in America are inevitable candidates for relocation because they’re too fragile to keep shipping half way around the world to customers.

But here’s what’s especially fascinating about Foxconn even considering this move: It demolishes or at least severely undercuts many of the most powerful explanations for why huge chunks of manufacturing will never return to the United States.

First, although Foxconn chief Terry Gou brushed off Trump’s trade stance, he has also stated that because of surging populism in the United States and globally, the rise of protectionism is “inevitable.” In this way, he’s just acknowledged the same trends that recently prompted his General Electric counterpart Jeffrey Immelt to declare that his huge multinational manufacturer will start making more goods where those goods are sold. So there’s little doubt that, precise timing aside, Gou has had his finger up to the prevailing political winds – which got a lot stronger on November 8.

Second, it may be true that very large flat panels for the highest tech TVs etc aren’t suitable for ocean voyages. But the United States, you may remember, is an awfully big country. And at least some of its roads aren’t in such hot shape. So since these panels will still have to travel by truck thousands of miles inside America to get from factories to warehouses and then to retail outlets (or directly to customers), it’s hard to imagine that transportation technicalities have been the main drivers of Foxconn’s decision.

Third, the kinds of electronics products made en masse by Foxconn in China have long been seen as especially farfetched candidates for domestic American production because the PRC is thought to have created such utterly matchless competitive advantage in this field. As Apple executives apparently told the (credulous) Obama administration five years ago, China’s manufacturing edge goes way beyond labor costs.  The U.S. company, of course, is one of Foxconn’s leading customers.  

Instead, “the vast scale of overseas [especially Chinese] factories as well as the flexibility, diligence and industrial skills of foreign [especially Chinese] workers have so outpaced their American counterparts that ‘Made in the U.S.A.’ is no longer a viable option for most Apple products.” In other words, the electronics sector’s main supply chains are now located in China, and changing this immense fait accompli is impossible.

Yet Foxconn’s Gou is talking about doing just that. For example, he’s talking about a 30,000-50,000 job gain from the investment. Moreover, he already employs 400 in Virginia in a packaging and engineering, and has announced his intention to build a Pennsylvania facility to “build precision tools and develop a robotics programme.” That sure sounds like supply chain stuff to me.

Ever since his first run for the White House, former President Obama has used the phrase “Yes, we can” to inspire his countrymen. His successor seems to recognize that the phrase applies to reviving American manufacturing, too.

Im-Politic: Americans are Far from Bitterly Divided on Everything

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Affordable Care Act, border wall, climate change, criminal illegal immigrants, Democrats, deportations, Gallup, illegal immigration, Im-Politic, infrastructure, Mexico, Obamacare, polls, regulations, Republicans, tariffs, taxes, TPP, Trade, Trans-Pacific Partnership, United Nations

America today is deeply divided on the new Trump presidency and many substantive issues. But the message sent by a new Gallup poll is that there’s considerable consensus when it comes to identifying the nation’s major challenges. And although polls have recently gotten a deserved black eye over their election performance, this fundamental finding tracks intriguingly with that reported (by a different organization) that I wrote about a little over a year ago.

Gallup sought Americans’ views on which of President Trump’s campaign promises they believe that it’s “very important” for him to keep. Here are the top four – which were also the only choices that topped 50 percent:

>”Enact a major spending program to strengthen infrastructure” 69 percent

>”Reduce income taxes for all Americans” 54 percent

>”Establish tariffs on foreign imports” 51 percent

>”Deport the more than 2 million illegal immigrants who have

    committed crimes” 51 percent

At least as interesting, three of these four stated Trump priorities enjoy strong bipartisan support:

>infrastructure: 68 percent of Democrats, 71 percent of Republicans

>tax cuts: 46 percent of Democrats, 62 percent of Republicans

>tariffs: 45 percent of Democrats, 62 percent of Republicans

The exception – interestingly – is

>deport criminal illegal immigrants: 33 percent of Democrats, 70 percent of         Republicans

Now here are the Trump priorities that Gallup found Americans regard as least important (note – which does mean that they oppose them):

>”Cancel billions in payments to UN climate change program” 30 percent

>”Withdraw from the Trans-Pacific Partnership” 26 percent

>”Build a wall along the border with Mexico” 26 percent

>”Require that for each new federal regulation, two must be

    eliminated” 23 percent

Just FYI, the administration has already announced officially that it’s pulling out of the Pacific trade deal.

And guess what? There’s a great deal of bipartisan consensus on the relative unimportance of these matters, too:

>UN climate change payments: 23 percent of Democrats, 38 percent of Republicans

>Trans-Pacific Partnership: 19 percent of Democrats, 32 percent of Republicans

>border wall: 12 percent of Democrats, 38 percent of Republicans

>regulations: 14 percent of Democrats, 31 percent of Republicans

Finally, I couldn’t help but notice that the most divisive Trump priorities, according to Gallup, are the aforementioned deportations of criminal illegal immigrants and…repealing Obamacare. A total of 46 percent of Americans told Gallup this move was “very important,” but although 68 percent of Republicans were on board with scrapping the Affordable Care Act quickly, only 26 percent of Democrats agreed.

I know that the president has his own pollsters – and of course his own opinions. But I wouldn’t be entirely surprised if their list of top White House priorities didn’t wasn’t very similar to those identified by Gallup as the public’s. Nor would I be surprised if achieving these goals – and softpedaling many of the others – made for a great first 100 days.

(What’s Left of) Our Economy: White House Fakeonomics on Tariffs and the Poorest Americans

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China, consumer spending, Council of Economic Advisers, incomes, Jobs, Labor Department, NAFTA, North American Free Trade Agreement, Obama, offshoring, poverty, tariffs, Trade, White House, World Trade Organization, WTO, {What's Left of) Our Economy

We’ve heard a lot lately about fake news. But President Obama’s outgoing Council of Economic Advisers (CEA) has just reminded us that at least as great a problem is fake policy analysis. For its new report emphasizing that tariffs are “an arbitrary and regressive tax” that hits low-income Americans especially hard glosses over and ignores completely the biggest trade-related income questions that any intellectually honest researcher would ask.

CEA argues that “tariffs – taxes on imported goods – likely impose a heavier burden on lower-income households, as these households generally spend more on traded goods as a share of expenditure/income and because of the higher level of tariffs placed on some key consumer goods.”

But here’s the main point it glosses over: The vast majority of spending by poorer Americans goes to goods and service that are lightly traded, at best. Indeed, the White House economists provide the first clues themselves. As they show (in the figure below), even though the tariff burden on after-tax income does rise as such income falls, the absolute levels are very low – a little over 1.50 percent of such income for the poorest 10 percent of households.

Figure 2 Tariff burden relative to after-tax income

And as the next figure reveals, when totally untraded mortgage, rent, and utilities are removed, both the tariff burden gap between the richest and poorest Americans, and the absolute tariff burden, shrink dramatically. The latter falls all the way down to less than 0.60 percent of the total income of the lowest 10 percent.

Figure 3 Tariff burden relative to expenditures excluding mortgage, rent, and utilities

Looking at what lower-income households actually spend explains these rock-bottom numbers. According to the same Labor Department consumption data set used by the CEA economists, households in the lowest decile on the American income scale are spending fully 42 percent of their income on housing (which is not at all traded internationally) and another 17 percent on food (which is mainly produced domestically). Another six-plus percent of these households’ economic intake goes to health care, five percent to education, and a bit over four percent to entertainment (also all wholly or largely un-traded).

Interestingly, another 14 percent of the lowest-income group’s expenditures goes to transportation. U.S. oil imports are (lightly) tariffed. But assuming most of the poorest Americans don’t own, lease, or rent their own vehicles, the impact on their finances is surely minimal.

Add these numbers up, and clearly America’s lowest-income consumers spend hardly anything on imported goods that are subject to tariffs.

Moreover, here’s what the CEA economists completely ignore: The last few decades’ worth of trade policies they implicitly endorse here have wreaked havoc on the employment – and therefore incomes – of many of these same lower-income households.

Just look at what’s happened to domestic payrolls in two industries that used to provide jobs for many Americans who have no doubt fallen way down the income ladder: furniture and apparel. According to Labor Department data, since the North American Free Trade Agreement (NAFTA) went into effect in 1994 and ushered in the current era of U.S. trade policy, employment is down by more than a third in the former and by nearly 85 percent in the latter. Moreover, import- and offshoring-related job losses have been especially steep since China entered the World Trade Organization at the end of 2001 – as widely cited scholarship has emphasized.

As NAFTA also triggered a heated debate on trade policy in the United States, critics started printing up and handing out garments reading “My job went overseas and all I got was this lousy T-shirt.” Obviously, these are gifts that someone should have mailed the White House economists who suggest that tariffs have delivered the main trade-related hit to America’s poorest.