(What’s Left of) Our Economy: A Winning Trade War Message from the Last Pre-China Virus Manufacturing Figures

Tags

aerospace, aircraft, Boeing, China, China virus, coronavirus, inflation-adjusted output, manufacturing, manufacturing production, metals, supply chains, tariffs, Trade, trade wars, {What's Left of) Our Economy

The new Federal Reserve industrial production figures are now out, and although they only bring the story up through February, they contain two vital messages: First, taking into account ongoing safety problems with aerospace giant Boeing (and its vast domestic supply chain), they’re very solid – and reinforce the case that the pre-China Virus manufacturing and overall U.S. economies were faring well despite widespread slowdown fears. Second, they also show that, despite the equally widespread tariff alarmism being mongered throughout the Trump years, domestic manufacturing wound up handling the so-called trade wars just fine.

According to the Fed, inflation-adjusted manufacturing output increased by 0.12 percent month-to-month and remained down on a year-on-year basis (by 0.18 percent). January’s monthly constant dollar production dip was revised down from 0.09 percent to 0.23 percent. Yet this real output is up on net by 1.33 percent since its last low point (last October) and by 0.36 percent since the first full month of significant Trump tariffs (April, 2018).

At the same time, these production levels remain 1.28 percent below those of manufacturing’s last peak – in December, 2018. So these are by no means salad days for domestic industry.

Take a look, however, at the main Boeing-related figures. Aircraft production and parts sank by 5.12 percent sequentially in February. It reached its lowest level since October, 2011 and this drop followed January’s 11.36 percent monthly nosedive.

Moreover, although impossible from the Fed figures to quantify precisely, the production halt of Boeing’s popular 737 Max model that began in January is clearly dragging down output in sectors ranging from metals to industrial machinery to plastics to electronics and instruments.

The rapid recent spread of the coronavirus throughout the United States will start generating very different and much worse manufacturing production and other data going forward. But these latest data show domestic industry’s performance even as tariffs on literally hundreds of billions of dollars worth of tariff on Chinese and metals inputs used by manufacturers remained firmly in place. And if that doesn’t signal loud and clear that both American producers and consumers were withstanding the Trump trade wars – a New Normal that’s likely to survive the passing of COVID 19 – quite nicely, and in fact that the entire economy had been winning it, what could?

(What’s Left of) Our Economy: Score Another Victory for Trump’s Tariffs – on Metals

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aluminum, Bob Tita, China, metals, overcapacity, steel, tariffs, The Wall Street Journal, Trump, World Steel Association, {What's Left of) Our Economy

Wall Street Journal manufacturing reporter Bob Tita, who knows his stuff, more than earned his paycheck with a new story on how all the coronavirus-related disruption to the global economy is worsening a chronic global glut of key metals – especially steel – that’s likely to keep ballooning thanks to continued over-production from glutter-in-chief China.

Especially alarming seems to be this Tita finding: As the PRC’s economy and manufacturing sector have slowed markedly due to the outbreak, and reduced demand for metals,

“many of the country’s steel mills and aluminum smelters have continued to operate because stopping and starting equipment handling molten metal is expensive and risky. Millions of tons of steel and aluminum produced during what is now the worst manufacturing slump on record in China have created a surplus of metal that will take months to shrink, even if the epidemic is contained and demand recovers later this year in China and beyond.

“As a result, the global stockpile of steel and aluminum threatens to push down prices and put new pressure on producers in the U.S., Western Europe and elsewhere. Many of those companies were already struggling to earn a profit on steel and aluminum because of lower prices and weakening demand from manufacturers.”

Indeed, he quotes a U.S. scrap steel broker as fearing that “We could see China swamp the entire world with steel.”

Yet Tita – and the broker – seem to be missing something crucial about the steel glut’s recent past, present, and likely future: The situation then, now, and going forward would’ve been much worse if not for the global nature of President Trump’s steel tariffs. And the latest global output data from the World Steel Association have just proven this point yet again.

When first imposed, in March, 2018, the levies were blasted as catastrophic mistakes by globalist and free trade conventional wisdom-mongers in politics, the Mainstream Media, big metals-using industries, and their hired guns in the think tank world. Yes, they acknowledged, China has been guilty of dumping its bloated steel (and aluminum) output overseas at artificially low prices, thereby exporting not only metals but a metals recession and unemployment around the world. But the United States was an exception, because of steel tariffs already imposed under the Obama administration.

The new U.S. duties were hitting America’s trade partners indiscriminately, including supposedly loyal allies in Europe and East Asia (along with Mexico and Canada). What could be dumber or more short-sighted – especially since these countries had joined with the United States to start putting multilateral pressure on China to cease and desist?

But as RealityChek regulars know, none of these complaints held even a drop of water. For the rest of the world was likely to continue responding to the metals flood from China the way it always had – by ramping up their own exports to the United States, and/or putting the Chinese metals inundating their own markets into new boxes with their own labels and sending them state-side – a practice known as transshipping (and involves committing customs fraud).

Moreover, after achieving exactly nothing since it was created in September, 2016, the multilateral steel talks seem doomed because China has decided it’s had it even with pretending to be interested in cutting its capacity meaningfully.

Yet thanks to the global scope of the Trump tariffs, the U.S. economy is no longer serving as the world’s steel buyer of last resort – and manufacturing punching bag. I first documented their effectiveness in this May, 2019 op-ed. And I’m pleased to report that as of January, 2020, the World Steel Association’s figures show that they’re still working exactly as intended.

The Association tracks output for 64 countries that comprise the vast bulk of global production. And its new figures show that on a January-January basis, China’s steel production rose in tonnage terms by 7.2 percent. That’s considerably faster than world production growth of 2.1 percent.

But the American industry expanded output by more than the global industry, too – by 2.5 percent. And much of this relative improvement stemmed from the poor production performances of other regions and countries that traditionally viewed the United States as the world’s big steel dumping ground. For example, during this year-long stretch, steel tonnage production in Japan rose by only 1.3 percent. For South Korea and Taiwan, it actually fell – by eight percent and 14.6 percent, respectively. And overall European Union production sank by twelve percent.

This success contrasts sharply with the pre-tariffs situation, when the United States was clearly the world’s biggest steel production loser as the result of gluts not only in China but created by many other economies.  

At the same time, the battle to safeguard American domestic metals producers hasn’t been won once and for all. As Tita notes, although “Tariffs have made many types of metal made in China uncompetitive in the U.S.,” China’s still “large steel-and-aluminum output drives up supply and weighs on prices around the world. Excess metal in China could create more competition for U.S. steel exports or enter the U.S. indirectly as imports from Canada and Mexico” – where the American levies have been lifted in connection with the signing of the new U.S.-Mexico-Canada trade agreement (USMCA), the follow-on to the North American Free Trade agreement (NAFTA).

But the new U.S. and global production numbers also show indisputably that Mr. Trump was right and his critics wrong about his sweeping approach to the metals tariffs. Just don’t expect any of the critics to admit it.

(What’s Left of) Our Economy: Solid Manufacturing Jobs and Trade Numbers Despite Boeing’s Woes

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Boeing, China, exports, imports, Jobs, manufacturing, manufacturing jobs, manufacturing trade deficit, Phase One, tariffs, Trade, trade deficit, {What's Left of) Our Economy

You say U.S. manufacturing jobs keep growing too slowly? You say manufacturing’s trade deficit remains too high, and its exports inadequate? According to two big new government reports on the state of the American economy this morning, if you do, you should also be saying (with beaucoup de snark) “Thanks, Boeing!”

For it keeps getting clearer that the aerospace giant’s safety woes and resulting production halt of its (once) popular 737 Max model are sandbagging both measures of manufacturing’s performance – and not trivially. Don’t forget the silver lining, however.  Despite the Boeing effect, domestic industry has been holding up encouragingly well. 

The evidence is clearest from the trade figures. As reported last month in RealityChek, if not for a big deterioration in the civilian aircraft trade balance (until recently the sector of the entire economy with the biggest trade surplus), the full-year 2019 manufacturing trade shortfall would barely have grown over the 2018 level. And since industry itself increased output last year in pre-inflation terms, (at least through the latest – third quarter – data available), that represented a heartening sign that domestic manufacturing was becoming more self-reliant.

In January, the manufacturing shortfall actually fell month-to-month (by 0.38 percent, from $82.24 billion to $81.93 billion, and $850 million in absolute terms). The mix wasn’t exactly ideal: Imports were down 3.11 percent, but the value of exports (which are much smaller) fell by 5.58 percent.

But the civilian aircraft trade surplus plunged 44.43 percent – from $3.06 billion to $1.70 billion. So in January, had the sector simply equaled its December trade performance, the January manufacturing deficit would have been not $81.93 billion but $80.57 billion – the lowest total since last March’s $76.96 billion, and a monthly drop of 2.03 percent, not 0.38 percent. Further, manufacturing exports would have been $87.93 billion rather than $86.25 billion – or down only 3.74 percent, not 5.58 percent.

The picture is muddier for manufacturing employment because the data for civilian aircraft and their parts is reported one month after most other industry-by-industry jobs statistics. Another complication: The new jobs report overall goes up to February.

More puzzling still: Although latest statistics for the Boeing-related categories are January, they’re little changed from the December totals even though the 737 Max production suspension was announced in the middle of that month.

But it’s still legit to wonder whether they would’ve been better without the Boeing crisis. And how much better? Moreover, the vast aircraft supply chain encompasses dozens of manufacturing sectors beyond the engines and parts themselves. After all, these systems are in turn made of any number of components and materials. Boeing’s difficulties, therefore, could have been holding back manufacturing job growth broadly speaking for months.

Even so, industry as a whole added 15,000 jobs sequentially in February – it’s best such performance (except for a November increase that was aided by the end of the General Motors strike) since January, 2019’s 20,000.

And let’s not forget – industry achieved this employment gain even though the “Phase One” trade deal with China has left stiff U.S. tariffs on hundreds of billions of dollars worth of imported goods from China, as well as on much foreign steel and aluminum.

No doubt the coronavirus outbreak could send the manufacturing performance arrows pointing down again, or leveling off, in the next few months. But the new jobs and trade data make clear that despite an external (Boeing) shock that has nothing to do with President Trump’s trade wars, and despite the trade curbs he has enacted, domestic manufacturing has been on the rebound lately, and showed impressive resilience that bodes well for its future – and the entire economy’s.

(What’s Left of) Our Economy: Boeing Woes Finally Smack (Otherwise Encouraging) Fed Manufacturing Data

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737 Max, aircraft, Boeing, China, China trade deal, Commerce Department, Fed, Federal Reserve, industrial production, inflation-adjusted output, manufacturing, manufacturing production, manufacturing recession, Phase One, recession, tariffs, Trump, {What's Left of) Our Economy

The Federal Reserve’s report on January industrial production is out, and it not only finally makes clear the impact on manufacturing output of Boeing’s safety woes. It also strongly suggests that whatever (mild) recession industry has experienced is now over.

I say “whatever (mild recession)….” because several official measures of manufacturing output indicate that no downturn took place at all. For example, the Commerce Department’s GDP-by-Industry data series (which gauge factory production on a quarterly basis, not a monthly basis like the Fed) shows that manufacturing’s real gross output (analogous to the Fed’s inflation-adjusted manufacturing output figures) has not declined for two consecutive quarters during the entire current economic recovery. At the same time, it has registered several two-quarter (and longer) stretches periods during which manufacturing by this measure of inflation-adjusted output fell cumulatively.

Commerce’s tables for real value-added (a measure of manufacturing production that tries to prevent counting the production of inputs both as such, and as parts, components, and materials of finished goods) do report that industry’s production dropped between the fourth quarter of 2018 and the first quarter of 2019, and between the first and second quarters of this year. Cumulatively, moreover, this production level was lower in the second quarter of this year than in the third quarter of 2018 – revealing that on this basis, manufacturing suffered a three-quarter downturn.

At the same time, according to this series, both by the consecutive quarters and the cumulative methodology, the manufacturing recession ended in the third quarter, when it topped both the second quarter level and the output figure for the third quarter of 2018.

And don’t forget: According to the Fed’s real manufacturing output figures, domestic industry’s price-adjusted production peaked in December, 2007 – i.e., it’s never pulled out of the slump that began with the Great Recession. Further, as I documented last month, the Fed’s data show that within this long manufacturing recession, several shorter recessions have begun and ended by the cumulative criterion.

So that’s some of context needed for the Fed finding that after-inflation U.S. manufacturing production fell by 0.09 percent in January. That represented its first sequential decline since October, and left year-on-year production down 0.72 percent. By that standard alone, therefore, manufacturing’s recession has continued.

At the same time, industry’s constant dollar production is up since last April – by 0.70 percent. It’s also up 0.34 percent since April, 2018 – the first full month when the Trump administration’s tariffs on steel and aluminum imports went into effect,  and signaled that the President’s tariffs-heavy approach to trade had begun in earnest.

But the Boeing effect also needs to be considered as well. January saw a nosedive in aircraft and parts production of 1.07 percent sequentially, due to the company’s December announcement that production of its flawed 737 Max model would be suspended. The drop-off was the sector’s biggest monthly decline since the nearly 24 percent plunge in recessionary September, 2008.

I’ve wondered whether Boeing’s troubles had already been dragging down manufacturing output – given the company’s huge domestic supply chain, and given that the 737s had been grounded or banned from national airspaces nearly worldwide since March. But today’s report leaves no doubt that their effects have shown up. Indeed, the Fed explicitly stated that “excluding the production of aircraft and parts, factory output advanced 0.3 percent” on month in January.

So without the Boeing effect, January manufacturing output would be up cumulatively since last February – by 1.09 percent, not by 0.70 percent. And the increase since the advent of the main Trump tariffs would have been 0.74 percent, not 0.34 percent. These figures certainly don’t reveal a manufacturing boom – or even close. But given that even after the Phase One trade deal was signed with China, tariffs on hundreds of billions of dollars worth of Chinese products remain in place (many of them levied against goods that are manufacturing inputs), they cast new doubt on how damaging the President’s trade war has been for domestic industry.

Boeing’s 737 Max crisis will end some day. But the company itself warned that it could last “several quarters” more. Moreover, Boeing’s troubles scarcely end with this ill-fated aircraft. In other words, the company’s woes will keep impacting both all U.S. manufacturing data for the foreseeable future. Therefore, it’s up to the nation’s economists and journalists (along with think tank hacks, no matter who’s funding them) to keep this in mind when judging the effect of the President’s trade wars and other economic policies. Let’s see how many can meet this challenge.

(What’s Left of) Our Economy: Strong Internals for America’s 2019 Trade Performance

Tags

Advanced Technology Products, aircraft, Boeing, China, manufacturing, merchandise trade deficit, North America, Pacific Rim, tariffs, Trade, trade deficit, Trump, U.S.-Mexico-Canada Agreement, USMCA, {What's Left of) Our Economy

Because last week’s official U.S. trade figures came out right after President Trump’s acquittal in the Senate impeachment trial and the confusing Iowa Democratic presidential caucuses, I didn’t get the chance to issue more than a limited analysis focusing on some very encouraging highlights for backers of administration trade policy. But the newsworthy results from the release – which covered December and therefore full-year 2019 – by no means stopped there.

For example, the biggest annual drop on record in the still-massive U.S. goods trade deficit with China was accompanied by the shrinking of the value of total merchandise trade between the two economies by more than 18 percent – to its lowest level ($558.87 billion) since 2012 ($536.14 billion). Moreover, since the U.S. economy has grown significantly over the last seven years, this sign of decoupling looks all the more impressive.

Also crucial – although that merchandise trade deficit remains way too big, the portion most heavily influenced by trade policy barely grew (and grew much slower than the overall economy). And even better, the overall merchandise trade deficit became more concentrated within North America. That’s could be a big positive for two reasons. 

First, even before the new U.S.-Mexico-Canada Agreement (USMCA)came into force, with its modest spurs to regional production and sourcing, American imports from its two neighbors contained relatively high levels of U.S. content. That means that domestic industries and their employees had a relatively big share of their production – along with the associated revenues, jobs, and wages. (At the same time, there’s now considerable disagreement over how these Canada and Mexico content levels compare with goods imported from elsewhere.  See, e.g., here and here.)

Less controversy surrounds the second argument for North American-izing U.S. trade:  America’s fortunes are much more directly affected by the well-being of its immediate neighbors than by conditions elsewhere.

And the new trade report shows that North American-ization advanced rapidly last year. Specifically, between 2018 and 2019, China’s share of this trade gap sank from 47.96 percent to 41.84 percent and that of Pacific Rim countries (an official U.S. government grouping that excludes the Western Hemisphere) from 58.26 percent to 53.37 percent. But North America’s share jumped from 11.40 percent t 15.10 percent.

Moreover, the Chinese share was the lowest since 2011 (40.70 percent), the Pacific Rim’s since 2012 (52.44 percent) and North America’s the highest of the current economic recovery. So anyone telling you that, under President Trump, the merchandise trade deficit has simply changed composition, with no net benefit for America, needs a clue.

The news was also unquestionably good on the manufacturing trade deficit front. As with the China goods deficit, it remains way too humongous. But between 2018 and 2019, it grew at the slowest annual rate (1.09 percent) since 2016. That year – the final year of the Obama administration – this trade shortfall actually shrank by 1.19 percent

Full-year 2019 data for domestic manufacturing output aren’t available yet, so it’s not possible to make the crucial comparison between this trade deficit progress and industry’s overall growth. (It’s up on a third-quarter-to-third-quarter basis, though.) But when evaluating how the manufacturing trade results reflect on President Trump’s tariff-centric trade policies, it’s essential to take into account one major development that has had nothing to do with these policies – the safety woes of aircraft giant and usual trade surplus standout Boeing.

During 2019, that small rise in the manufacturing trade deficit amounted to $11.15 billion. There’s no doubt, however, that Boeing’s problems have cut deeply into its trade performance. In fact, last year, the civilian aircraft trade surplus fell from $40.25 billion to $29.77 billion – a difference of $10.48 billion. As a result, had this trade balance simply remained the same, the overall manufacturing trade deficit would have practically leveled off.

Further, Boeing’s problems also worsened the nation’s trade deficit in advanced technology products – which continued worsening in 2019. This high tech trade gap hit $132.37 billion – its third straight all-time high, and a 3.29 percent increase from the 2018 total ($4.22 billion). But without the $10.48 billion increase in the trade deficit for civilian aircraft (which are classified as an advanced technology product), the high tech trade gap would actually have narrowed slightly, and for the first time since 2016.

A classic 1960s ad sought to sell hairspray by claiming, “The closer he gets…the better you look!” From today’s standpoint, that looks kind of chauvinistic. But with a few word changes, it’s a pretty good description of the year in trade, 2019 for the United States, and for President Trump.

(What’s Left of) Our Economy: Manufacturing Jobs Revisions Burnish Trump’s Employment and Trade War Record

Tags

Barack Obama, Bureau of Labor Statistics, China tariffs, election 2020, Jobs, manufacturing, manufacturing recession, metals tariffs, tariffs, trade war, Trump, {What's Left of) Our Economy

However much of a pain it is for us data geeks to slog through monthly U.S. jobs reports incorporating multi-year revisions, President Trump, his supporters, and everyone rooting for the domestic manufacturing sector (which should be everyone) should be grateful for the latest such exercise.

For the results show that the economy’s manufacturing job creation record under his administration has been better on the whole even than previously believed. Moreover, that conclusion also is justified for manufacturing employment since the President’s tariff-heavy trade policies began in earnest (in April, 2018, the first full month when the global duties on imports of steel and aluminum were in effect).

Not that this morning’s release from the Bureau of Labor Statistics came up all roses for Trump-World and U.S.-based industry. Manufacturing lost 12,000 net jobs sequentially in January – the worst such total since October’s 41,000 (when payrolls were dragged down by the strike at General Motors). Ignoring that anomalous figure, the January manufacturing jobs shrinkage was the worst monthly decline since August, 2016’s 21,000 nosedive.

Moreover, the year-on-year gain of 26,000 was the weakest since the 17,000 annual improvement in February, 2017 (the President’s first full month in office).

But check out the revisions, and the record during the Trump years improves in some key respects – especially compared with that compiled under his predecessor, Barack Obama. The table below shows how the revisions change the picture between the two administrations – an issue bound to matter greatly during the current presidential campaign. They begin with 2015 (the first year for which the totals were updated) and proceed through last month. The figures for the post-Trump tariffs period and the Trump administration’s tenure stop in January (because that’s when the effects of the benchmark revisions stop. The left-hand column shows the pre-revision results and the right-hand column the new. All figures are seasonally adjusted (the statistics most closely followed by economists):

                                            Old manufacturing job change      New change

2015:                                                  +30K                                  +70K

2016:                                                   -45K                                    -6K

2017:                                                +196K                               +185K

2018:                                                +284K                               +264K

2019:                                                  +46K                                 +58K

final 34 Obama months:                  +270K                               +259K

first 34 Trump months*:                 +478K                               +479K

since tariffs*                                   +197K                               +231K

(April, 2018):

21 months before:                          +320K                               +253K

*thru December, 2019

To me, the most important comparisons involve those between the two administrations, and those between the pre- and post-tariff periods of Mr. Trump’s presidency.

The Obama and Trump figures show how manufacturing employment changed during their periods in office closest together in the current (expansionary business) cycle – the comparison that yields the best apples-to-apples results. The Obama period ends with January, 2017 (the former President’s last – near-full month in office and the Trump period begins with February, 2017 (his first full month in office).

And as made clear above, the growth in manufacturing payrolls was a bit weaker during the Obama period than previously reported, and the growth during the Trump period ever-so-slightly stronger.

As for the impact of Mr. Trump’s tariffs, although these numbers don’t isolate the industry sectors likely to be most seriously affected (especially the metals-using industries – which I’ll examine shortly), the results are instructive in particular for the China duties’ effects, since they’re so widely, if unevenly, spread throughout domestic manufacturing.

Since the Trump tariffs’ advent, 21 revised data months passed through December, 2019, so the best comparison is that with the 21 months preceding them. And interestingly, the revisions show that although manufacturing’s hiring pace indeed has slowed since the first full tariff month, they’ve slowed much less markedly (by 8.70 percent rather than 38.44 percent).  And that means that manufacturing employment has improved more since the tariff era began than previously thought (by 231,000 instead of 197,000).  

Manufacturing trends won’t be working in Mr. Trump’s favor politically this year unless its recent weakness (which may not technically have been a recession) ends – especially on the hiring front. Sure , he could in theory blame the troubles of Boeing and its safety-related woes, which could last many months more. But voters are unlikely to be interested.

Economically speaking, however, the President can legitimately contend that, contrary to endless predictions, American industry and indeed the entire nation are weathering the trade conflict with China in particular just fine – and claim that the modest costs have been well worth the strategic goal of checking the economic and technological progress of this dangerous dictatorship.

(What’s Left of) Our Economy: Why 2019 Was a Winner for Trump Trade Policies & America

Tags

Barack Obama, Boeing, China, GDP, Made in Washington trade deficit, manufacturing, non-oil goods trade deficit, tariffs, Trade, Trade Deficits, Trump, {What's Left of) Our Economy

OK, let’s cut to the chase regarding the new U.S. trade deficit data. (We’ll analyze today’s report from the Census Bureau more comprehensively tomorrow.)

The most important result revealed by the figures – which bring the story up to December and therefore give us our first look at full-year 2019 development – isn’t that the overall U.S. trade deficit fell year-on-year last year (which alone indicates that President Trump is starting to keep one of his signature campaign promises). It isn’t that the huge annual China goods deficit cratered (by 17.62 percent, the biggest such drop on record – including Great Recession year 2009 – and indicating another promise being kept). It isn’t that the still-huge manufacturing deficit has virtually stabilized despite the safety woes of Boeing, long the generator of major trade surpluses. And it isn’t even that these trade gaps have narrowed even as the economy has continued growing acceptably (which most economists insist is practically impossible, especially for a consumer-heavy country like the United States).

Instead, the most important result is that this economic growth continued in 2019 even as that portion of the trade deficit most influenced by trade policy increased at a particularly slow rate. The obvious conclusions? Trade policy can influence the size and rate of change in the trade deficit, and that the Trump trade policies are working.

To remind, this portion of the trade deficit (which I call the Made in Washington trade deficit) sheds light on the above points because it’s the non-oil goods deficit. It’s highly trade policy sensitive because it strips out of the total trade balance numbers the services balance (because so little progress has been made in worldwide services trade liberalization) as well as the oil balance (because oil is rarely the subject of trade deals or other trade policy decisions).

The table below presents the numbers for the last three years of the Obama administration and the first three of the Trump administration – a comparison that’s apt because these time periods are right next to each other in the current (expansionary) business cycle.

Made in Washington trade deficit % change     GDP % change          ratio

2013-14:        +19.35                                                 +4.42                4.38:1

2014-15:        +21.23                                                 +3.98                5.33:1

2015-16:          +2.41                                                 +2.69                0.97:1

2016-17:          +8.05                                                 +4.30                1.87:1

2017-18:        +12.66                                                 +5.43                2.33:1

2018-19:          +1.75                                                +4.12                 0.42:1

As is obvious from the above, the Made in Washington deficit’s growth rates during the Obama years (measured in pre-inflation terms) have been considerably slower than those of the Trump years. And yet the GDP (gross domestic product) growth rates of the first three Trump years have been notably faster than those of the last three Obama years.

In other words, as made clearest by the right-hand column, which shows the ratio between the two, the link between economic growth and trade deficit growth has been weakening significantly during the Trump years. And the President’s tariff-heavy trade policies have plainly played a major role. All else equal, moreover, that means growth that’s more nationally self-sufficient (no small achievement in a still dangerous world), healthier, and therefore more sustainable.

President Trump makes way too many false or exaggerated boasts about the economy (among other subjects). But the 2019 trade data show that when it comes to trade policy, he’s entitled to considerable bragging rights.

(What’s Left of) Our Economy: New Productivity Data Further Debunk “Tariffs Hurt” Claims

Tags

aluminum, aluminum tariffs, China, durable goods, fabricated metals products, inputs, Labor Department, labor productivity, manufacturing, metals, metals tariffs, multi-factor productivity, productivity, steel, steel tariffs, tariffs, Trade, trade law, World Trade Organization, WTO, {What's Left of) Our Economy

The Trump administration’s announcement last Friday of new tariffs on some metals-using manufactures imports was greeted with the predictable combination of chuckles and gloating from the economists, think tank hacks, and Mainstream Media journalists who keep insisting that all such trade curbs are self-destructive whenever they’re imposed.

If the critics bothered to look at the new official data on multi-factor productivity, however, they’d stop their victory laps in their tracks. For the Labor Department’s latest report on this broadest productivity measure utterly trashes their claims that the tariffs slapped on metals in early 2018 – which unofficially launched the so-called Trump trade wars – have backfired by undercutting most domestic American manufacturing.

In fairness, the Trump administration itself gave the trade and globalization cheerleaders lots of evidence for their triumphalism. Specifically, the levies were justified with statistics showing that various categories of goods made primarily of tariff-ed steel and aluminum had seen major surges of imports since the duties began. The obvious conclusion? Foreign-based producers of these products were capitalizing on their cheaper metals available to their factories to undersell their U.S.-based competition.

As a result, Mr. Trump decided to tariff some of these final products, too – to erase the advantage created for imports from less expensive steel and aluminum.

So in one sense, it’s tough to blame tariff critics for feeling vindicated about predictions that the metals levies might boost the metals-producing sectors themselves, but injure the far larger metals-using sectors. Ditto for their warnings that in an economy with so many connected industries, protection for one or a few would inevitably spur calls for such alleged favoritism by others, threatening a consequent loss of efficiency for all of manufacturing and even the entire economy.

Examine the issue in more detail, though, and you see that it’s entirely possible to arrive at radically different conclusions. For example, the new tariffs appear to be imposed on a limited set of products, and none of them (e.g., nails, tacks, wires, cables, even aluminum auto stampings) qualifies as a major industry. In other words, the chief metals-using industries, like motor vehicles and parts overall, aerospace, industrial machinery (many of which have been complaining loudly about the metals tariffs, even though their overall operational costs have been barely affected) were left out.

Finally in this vein, and as the critics imply, the new Trump tariffs also make the case for trade curbs on any final products whose significant inputs receive duties. Why indeed strap otherwise competitive domestic producers with higher prices for materials, parts, and components? This practice has been a major flaw in the U.S. trade law system, which has prioritized legal over economic and industrial considerations, since its founding. And in fact, my old organization, the U.S. Business and Industry Council, has been urging this reform since at least 2008.

Even better – to prevent cronyism from influencing such trade policy decisions, impose a uniform global tariff on all manufactures, or all non-energy goods.

But it’s just as important to point out a gaping hole in the longstanding argument that cheap imported inputs (including subsidized, and therefore artificially cheap imported inputs) are essential for the overall global competitiveness of U.S. domestic manufacturing. And the hole has been opened (or perhaps it’s more accurate to say, reopened, given this previous RealityChek analysis of earlier data) by those new multi-factor productivity statistics.

They only go through 2018 (such time lags explain why multi-factor productivity trends aren’t followed as closely as labor productivity trends). But they’re the broader of the two productivity measures, as they gauge the effect of many inputs other than hours worked. And via the table below, they make clear that even the wide open access domestic manufacturers enjoyed to artificially cheap metals and other imported inputs have played absolutely no evident role in improving industry’s health. In fact, there’s reason to conclude that the more access domestic industry had to such materials, parts, and components, the less productive it became.

                                                               Total mfg   Durable goods   fabr metals

1990s expansion (91-2000):                   +23.40%       +38.76%         +4.79%

bubble decade expansion (02-07):          +11.74%      +16.61%          +7.62%

current expansion (10-present):                -4.84%         -0.84%           -4.51%

pre-China WTO (87-2001):                   +22.18%      +37.72%           -3.32%

post-China WTO (02-present):               +6.72%      +17.17%           -2.05%

As usual, the time periods chosen to illustrate these trends consist (with one exception) of recent economic expansions (because they enable the best apples-to-apples comparisons to be made). And the 1990s expansion is the first one examined because the relevant Labor Department data only go back to 1987. The products chosen consist of all manufactured goods, durable goods industries (the super-category containing most of the big metals users), and fabricated metals products (the most metals-intensive sectors of all).

The table demonstrates that multi-factor productivity growth across-the-board has weakened dramatically from the 1990s expansion through the current – ongoing – expansion. The slowdown between the 1990s expansion and the previous decade’s expansion was moderate (and multi-factor productivity actually grew faster during the second in fabricated metals, though in absolute terms its improvement lagged badly). But during the current recovery, multi-factor productivity growth has been replaced in all three instances by multi-factor productivity decline. And crucially, during none of this time did any of these manufacturing categories face any shortage of imported inputs of any kind – subsidized or not.

Indeed, one event in 2001 greatly increased the supply of subsidized inputs – China’s admission into the World Trade Organization (WTO). For once China joined, the difficulty of using U.S. trade law to keep these Chinese products out of the U.S. economy became much greater.

Yet at the same time, as shown below, productivity growth was considerably weaker after China’s WTO entry than before in manufacturing overall, and in durable goods. And although its performance actually improved in fabricated metals, that industry’s performance was much worse in absolute terms.

Nor does the inclusion of the 2007-2009 Great Recession in the post-2002 China-related data (which violates the “apples-to-apples rule”) seem to have been a game changer – because the worst performances of all in each case, and by a mile, have been registered during the current expansion. Moreover, since the data stop in 2018, those current expansion results are dominated by the period preceding both the Trump metals tariffs and the Trump China tariffs (most of which target industrial inputs, as opposed to final products).

It’s entirely possible that, for various reasons, the multi-factor productivity statistics would have been even worse if not for the widespread availability of cheap imports. Or maybe multi-factor productivity isn’t much of a measure of manufacturing’s health? Both alternative explanations, however, seem pretty far-fetched (especially given the pre- and post-China WTO results).

Much likelier – as I argued in that post linked above – the availability of cheap inputs has helped retard productivity growth by enabling businesses to achieve cost-savings without investing in research and development into new products and especially processes, and without buying more efficient equipment (including software).

(What’s Left of) Our Economy: Let’s Get Real When Criticizing Trump’s China Trade Deal

Tags

Charles Schumer, China, dispute resolution, enforcement, Made in China 2025, Phase One, rule of law, tariffs, Trade, trade deal, {What's Left of) Our Economy

Of all the desperation- and Trump Derangement Syndrome-fueled arguments used to disparage the President’s new “Phase One” trade deal with China, one stands out as especially silly. It’s the complaint that the agreement hasn’t secured Beijing’s agreement to change its laws permitting the various predatory trade and broader predatory commercial practices that China is using to seize world leadership in key advanced industries and technologies, or otherwise promise verifiably to halt them. (Senate Democratic leader Charles Schumer of New York has been particularly outspoken on this point.)

And the complaint isn’t silly simply because the very title of the deal – Phase One – makes completely clear that it was never meant to once and for all solve all the grave problems that Chinese predation has created. It’s mainly silly for two reasons. First, the absence of anything remotely resembling rule of law in China means that Chinese promises to change laws and regulations and even actions to change what’s on paper could not be less important.

For China’s system is based on the arbitrary exercise of power  That is, by definition, its dictators and the bureaucracies they run feel absolutely no obligation to adhere to whatever text happens to be on paper at a given moment. In fact, one of the main purposes of publishing these fake measures is to keep outsiders ignorant of the practices both of the central government and of the various layers of sub-national government – i.e., the situation on the ground, and what needs to be done to become or remain viable in China.

Second, thanks to Phase One’s actual terms, whether the Chinese do or don’t change their laws, and even their practices, matters little now. That’s because the stiff remaining tariffs on massive amounts of Chinese goods intended for American customers effectively deny Beijing the ability to turn its technology extortion into advantages in the U.S. market – the market it needs to access and dominate in order to realize its ambitions. Indeed, the highest remaining tariffs (25 percent) penalize the very high value products targeted by the Made in China 2025 program that’s carrying out Beijing’s plans.

Moreover Phase One’s dispute-resolution and enforcement system – which ingeniously and crucially establishes a de facto American last word – goes far toward preventing China from using Made in China 2025 to turn its predation into advantages in the China’s own large market, either. If it makes the attempt, American victims can take their cases to the Washington, which enjoys broad authority under the deal to hike duties on key Chinese products even higher – and without fear of tit-for-tat Chinese retaliation. China’s only legal option is pulling out of agreement entirely – which given its continuing heavy reliance on accessing the American market, would amount to cutting off more than its nose to spite its face.

Thoughtful criticisms of Phase One have come from some quarters. Further, as I wrote in my initial assessment of the dispute-resolution system, realizing its benefits for the United States will require American leaders to show major poker-playing skills – which shouldn’t be taken for granted under the Trump administration, let alone under future Presidents. Neither development is guaranteed. But Phase One critics genuinely seeking to make certain that it works for the United States should focus on identifying actual weaknesses rather than trying to portray successes as failures.

Im-Politic: A Billionaire Candidate’s Massive Climate Change Blind Spot

Tags

China, climate change, Democratic debate, Democrats, election 2020, Im-Politic, tariffs, Tom Steyer, Trump

It’s now been five days since I first heard it, but I still can hardly believe my ears because this utterance might have been the single dumbest and/or most ignorant combination of positions I’ve ever heard a leading political figure make. It came from Tom Steyer during the Democratic presidential debate last Tuesday night, and even though the California billionaire’s campaign seems to be going nowhere fast as the 2020 campaign nears its primary phase, it deserves to be spotlighted.

The first of the two statements in question? Steyer’s declaration that “On the first day [of his presidency], I would undo Mr. Trump’s [China] tariffs.” The second? “…I would declare a state of emergency on day one on climate.”

Why is this so mind-boggingly idiotic? Because as should be known by anyone who thinks he or she is qualified to be President, not only has China become by far the world’s largest emitter of the greenhouse gases held to be responsible for climate change, but as shown in the left-hand chart below, it started becoming an emitter in a class by itself at the turn of the century – i.e., right about the time when it was admitted into the World Trade Organization (WTO). And the most important effect of WTO admission was greatly complicating the challenge faced by all the world’s economies – including America’s – in using tariffs to curb the growth of China’s subsidy-fueled carbon-belching export-heavy industries. 

We don’t yet have data for 2019, but the chart also shows that the growth of China’s emissions began to slow (though they’re still growing faster than anyone else’s except India’s) as China’s economic growth (which has always been export-heavy) began slowing. Moreover, over the last year, as literally hundreds of billions of dollars worth of Chinese goods intended for U.S. markets have been hit by President Trump with stiff tariffs, China’s growth hit a 29-year low. Think that’s a coincidence? Think again, as between 2018 and 2019, China’s annual export growth crash dove from 9.9 percent to 0.5 percent in U.S. dollar terms. (The right-hand chart, which measures emissions on a per capital basis, displays similar trends.) 

There’s nothing of course intrinsically wrong with Steyer’s passionate belief in the need to combat climate change. But his utter failure to recognize China’s immense contribution to the danger he sees makes embarrassingly clear – to put the kindest interpretation on the matter – that his knowledge base lags far behind his emotions. To the extent that other high profile climate activists repeatedly let China off the hook as well, they deserve the same criticism. And if this massive blind spot (or delusion) casts big-time doubt on Steyer’s qualifications to be President (which it should), it should have the same effect on all the other climate change resisters who display this shortcoming, too.