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

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

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

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

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

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

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

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

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

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

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

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

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

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

(What’s Left of) Our Economy: Welcome Signs of Healthier U.S. Growth

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business investment, Commerce Department, GDP, gross domestic product, growth, housing, inflation-adjusted growth, Obama, personal consumption, real GDP, Republicans, tax reform, {What's Left of) Our Economy

With the Commerce Department having issued last week its second read on U.S. economic growth in the third quarter of this year, RealityChek can update its ongoing examination of a major but sorely neglected economic issue: Is the quality of America’s growth improving or worsening? That is, has the nation managed to generate more output in ways that will make a repeat of the last decade’s financial crisis and ensuing Great Recession likelier? Or is it still relying excessively on the same unsustainable growth engines that made the crisis inevitable?

Happily, the news here is pretty good. Not earthshaking, to be sure. But the new statistics confirm that, so far during 2017, the nation has made gradual (though by no means adequate) progress toward former President Obama’s essential goal of creating “an economy built to last,” rather than one dependent on spending and housing bubbles.

As suggested by that last sentence, RealityChek measures the health of growth by looking at the share of the inflation-adjusted gross domestic product (GDP) made up of consumer spending and housing – the toxic combination whose bloat let to the previous decade’s near meltdown.

These two sectors’ combined share of the after-inflation economy peaked in the third quarter of 2005, at 73.27 percent. Last week’s GDP statistics pegged it at 72.85 percent – the lowest since the 72.70 percent in the third quarter of 2016.

In the fourth quarter of 2016, this figure rose to 72.94 percent, and increased again to 73.14 percent in the first quarter of this year. But since then, it’s dipped for two straight quarters – the first such sequence since the first half of 2014.

The big change hasn’t come from personal consumption. In fact, it’s share of real GDP hit its all-time high in the second quarter of this year: 69.60 percent. And the latest third quarter figure is a still elevated 69.43 percent. What’s happened has been a dramatic shriveling of the housing sector. It peaked as a share of real GDP in the second quarter of 2005 at 6.17 percent. The new GDP report pegs it at just 3.42 percent

Business investment – another pillar of solid, healthy growth – may have picked up in the third quarter, too. The quarter’s first estimate of GDP judged that such spending accounted for 16.33 percent of its 2.96 percent annualized constant dollar growth. That would have continued a string of declining relative importance that began in the second quarter. But the newest data revises the business investment contribution upward to 18.10 percent of a (higher) 3.26 percent annualized price-adjusted growth rate.

This hardly a sterling performance. And it hasn’t lasted very long. But these results are considerably better than those for 2016 (when business spending actually subtracted 5.33 percent from the year’s 1.49 percent real growth) or for 2015 (when such investment’s role was positive, but it fueled only 10.34 percent of that year’s 2.86 percent real growth).

In addition, they could set the stage for an interesting test of the Republican party’s fundamental tax reform strategy: Use tax cuts to put more money into the pockets of businesses and wealthier Americans to encourage the building of more factories and labs and other kinds of productive facilities at home. If the Republican approach survives Congress intact, the GDP numbers will be a big help in seeing whether its promise of producing better and healthier growth is kept.

Making News: On Batchelor Show Tonight Talking Trump’s Asia Trip – & More!

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Asia, IndustryToday, Korn Ferry Institute, Lifezette.com, Making News, NAFTA, North American Free Trade Agreement, tax reform, The John Batchelor Show, Trade, Trump, wages

I’m pleased to announce that I am scheduled to return to John Batchelor’s nationally syndicated radio show tonight. The subject of the 9:15 PM EST segment: President Trump’s trip to Asia.

You can listen live on-line here, and as usual, I’ll post a podcast of the interview as soon as one’s available.

In addition, this morning, I was quoted in this Lifezette.com article on what would have been a genuinely game-changing, trade-related provision in the House Republican tax reform plan. I say “would have been,” because later today, the provision was removed. But given how frequently the bill’s contents have been changing, it’s still anyone’s guess whether or not it will be resuscitated sometime down the line.

Yesterday, my recent report on the latest Labor Department data on American wage growth (or lack thereof) was re-posted at IndustryToday.com. You can access it at this link.

And I just discovered that this October 18 post from the Korn Ferry Institute featured my views on the implications for businesses of President Trump’s efforts to rewrite the North American Free Trade Agreement (NAFTA). The Institute is a leading global executive search and management consulting firm.

Keep checking in with RealityChek for news of media appearances and other developments.

(What’s Left of) Our Economy: The Multinationals’ Supply Chain Hypocrisy

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creative destruction, globalization, investment, multinational corporations, NAFTA, North American Free Trade Agreement, supply chains, tax reform, Thomas Friedman, Trade, Trump, {What's Left of) Our Economy

It’s widely contended in coverage and commentary about President Trump’s efforts to renegotiate the North American Free Trade Agreement (NAFTA), some of his administration’s key proposals could disrupt the global supply chains that multinational companies from all over the world have set up in recent decades to produce their goods at the lowest possible total cost. The same criticism has come up in connection with a provision of the (current) Trump tax reform plan that would impose a levy on the cross-border purchases of goods purchases by these companies’ domestic operations from their foreign operations (e.g., parts and components of manufactures that are turned into final products).

On the one hand, this is all understandable. If new tariffs are approved to penalize production outside the NAFTA zone, or if new tax code provisions accomplish the same tasks, networks of factories and other facilities that multinationals have spent big bucks setting up could need to move – in the process saddling the firms with yet more expenses.

On the other hand, these claims make no sense at all – at least if you’ve taken seriously the conventional wisdom about multinationals that’s prevailed since these supply chains came into being. For this notion insisted that, because of the natural evolution of the global economy, and of business, and of the interaction between the two, these companies had become free to hopscotch around the world seeking countries to host their facilities that offered the most favorable business environments. And if those environments deteriorated, the “footloose” multinationals would simply pick up stakes and move to more inviting locations.

As a result, countries at the very least needed to keep on their economic policy toes. At most, they’d need to keep improving their business environments – because countries all over the world were competing for the precious capital, jobs, growth opportunities, and knowhow that they offered. The most vivid expression of this idea was the “Golden Straitjacket” theory advanced by New York Times uber-pundit Thomas Friedman. As he wrote, countries that ran their economies based on free-market (aka U.S.-style) rules and practices (roughly his definition of the Straitjacket) would be rewarded with abundant investment that would fuel their economic development and raise their living standards. Those that ignored these rules would be shunned.

Indeed, Friedman even colorfully called the sources of this capital “the electronic herd” – an image that connotes both high levels of mobility generally, and a strong inclination to move to greener pastures whenever they beckoned. (In fairness, this electronic herd, strictly speaking, referred to high flying financiers who commanded vast amounts of “hot money” – highly liquid capital that could be sent across borders with the click of a mouse. But for his Straitjacket theory to achieve its promised benefits, businesses in the less mobile real economy would need to adopt much the same model, too, and indeed pursue the opportunities created by the Herd, however fleeting they might be.)

And since Friedman is one of the world’s primo thought leaders, and since his influence largely depends on his access to what the captains of finance and industry think (or want us to think), you can be sure that the Golden Straitjacket analysis – and all its implications for trade policy and economic globalization writ large – was one that was adopted and actively propagated by the world’s political and business establishment.

But the outcries prompted by the Trump NAFTA and tax reform proposals point unmistakably to conclusions that hardly flatter the Straitjacket theory, either in its actual or publicly conveyed forms. The one that I believe conforms most closely to how the global economy actually works? As I’ve been documenting since my book The Race to the Bottom came out in 2000, contra Friedman – and the bipartisan globalist American leaders who drank and sold this kool-aid – governments all over the world, big and small, have long been attracting investment with a wide array of interventionist policies that combine mixtures of trade barriers sticks and subsidy carrots. That is, the Golden Straitjacket theory in all its forms was self-serving corporate garbage – a particularly cynical version of “Heads, I win. Tails, you lose.”

Of course, economies that attracted investment needed to be relatively well governed (at least for the multinationals’ purposes) and politically stable. But as long as the main effect of these national investment conditions was consistent with corporate cost-cutting, and resulting greater profits, the multinationals didn’t publicly protest being jerked around. Indeed, they complied with foreign governments’ dictates pretty meekly.

The only difference, then, that could be made by the Trump NAFTA and Republican tax proposals? The multinationals face being jerked around in ways that will likely narrow their profits. And since they naturally view that as anathema, they’re suddenly claiming that they can’t easily hopscotch across national boundaries very quickly after all.

That’s not to say that the companies are wrong in noting that supply chains will be shaken up if the Trump NAFTA and Republican tax proposals become policy. But remember – the multinationals have for decades been highly successful at moving these chains out of countries like the United States. Surely they’ll manage to move them back if need be just as successfully. And those that can’t meet this challenge? Anyone truly believing in capitalism and its virtues will be confident that others will emerge to fill the vacuum and service a near $20 trillion American market (in pre-inflation terms). Unless those “creative destruction” and entrepreneurship things are just fakeonomics, too?

Making News: New NAFTA Column on Marketwatch.com – & More!

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Brendan Kirby, Canada, CNBC.com, Crain's Cleveland Business, Lifezette.com, Making News, manufacturing, Marketwatch.com, Mexico, NAFTA. North American Free Trade Agreement, tax reform, think tanks, Trade, Trump

I’m pleased to announce that an op-ed column of mine was published (yesterday afternoon) on Marketwatch.com. The piece explains how the North American Free Trade Agreement (NAFTA) can be rewritten to serve the interests of all three signatory countries (the United States, Canada, and Mexico) by turning the current continental trade zone into a genuine trade bloc.  Click here to read it.

In addition, on October 18, it was great to see Lifezette.com‘s Brendan Kirby spotlight my research and analysis of the mounting intellectual dishonesty and outright corruption at the nation’s major think tanks – and how they regularly hoodwink the media. Here’s the link.

On October 14, Crain’s Cleveland Business featured my views of President Trump’s manufacturing and trade policies – which I said so far have produced some positive and negative surprises.  You can access the article at this link.

On October 12, this Lifezette piece quoted me on Mr. Trump’s emerging NAFTA revamp strategy.

Finally, for now, this October 11 CNBC.com summarized my appearance that day in a segment that I thought would deal with NAFTA and trade, but instead – strangely – wound up focusing on tax reform.

And keep checking in with RealityChek for news of upcoming media appearances and other events and developments.

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

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

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

Think this is a stretch?  Then consider this:

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

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

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

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

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

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

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

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

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

Im-Politic: Did Trump (and Trump-ism) Really Lose Big in the Healthcare Fight?

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border adjustment tax, Congress, conservatives, Freedom Caucus, healthcare, Im-Politic, Immigration, infrastructure, Obama, Obamacare, Paul Ryan, Peggy Noonan, Republicans, RyanCare, tax reform, Tea Party, The Wall Street Journal, Trade, Trump

The list of realities, considerations, factors – call them what you will – that President Trump either forgot or overlooked as he pushed for House passage of the Republican healthcare bill is long, impressive, and pretty obvious according to the Washington, D.C. conventional political wisdom. On the off chance you haven’t heard it or read it, it includes the difference between cutting deals among real estate tycoons and negotiating with ideological politicians; his own voters’ tendency to rely heavily on the kind of government healthcare aid that the GOP legislation either eliminated or sharply curbed; the powerful vested stake developed after years or working with it in the current healthcare system – however troubled it might be – by major participants in the system; and the dangers to Mr. Trump’s own credibility and political power of choosing to tackle first a highly contentious subject (like healthcare) instead of a priority that’s reasonably uncontroversial (like infrastructure spending).

All those points seem valid to me, but I would add two more that seem at least equally important. Then I’ll present an interpretation of the healthcare story that hasn’t appeared anywhere else yet but that shouldn’t be overlooked – if only because it ties the otherwise puzzling story together in ways that are admittedly byzantine, but that make eminent sense in a Machiavellian (and therefore quintessentially political) way. In fact, this analysis dovetails exceptionally well with the president’s clear (to me, certainly) determination to remake American politics by rejecting the doctrinaire conservatism embodied by the Republican party for decades, and thereby increasing its appeal to independents and moderates.

The first such consideration that should be added to the overlooked list: how much more difficult it is both politically and substantively to take away government assistance used by economically stressed Americans (like those who backed Trump in droves) than it is to enable them to thrive without the assistance via other major planks of the Trump platform – chiefly immigration and trade policy overhaul.

One of the secrets of Trump’s success, after all, was his recognition that vast numbers of working and middle class Americans no longer buy the mainstream Republican argument that they could greatly increase their economic self-reliance through the wealth that would trickle down to them through shrinking taxes and government. He understood that this promise would always ring false as long as so many good jobs and so much income were being sent to foreigners through offshoring-friendly trade policies and mass immigration.

So it’s easy to understand why the Republican healthcare legislation registered so little support from even Republican voters – no doubt including many Trump backers. He seemed to be putting the cart before the horse not when it came to the kinds of government programs touted by liberals that Trump-ites viewed as bupkis, but with a program that had become central to their lives. (For a terrific analysis of Main Street views of healthcare at the usually ignored gut level, see this column by The Wall Street Journal‘s Peggy Noonan.)

The second neglected consideration flows directly from the first: President Trump’s election shows that the Republican party has moved significantly in his more populist and particularly less ideological direction, if not at the interlocking think tank/donors/Congressional level, at the far more important voter level. As a result, there was no apparent reason for Mr. Trump to defer to the more ideological Congressional Republicans on the healthcare front.

More specifically, even though the national party’s leadership did indeed treat Obamacare repeal and replacement as a defining principle and promise to its grassroots, and even though candidate Trump expressed strong opposition to his predecessors’ signature achievement, healthcare was never the defining principle of the maverick movement he led. That’s why he so frequently spoke of achieving healthcare goals that have been so widely rejected in Republican and conservative and leadership circles, like ensuring universal coverage.

So why did the president lead off his legislative agenda with orthodox Republican-style healthcare reform? Here’s where the story gets Machiavellian to me – but in ways that should be entirely plausible to anyone familiar with how successful political strategists think. Further, it’s a narrative that fully takes into account the hyper-partisan nature of Washington and legislative politics with which Mr. Trump needs to deal. And it goes like this.

The president recognizes that even though he’s remade much of the Republican base in his own image on the issues level, he also must realize that the Washington Republicans – which include the party’s mainstream conservative Congressional leaders and its more ideological Tea Party wing – remain hostile on the highest profile matters on his own agenda. I imagine he also recognizes that they might be powerful enough to undermine his initiatives on trade, immigration, and/or infrastructure – especially if Democratic leaders remain in their adamant “resistance” mode.

For even if Democrats are ultimately winnable on trade and infrastructure, they have no interest even in these areas in giving the president the kind of quick victory that would greatly strengthen the odds of turning his first term of office into a success that would boost the odds of his reelection. They have even less interest in helping Mr. Trump further strengthen his appeal to many of big Democratic constituencies.

So the Washington Republicans needed to be at least neutralized – and sooner rather than later. And appearing to fight the good fight for their healthcare reform proposal was an ideal way to demonstrate his loyalty to their objectives and strengthen his case for demanding concessions from them in return in areas he valued much more highly. This calculation looks especially shrewd since the Republican bill was so draconian that even had it squeezed through the House, the Senate was bound to prevent its reaching his desk in anything like its current form.

As a result, now that the “RyanCare” legislation is dead, Mr. Trump can say to both the House Republican leaders and even to the hard-line Freedom Caucus something to the effect, “We tried it your way, I carried lots of your water, and I paid a noticeable price. Now we drop the healthcare effort, pivot to my priorities, and I expect your votes, even if you won’t pull front-line duty. And when we do address healthcare as Obamacare’s failures multiply, you’re going to do right by your own constituents and drop the free market extremism. P.S. Anyone remaining obstructionist comes into my social media cross-hairs with your reelection bids coming up.”

I have no inside information here, and my reasoning could certainly be too clever by half. Moreover, one of the most important lessons I’ve learned in my professional life is that just because an analysis seems logical or commonsensical, doesn’t mean that it’s true. But even though it’s only about a day since the healthcare bill was pulled from a scheduled floor vote for the second and final time, I derive some satisfaction in seeing the president is making nice with both House Speaker Paul Ryan and the Freedom Caucus members, and making clear that it’s tax reform time (which could bring a tariff-like border adjustment tax). Which could mean that Donald Trump’s presidency is highly conventional in at least one respect – temptations to dismiss it as a failure should be strongly resisted.  

(What’s Left of) Our Economy: Latest Trade Deficit Scuffles Still Missing Lessons of 2008

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bubbles, finance, Financial Crisis, free trade agreements, G20, Germany, Global Imbalances, investment, Japan, manufacturing, offshoring, tax reform, Trade, Trade Deficits, trade policy, trade surpluses, Trump, Wall Street, {What's Left of) Our Economy

Roughly ten years after it broke out, it’s still incredibly rare to see economists or pundits link U.S. and resulting global trade imbalances with the financial crisis. So I’m always thrilled – as I tweeted this past week – to see it ever happen. All the same, even this insightful column by Reuters’ Edward Hadas simply dances around the crucial link between these imbalances and American trade policies, and in particular, their offshoring-friendly nature.

In a March 15 essay, Hadas commented on the German (and other countries’) trade surpluses that have attracted such attention this past week for two main reasons: German Chancellor Angela Merkel’s first-ever meeting with President Trump, and a conclave taking place at the same time of the finance chiefs of the world’s 20 leading economies (the so-called G20). The author’s main contention is indisputable as far as it goes. According to Hadas, the real problem with these imbalances is financial:

“The euros, pounds and dollars which Germany, Korea et al accumulate inevitably land in the global financial system. There would be no problem – only gains all round – if these monies funded valuable infrastructure, productive factories and other assets which can generate a reasonable economic return.

“Too often, though, though, the extra currency winds up supporting counterproductive finance. It backs ultimately ruinous property speculation, lends support to chronically weak governments, encourages unsustainable consumer spending and destabilises developing economies, not to mention enriching banks and bankers and stimulating corruption. A typical example: the recycled dollars from the U.S. trade deficit helped fund the American housing bubble whose pop created the 2008 crisis.”

But what Hadas – and so many others – fail to do is explain adequately why deficit countries (like the United States) make such dangerously shortsighted choices with their windfalls. Three main (and not mutually exclusive) reasons have been served up. First, financial systems in the deficit countries (especially the United States, which runs the biggest deficits) have over-rewarded uses of capital that produce the fastest possible payoffs, and under-reward longer-term projects. The result is too much investment that encourages speculation, financial monkey business, and simple consumption, and too little investment that builds factories and laboratories and funds other activities that create wealth more slowly, but on a more sustainable basis.

Second, such irresponsible uses of capital have become practically inevitable if only because the deficits have been so enormous, and so much money has become available. When anything is in such abundance, and therefore costs so little, most economists would agree that there’s little reason to use it carefully. After all, it looks like a sure bet that more of that thing at very attractive prices will be readily available.

A somewhat different version of this argument has to do with what economists call “moral hazard.” It argues that the American financial system used over-abundant money so recklessly at least partly because investors felt certain that they’d get bailed out of most or all of their mistakes by government. So why not take maximum advantage of what seems to be a “heads, we win; tails, we lose” proposition?

The third explanation for the irresponsible use of resources focuses on the consumption-heavy nature of the economies of the deficit countries. (This argument also tends to note that the surplus countries frequently try to limit and even depress consumption.) The more capital they take in, in other words, the more such spending (as opposed to productive investment) is likeliest to result either because such behavior is encouraged by government, because a “live for today” has been produced by that country’s culture, or because of some combination of the two.

Whenever something as a big as a global financial crisis strikes, many culprits are responsible. And all of the above explanations should be taken very seriously (along with others, like lax financial regulation). But what Hadas and all the rest continue to miss is how the world trade system, national trade policies, and the trade flows they have fostered have actively fostered in deficit countries like the United States a neglect of productive activities like manufacturing (which is so heavily traded).

Specifically, as Washington in the 1990s and 2000s signed more and more trade agreements structured to encourage multinational companies from all over the world to supply U.S. consumers from locations in super low-cost and virtually unregulated developing countries like China and Mexico, American leaders and other elites (e.g., in the media) naturally sought to rationalize their decisions by spreading the message that sectors of the economy like manufacturing (and the income loss produced by the accelerated offshoring that rippled throughout so much of the Main Street economy) could be neglected with impunity. And the administration of George W. Bush (along with Congress of course) and the Federal Reserve chaired by Alan Greenspan underwrote America’s spendthrift ways with big budget deficits and ultra-low interest rates, respectively.

Even worse, these destructive trends fed on themselves. The more offshoring seemed to pay off, and the more domestic manufacturing operations looked like losing — or at least anachronistic — propositions, the less interested financiers became in investing in them. So the amount of productive activity on which to use incoming capital to start with began shriveling. And the less productive activity available to sustain Main Street living standards responsibly (i.e., mainly through earnings), the greater the political establishment needed to prop up those living standards by providing more easy money — at least if it wanted to stay in power while maintaining the offshoring status quo.

Ironically, even though Hadas emphasizes regulation as the answer to global imbalances, his particular focus has big trade implications:

“Regulation can do more than strengthen bank capital ratios. It can reform the system, so trade surplus funds are not directed to economically counterproductive uses. That will be tough, both politically and practically. But it should be easier – and will be far more helpful – to solidify finance than to try to change the national characters of Germany or Korea.”

I’m all in favor of channeling the use of trade surplus funds by deficit countries into productive activity. In fact, I strongly support requiring such uses by U.S. multinational companies if much-discussed tax reform finally succeeds in persuading them to bring home the vast amounts of earnings they’re currently stashing abroad to avoid paying higher U.S. corporate rates. 

But this requirement needs to be accompanied by (at the very least) strong measures to keep out foreign-made goods that benefit from predatory trade practices like dumping, subsidization, and intellectual property theft. Otherwise, foreign competitors will be able to keep undercutting their domestic American competition in the U.S. market, and these new productive investments will fail. It’s also entirely likely, however, that more sweeping trade curbs will be needed – to offset the scale economy disadvantages created by U.S.-based firms’ inability to sell into so many important markets and their rivals’ ability to sell freely in their home countries and the United States.

And this is in fact where recognition is needed that the trade problem created by American policy concerns not simply inducements to offshore, but the coddling of protectionism in high income countries like Japan and Germany.

The bottom line: As indicated in a post last week, the United States may have to accept that even reasonably balanced foreign trade is not achievable with competitors holding radically different economic priorities (as I argued last week was precisely the case with Germany), and that reducing trade flows is a more than acceptable price to pay for preventing financial crises caused by imbalanced trade. When you add in America’s great capacity for much more self-sufficiency in a wide range of manufactured good, that seems like a more than acceptable trade-off to me. More important, it’s where the Trump administration, admittedly in fits and starts, could be leading us.

(What’s Left of) Our Economy: Why Trump’s Budget Proposal is a Win for Trade Policy Realism

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border adjustment, budget, Commerce Department, enforcement, exports, imports, Robert Lighthizer, tax reform, Trade, trade law, Trump, U.S. Trade Representative, Wilbur Ross, {What's Left of) Our Economy

Certainly since Donald Trump has been elected president, there’s been a tension even among his most supposedly hawkish trade policy advisers over basic objectives: Should the United States seek to solve its major trade-related problems mainly by promoting exports, or mainly by curbing imports? Of course, the two goals aren’t mutually exclusive. But the first suggests that the nation’s approach to trade will essentially be more of the same (albeit executed more competently), while the latter suggests a significant shift and is vigorously put into effect.

That’s one trade-related reason why Mr. Trump’s new budget proposal is so interesting and potentially important. If you believe that “money talks,” or “deeds count more than words” or any homilies to that effect, then it looks like that the tension has been resolved in favor of import limits – which would be good news indeed if it remains intact.

The reasons, as I’ve long written, are pretty simple, and should be much more obvious than they’ve been. First, for all its problems, the U.S. economy has been growing faster recently than most major world economies. And unlike the faster growers (mainly in the developing world), America’s growth isn’t export-led or -heavy. For that reason alone, its domestic market continues to be the world’s paramount emerging market.

Second, that relatively fast growth, combined with the ongoing export-heavy nature of most foreign economies means, and the huge and chronic American trade deficit, means that the size of the U.S. domestic market into which domestic producers can sell is enormous in absolute terms and indeed much bigger relative to foreign markets than widely realized. After all, this American market includes not only whatever growth the United States can generate going forward, but the large chunks of its market currently controlled by foreign competition.

Third, however much leverage the United States enjoys in global trade, and over foreign countries, its influence over its own market will always be much greater. And that goes double for countries with long records of sweeping protectionism.

Fourth, the domestic market is the market that domestic American producers should know best. Therefore, despite its undeniably impressive dynamism, these domestic producers have less to learn about customer preferences than is the case with foreign market.

For examples of the administration’s apparent ambivalence, simply check out statements made in the confirmation hearings of Commerce Secretary Wilbur Ross and U.S. Trade Representative-designate Robert Lighthizer. Indeed, it’s easy to conclude that their stated bottom line endorses the export-focused approach.

But the new Trump budget document is sending the opposite message – and its declared spending priorities arguably matter more than even sworn testimony. Specifically, according to the Commerce Department section, the final budget

“Strengthens the International Trade Administration’s trade enforcement and compliance functions, including the anti-dumping and countervailing duty investigations, while rescaling the agency’s export promotion and trade analysis activities.”

Not that this text is the end of the story, or even close. As widely recognized, the new budget statement is the first step in a lengthy process in which Congress will be heavily involved. Moreover, because so much of it is so controversial, and because the nation is so far from a consensus on official spending priorities, it’s entirely likely that the current budget priorities will simply wind up being carried over for the time being.

And as for trade policy specifically, Commerce Department funding will be far from the only determinant as to where the administration will put most of its energies. Just one example: the structure of whatever new or revised trade agreements it seeks will matter greatly as well. So will the fate of the border adjustability feature of the House Republican leadership’s tax reform proposals – which would both in effect penalize imports and subsidize exports. Moreover, because the U.S. trade law system is so (inevitably) slow-moving, episodic and reactive, relying exclusively or even mainly on this traditional trade enforcement tool will become a recipe for trade policy failure.    

But the Commerce budget priorities appear to be a straw in the wind that’s unmistakable – and because realistic, unmistakably welcome.

(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.