Our So-Called Foreign Policy: North Korea, China, & the (Inevitable) Limits of Diplomacy

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agriculture, China, commodities, diplomacy, energy, Iran, Kim Jong Un, LIbya, Made in China 2025, manufacturing, Muammar el-Qaddafi, North Korea, nuclear weapons, Our So-Called Foreign Policy, Russia, Saddam Hussein, Saudi Arabia, South Korea, tariffs, technology, Trade, trade deficit, tripwire, Trump, Ukraine

Diplomacy has sure taken a beating these last few days. And revealingly, that looks like a good thing.

Let me explain: I have no problem whatever with countries trying to resolve their differences peacefully, through dialogue and compromise. But in the nuclear age, and especially after America’s Vietnam debacle, this age-old concept has turned into a foreign policy magic bullet in the United States – including among the nation’s bipartisan globalist establishment. So the collapse (for now) of plans for a summit between President Trump and North Korean dictator Kim Jong Un, and the failure so far of the President to make any headway in curbing China’s predatory trade practices, could be welcome developments. For these developments could remind Americans of diplomacy’s limits in promoting U.S. national interests (the overriding priority of the nation’s foreign policy), and how even on crucial issues of war and peace, it can be completely pointless and even dangerously distracting.

On North Korea, there have always been strong grounds for skepticism that negotiations could achieve America’s main objective – the complete elimination of Kim Jong Un’s nuclear weapons. It’s true that Kim has appeared more interested in economic reform than his father or grandfather – who preceded him in power. Therefore, in principle, he would be more responsive to economic carrots and sticks. On the one hand, he might be amenable to surrendering his arsenal in exchange for foreign investment and aid (along with security-related concessions from the United States like formal recognition of his regime, a peace treaty ending the decades-long state of war between Pyongyang and its enemies). On the other hand, he might be more concerned about the impact of the sanctions that President Trump has both broadened and intensified.

Yet it was always difficult to believe that Kim would prize any of these considerations above his regime’s defense against overseas threats, and for these purposes, nuclear weapons are hard to beat. As widely noted, he’s surely been impressed by the gruesome fates of fellow autocrats who gave up their nuclear hopes (Libya’s Muammar el-Qaddafi) or who hadn’t the chance to develop these weapons (Iran’s Saddam Hussein).

Further, Kim also is no doubt aware of a third recent example of a country paying heavily for signing away its nuclear weapon status: Ukraine. In 1994, that nation agreed to dismantle the large nuclear force stationed on its soil when it was part of the Soviet Union, and left there after the USSR’s demise. In return, it received security promises from the United States, the United Kingdom, and Russia that its territorial integrity would be respected. A quarter century later, Moscow has seized effective control over much of the country’s eastern half.

Moreover, if a Trump-Kim summit and follow-on negotiations resulted in a compromise that left the North with some kind of nuclear arsenal, this “victory” could eventually become disastrous for America and its homeland. For there would be no guarantee that Kim would have truly abandoned his family’s goal of dominating the Korean peninsula through nuclear-aided conquest or intimidation of the South. And as long as large U.S. ground forces remained in South Korea, the outbreak of war would still threaten to draw Washington into a conflict with a foe capable of hitting its territory with nuclear warheads.

That still-live prospect should be an awfully powerful reason for switching to a strategy I’ve long advocated – ditching diplomacy, withdrawing the U.S. troops in South Korea that expose the United States to nuclear danger, and permitting North Korea’s neighbors to handle Kim and his nuclear ambitions any way they wish.

Trade diplomacy with China doesn’t threaten to turn an American city into a glowing ruin. But it’s all too likely to result in open-ended talks that do as little to combat the economic and security threats created by Beijing’s trade predation as previous negotiations involving President Trump’s predecessors. As I’ve recently written, even if his administration could come up with a coherent set of priorities, adequately verifying any Chinese compliance with U.S. positions is a pipe dream.

But this latest American attempt at trade diplomacy faces two other seemingly insuperable obstacles. First, the President’s objective of reducing the U.S.’ massive bilateral trade deficit with China appears to neglect the makeup of this deficit – which matters more than its size. Specifically, his proposals to date envision narrowing the trade gap mainly by boosting American exports of farm products and energy to China.

Both sectors of the U.S. economy are obviously important. But neither can become a major driver of sustainable American prosperity, because they’re essentially involved in producing commodities – which have never added nearly as much value to national economy as manufactures. That’s why developing countries invariably view a transition from agriculture to industry as the key to their hopes for rising living standards, and why even wealthy energy producers like Saudi Arabia have resolved to focus more on manufacturing and other higher value activities.

And P.S. – that’s no doubt why the Chinese clearly consider this American demand the most appealing on the Trump agenda.

As for the intertwined threats of continued and rampant Chinese intellectual property theft, and of China’s master plan to lead the world in a wide array of “industries of the future” (the Made in China 2025 program), U.S. tariffs on the goods and services these policies already enable Beijing to produce and export could well deal its ambitions a major blow. And clearly, that’s the Trump administration’s aim.

But if so, why negotiate over these matters? The United States has made reasonably clear what it wants China to do. And it’s declared its intent to retaliate with trade curbs if China balks. If the Trump administration is serious about this approach, and confident that it will succeed, what is there left to talk about? Either the Chinese accede (in which case, as I wrote this week, towering verification challenges would remain), or they dig in their heels and the tariffs follow.

Further talks, unless they’re simply aimed at clarifying American positions, can only muddy the waters and encourage endless Chinese foot-dragging – including regularly throwing Washington a few crumbs of market share – by telegraphing a Trump reluctance to pull the trigger. All the while, the Chinese tech prowess ostensibly alarming Americans across the political spectrum will keep growing.

And as with the case of the Korean crisis, a far better American approach would be disengagement – i.e., a series of measures aimed at reversing the disastrously wrongheaded twenty-year U.S. effort to more closely link the nation’s fate to a country with which mutually beneficial commerce was never possible. The Trump administration has already taken some important steps in this direction. Chiefly, it has greatly tightened restrictions on Chinese takeovers of economic assets in the United States. And the President’s threatened tariffs have induced some factories to move from China to the United States. But as previously indicated, the administration also seems bent on helping U.S. companies invest more in the Chinese economy, which can only further widen the trade deficit and hand China more cutting edge American technology. And it’s given no hint of a comprehensive strategy to bring manufacturing supply chains now concentrated in China back to the United States.

The latter task, in particular, will entail a long-term effort – not exactly the American governing system’s strong suit these days. And success will also depend on thoroughgoing domestic policy reform. (See this article for one sensible list.) But compared with the apparent belief that, over any policy-relevant time frame, China’s will become an economy compatible with America’s, it’s the height of realism.

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Following Up: A Big China-Related National Security Hole May Get Plugged, and Trade Derangement Syndrome Keeps Spreading

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CFIUS, China, Committee on Foreign Investment in the United States, consumers, East Asia-Pacific, Following Up, foreign direct investment, LG Electronics, manufacturing, Samsung, South Carolina, tariffs, technology, Tennessee, Trade, washing machines

Yesterday alone produced a news item that provides important grounds for hope that America’s policy toward China might finally be getting coherent, and one that shows that Mainstream Media coverage of international trade issues remains almost determinedly brain-dead. And conveniently, both items concern developments recently reported on by RealityChek.

The first came in The Wall Street Journal, and describes some important new provisions in legislation proceeding through Congress that would update the federal government’s standards for approving or blocking prospective foreign proposals to take over U.S. businesses with defense-related implications. The current process for screening such investment enables Washington to nix (and this is just an obvious hypothetical example) a Russian or Chinese proposal to buy a company that makes jet fighter craft.

Most cases examined by the inter-agency group that makes recommendations to the President for final action (the Committee on Foreign Investment in the United States, or CFIUS) aren’t such easy calls, which is precisely why lawmakers seem determined to expand the grounds for blocking potentially dangerous takeovers. That’s an idea I’ve long favored.

But at least as important is a provision in the bill that addresses a problem I’ve written on, but that Washington has been slow to recognize – even under the Trump administration. That’s the growing tendency of American technology companies to share their best knowhow with partners in places like China. In some cases, the U.S. firms voluntarily hand over the keys to these kingdoms. In others, they invest capital in Chinese start-ups and other ventures.

It’s true that the United States maintains a system for controlling exports of national security-related technology to problematic countries like China. But the proliferation of these corporate transfers and investments makes clear it’s too sieve-like. And plugging holes is particularly important now because China has so aggressively challenged America’s position as the lead power in the economically vibrant East Asia-Pacific region.

I’ve long opposed the U.S. strategy of maintaining major military forces in this far-off area decades after the Cold War’s end in order to fend off the Chinese and North Koreans. But if American leaders stay determined to ignore my advice (!), it’s nonsensical to keep pushing for bigger and bigger military budgets and stronger forces (in part to buttress its East Asia strategy) while allowing American companies in effect to help China strengthen the military against which Americans may fight. So let’s hope Congress sends a CFIUS reform bill to President Trump’s desk tout de suite.

The second, more dispiriting news item came from Reuters, and dealt with those tariffs Mr. Trump last week imposed on certain imported washing machines from South Korea. As I wrote on January 24, these actions seemed to infect officials in South Carolina with a case of Trade Derangement Syndrome – the utter mindlessness produced by announcements or fears of even small-scale restrictions on trade flows. In this case, South Carolina officials were criticizing the tariff decision even though it undoubtedly led one South Korean manufacturer – Samsung – to announce that it would begin producing washing machines in the Palmetto State, thereby avoiding the tariffs and creating hundreds of jobs for South Carolinians.

Yesterday, Reuters reported similarly looney reactions on the part of the other South Korean company fingered – LG Electronics. LG, too, clearly has been convinced by the prospect of tariffs to manufacture some of its products in the United States – in this case, in Tennessee. But the company clearly is not thrilled with the prospect. It’s grousing that, because of the tariffs, it will need to raise the prices it charges American consumers.

That’s pretty par for the course – though has anyone who’s bought a major appliance lately seen many producers or retailers that are full of confidence that they can charge more? But what was completely doofy was what the company spokesperson quoted by Reuters reporter David Lawder (with a figurative straight face) said next. He fretted that the price increase could cost the company market share, therefore reducing the demand for the new Tennessee factory’s products and for local workers. And then he noted that the costs could be long-lasting: “If you lose floor space at retail, it can take years to get it back.”

I don’t blame the LG spokesperson for trying to drum up American opposition to the tariffs any way possible. But maybe Lawder could have asked him why on earth the company would take actions that it’s admitting would lose it money – for “years”? Or pointed out that these adverse consequences do a great job of explaining why LG is not remotely likely to raise prices? Instead, Lawder simply permitted the LG flack to get away with arrant nonsense – and reinforced my claim that nothing, but nothing, is as badly, and as tendentiously covered by the media as anything having to do with international trade.

(What’s Left of) Our Economy: The Big Messages Being Sent by a Jetsons-Like Invention

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Aeolus Robotics, automation, capital spending, Consumer Electronics Show, Democrats, domestic workers, economics, Fight for 15, Immigration, innovation, Jobs, minimum wage, offshoring, Open Borders, robots, Roomba, Rosey, technology, The Jetsons, Trade, Washington Post, {What's Left of) Our Economy

Along with the rest of the world, I just got another reminder that the future is arriving a lot faster than most of us expect. And that’s got especially big implications for related points I’ve long been making about U.S. immigration policy and efforts to boost the country’s minimum wage.

For many years, when I’ve spoken about immigration policy, I’ve used the following argument to explain the relationship between the mass immigration America has fostered for so long (including winking at illegal immigration) and the productivity gains and technological progress needed to ensure that living standards can improve in a sustainable (not bubbly) way:

“Does anyone remember Rosey, the robot maid on the 1960s TV cartoon show, ‘The Jetsons’? Did you ever wonder why, decades later, there’s still no Rosey – or anything better than a Roomba? A major reason has to be that, with so many legally and illegally present housekeepers and housekeeper candidates available, and willing to work so cheaply, there’s been little incentive to automate domestic work.”

It was my way of using pop culture to illustrate why a big spur to technological progress (and the higher productivity it tends to bring) for the United States in particular has been the scarce labor situation that’s existed for most of American history. With workers in chronically short supply, and therefore increasingly expensive to hire, U.S. businesses were constantly looking for labor saving devices that could cut their costs. And American inventors were terrific at seizing the opportunity and providing them.

In other words, the U.S. economy was behaving exactly the way the textbooks said it should. When labor became too costly, business stepped up its search for ways to substitute capital (which often meant) technology, for those overly dear workers. More recently, as labor has become more abundant (and therefore, all else equal, cheaper), this dynamic has often shifted into reverse.

Incidentally, mass immigration policies aren’t solely to blame. Offshoring-friendly international trade deals like the North American Free Trade Agreement (NAFTA), and similar trade policies (like coddling China’s trade predation) have also greatly expanded the amount of workers realistically available to American employers, especially in sectors like manufacturing. And it’s surely no coincidence that business spending on equipment and machines and the like (called capital spending) has been a notable weakness lately in the U.S. economy. (In fact, although many factories in China are automating rapidly – because of wage increases – this report makes clear that labor surpluses are still slowing its pace in some important Chinese manufacturing industries.)

What has this to do with Rosey? Simple. As this Washington Post piece from last week shows, she’s here – or just about here. For at the latest annual Consumer Electronics Show (one of the tech industry’s major events), a company called Aeolus Robotics unveiled a device that looks awfully similar. According to the Post reporter, this “child-sized” machine

“performed domestic duties such as mopping, picking up stuffed animals off the floor and moving furniture, and, perhaps most impressively, retrieving drinks from the fridge using an intricate-looking grabbing arm — all without human assistance.”

The robot – billed as “the first multi-functional robot that can act like a human being” – still doesn’t crack wise in a New York accent, like the cartoon Rosey. But how far off can that be?

Technology and labor costs hardly move in lockstep, and of course innovation results from many causes. But economic theory, anyway, is saying that my view on the cost and supply of domestic workers is becoming outdated. Common sense also suggests that if something like Rosey is just about here, then domestic workers aren’t as cheap and/or as abundant as I believed. So their wages may well have been rising strongly enough lately to create demand for an automated counterpart.

At the same time, the advent of “Rosey” (and how many other devices like “her” just over the horizon?) amounts to a frantically waving red flag about the wisdom of any immigration policy moves likely to increase the supply of poorly-skilled workers in the American economy – which is to say, any proposals supported by the national Democratic Party and the rest of the country’s Open Borders enthusiasts. Just what kind of work can they be expected to find? Indeed, the automation progress represented by “Rosey” signals that much of the existing workforce in the nation is going to be increasingly hard-pressed to secure or hang onto decent-paying jobs.

Similarly, although I believe there’s still a strong economic (and moral) case for a national minimum wage that tracks inflation, the seemingly impending dawn of the Age of Rosey raises big questions about the wisdom of the kinds of minimum wage jumps sought by the “Fight for 15” campaign and other activists.

“Rosey’s” appearance at the Consumer Electronics Show doesn’t mean that I’ve come down one way or the other in the vital debate taking place today over whether all this recent technological progress ultimately will be a net job killer or creator. But it seems clear as a bell that this tech wave is being completely ignored by the Open Borders and the Fight for 15 backers, and that Americans closest to the low end of the wage and income scale are likely to be among the biggest victims.

(What’s Left of) Our Economy: Intel – & Often China – Inside Your Hackable Electronics

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China, computers, counterfeits, cyber-security, Defense Department, electronics, globalization, hacking, Intel, microchips, semiconductors, smart phones, technology, Trade, {What's Left of) Our Economy

OK, who out there has an electronic device like a computer or a smartphone? I thought so. And who uses them like…nearly all the time? And engages in lots of financially or personally sensitive activity on-line? Thought so again. And you no doubt weren’t thrilled to find out yesterday that the computer chips vital to the operations of virtually all of these devices have some big security flaws that make them eminently hackable.

Well, here’s worse news: There’s an excellent chance that the hackers could be working for the Chinese government. And for that, you can thank decades of stupefyingly boneheaded American trade and globalization policies.

I can’t tell you how excellent the chances are, because one of the completely unnecessary failures of these policies has been pre-Trump Washington’s complete lack of interest, from either major political party, in tracking and letting the American public know how dependent they and their economy have become on products from potentially dangerous countries.

But I feel confident in claiming that the chances are at least pretty excellent. The reason? Private sector specialists have published detailed studies on subjects like the Chinese electronics industry. Thanks to them, it’s well established that, although China has yet to become a top global player in manufacturing semiconductors, and especially cutting-edge microchips, it’s a powerhouse in what’s known as “back end” semiconductor production – relatively low-tech phases of the process that involve activities like packaging, assembling, and testing.

So many U.S. and other non-Chinese information technology companies do so much of this activity in China that, according to a report from the consulting firm PwC, in 2015 (the latest available data) China-based facilities accounted for 44.6 percent of total global revenues from these back end operations. That’s up from just 20.3 percent in 2009. In other words, Chinese employees of these companies have ample opportunity to insert all sorts of bugs in them, and these opportunities have been growing rapidly.

Think I’m paranoid? Or just anti-Chinese? Then you need to learn that the Defense Department had admitted that, over a recent two-year period, its weapons systems had been studded with some 1 million counterfeit electronics parts and components – some 70 percent traceable to China. DoD now claims it’s solved much of the problem with a “trusted supplier” program. But good luck reliably inspecting the gargantuan Chinese electronics production complex over any serious length of time.

Longstanding American trade and globalization policies deserve most of the blame because, through priorities like indiscriminately expanding U.S. commerce with and export-oriented investment in China, they actively encouraged much of the world’s electronics industry to migrate to the People’s Republic.

The world’s current Number Two semiconductor producer, likes to tout “Intel Inside” a huge share of the world’s electronics devices. Maybe it, and others, should start to advertise “China Inside”?

(What’s Left of) Our Economy: A Big New Hit to Free Trade Theory

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Adam Smith, Bruce R. Scott, comparative advantage, David Ricardo, economics, economists, factors of production, free trade, Great Britain, machinery, manufacturing, Portugal, protectionism, Ralph E. Gomory, Steve Keen, technology, textiles, The Wealth of Nations, Trade, William J. Baumol, wine, {What's Left of) Our Economy

OK, time for some good news – at least if you’d like the economics community to come up with more realistic views of trade policy and its impact on the national and global economy. As made clearest by a (sadly overlooked) journal article by Steve Keen of Kingston University in London, some noted academic economists have identified fatal-looking flaws in comparative advantage theory – the 18^th century concept that ever since has anchored mainstream scholarly thinking about the entire discipline, along with justifying the virtues of the freest possible trade flows.

As Keen writes, comparative advantage identified benefits flowing from economic specialization, and was first advanced by British economist Adam Smith in his seminal The Wealth of Nations to explain the superiority of laissez-faire, free market practices within industries. His compatriot David Ricardo extended the concept to relationships between industries and countries. The core idea in its trade theory version is that all countries and their peoples will reap maximum gains if they limit themselves to those tasks that represent their own best efforts – even if they’re laggards by international standards in that particular sector.

I first encountered a compelling objection to comparative advantage in the early 1990s, in the form of a sharp observation by Harvard Business School professor Bruce R. Scott. As he noted, Portugal, one of two countries in Ricardo’s classic description of comparative advantage’s virtues, basically hewed to the Ricardian prescription, specialized in turning out relatively simple products (in this case, wine) – and remained a poor country for centuries. The second country was Great Britain. It specialized in higher value goods (epitomized, in that era, by textiles), and became the world’s greatest and richest empire.

More fundamentally, Portugal specialized in activity that could generate good levels of growth in the short-term, but whose long-term wealth creation potential was limited by low levels of productivity growth, capital and technology intensiveness, by limited potential for innovation, and by deficiencies in other closely related indicators of dynamism. Great Britain specialized in activity whose positive spinoffs were bound to be far greater.

Other major Ricardo blind spots have been pointed out since then – for example, his skepticism that capital would ever easily move across borders. But his central insights have continued commanding pervasive respect among professional economists. Just as important, they’re still revered by political leaders and opinion molders who find these theories convenient for portraying their often self-interested trade policy preferences as indisputable truths, or who learned in a freshman economics class that they’re gospel.

Keen’s big addition to comparative advantage critiques has to do with unfettered free trade’s likely effect on an economy’s diversity and growth potential. As he notes, Ricardo’s case for liberalizing trade flows hinges on a completely unrealistic assumption about its impact on a national productive base, and hence on national output and incomes. The assumption: that countries will wind up better on net if they abandon those activities that don’t meet the comparative advantage test, and refocus their efforts on activities that can pass it, and that such a transition is feasible in the first place.

In other words, Portugal would scrap all of its textile factories (and presumably all its other industries as well), and become for all intents and purposes a mono-economy devoted to wine. Great Britain would abandon whatever wine-making and other non-textile work it was engaged in, and turn into a big cloth-making facility. What of the other necessities of national and individual life, at least those that are in theory trade-able? They would be imported – and paid for by the earnings from exports of the national champions.

Simply articulating this scenario reveals how completely fanciful it is. For example, what about supplying needs before the envisioned transitions are completed? How long will they last? And even over decades under a free trade regime, could the global economy possibly be expected to turn into the kind of exquisitely complex but perfectly functioning mechanism that could enable a large number of mono-economies from securing the full range of traded goods and services that are either needed or simply wanted?

Keen, however, identifies what he reasonably seems to view as a more fundamental problem: The sectors of the economy in which Ricardians want countries to specialize are relatively strong because they efficiently use various factors of production (chiefly, according to Keen, machinery). The Ricardian transition entails other parts of the economy switching to that strong sector (again, wine-making and textile-making in Portugal and Great Britain, respectively), and essentially becoming just as good as wine-making – largely because all the kinds of machinery used in that economy can easily, and indeed seamlessly be redeployed in the strong sector.

If this assumption was valid, as Keen observes, then it would be reasonable to suppose that each rejiggered national economy could produce even more output, and generate higher incomes for its population, than before. But as the author also observes, this outcome makes no sense because “machinery is specific to each industry, and the crucial machines in one industry cannot simply ‘move’ to another without loss of productivity.” And if you believe, as is the case with mainstream economics, that rising productivity is a key – and over the long run, the biggest key – to rising incomes, then you should recognize this Ricardian transition also as a recipe for worsening national impoverishment.

That is, in the kind of mono-economy Ricardo hoped would eventually comprise the global economy, most of the populace would be struggling with inappropriate capital stock and other assets to earn a living engaged in activity with which it boasted little, if any, experience.

Why did Ricardo overlook something so obvious? In Keen’s words, it’s an example of “a confusion of monetary capital (which Ricardo, as a stockbroker by trade, knew intimately) with the physical machinery in factories (about which he knew very little). Yes, monetary capital moves easily in search of a profit—today, even internationally. But machinery is specific to each industry….”

However, Keen continues, “The archetypal machines for cloth and wine manufacturing in Ricardo’s time included the spinning jenny and the wine press. It is stating the obvious that one cannot be turned into the other, but stating the obvious is necessary, because the easy conversion of one into the other was assumed by Ricardo, and has been assumed ever since by mainstream economic theory.”

Here’s another example of the same delusionality that will be familiar to everyone who’s followed the U.S. trade policy debate for the last few decades: the claim by supporters of current trade policies that trade-related production and job losses are no big deal because America’s real edge in the global economy going forward is, say, services. So the best response is to train all those displaced auto workers to become nurses (and, pace Keen, to use all that surplus auto production machinery to write software).

Just as interesting, Keen points to a small but growing body of research touting the advantages of industrial and other economic diversity – the opposite of Ricardo’s aim. A broad-based manufacturing and technology base has of course long been supported by critics of current trade policies for national security reasons (to ensure the ability to produce an adequate range of defense assets), and to avoid potentially dangerous dependence on foreign supplies of civilian goods as well.

Similarly, it’s been contended that too many linkages exist among manufacturing industries, and between manufacturing and many kinds of services, to assume that entire sectors can be lost without major collateral damage.

Keen’s piece, however, also spotlights evidence that the world’s least successful national economies tend to possess narrow – at best – productive bases and to generate a comparably narrow range of exports, and that the most successful turn out a wide variety of goods for both domestic and foreign markets.

Keen’s theoretical critique of Ricardo is by no means the only one that’s come from the ranks of economists themselves. In 2001, William J. Baumol (a former President of the American Economic Association no less) and Ralph E. Gomory, one of the nation’s leading technology authorities, produced this study purporting to show that explicitly promoting national industries and technologies via various forms of government intervention (including tariffs) can produce better results for individual countries that toeing the free trade line.

But the Baumol-Gomory case has (so far) failed to dent confidence in Ricardian trade theory notably. And certainly the Mainstream Media never displayed much interest. In that vein, of possible import is the appearance this week on Bloomberg.com of this follow-up of sorts to Keen-like analysis. More steps on a  journey of a thousand miles?

Our So-Called Foreign Policy: A Narrow-Minded Wake-Up Call on China’s Tech Drive

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artificial intelligence, Barack Obama, budget, China, mercantilism, National Science Foundation, Our So-Called Foreign Policy, research and development, technology, technology transfer, Trade, trade surpluses, Trump

“#SMH” (Shaking My Head) is one of my favorite Twitter hashtags, and it’s the perfect reaction to a new post on FOREIGNPOLICY.com on the growing technological challenge being posed to the United States by China, and on its frightening national security implications. The post has me shaking my head, and should have you shaking yours, because for all the useful information it contains on this critical subject, it completely misses the much bigger, much more important picture. And it misses it because the authors are so transparently determined to lionize former President Obama’s record in this regard, and vilify President Trump’s – though few of the facts warrant this conclusion.

The post is useful mainly for calling attention to China’s intensifying effort to establish global superiority in artificial intelligence, and to the Trump administration’s budget policies, which look oblivious to China’s efforts because they don’t provide adequate resources for federal research efforts capable of keeping the United States ahead.

I say “look” because the budget situation may not be as dire as strongly suggested by the authors. Specifically, it’s true that the administration has proposed cutting funding for the National Science Foundation’s artificial intelligence programs by 10 percent. At the same time, as made clear by the source they relied on, “the proposed budget does call for more spending on defense research and some supercomputing.”

Much more misleading is the post’s portrayal of the Obama administration as nothing less than Churchillian in sounding the tocsin. After all, the Obama reports the authors cite as evidence of his foresight on the subject came out at the very end of his presidency. At least as important, they gloss over major non-budgetary developments crucial to understanding China’s progress.

As they themselves admit, for instance, Chinese tech companies have established presences in Silicon Valley because they believe that “by rotating Chinese staff to Silicon Valley and American staff to Chinese campuses, they can accelerate the timeline for reaching parity with the United States in AI technology and depth of talent.” Under whose administration do the authors believe this practice started? And why do they think the Chinese were confident they were so free to proceed?

Also completely ignored: Throughout his presidency, Mr. Obama did absolutely nothing as American companies continued their longstanding efforts to transfer advanced technologies to Chinese partners voluntarily, or were forced to share this knowhow due to Chinese threats to shut them out of its market. Nor did he move to prevent these firms from investing in Chinese companies working on tech products and services with clear defense implications, or to help them cope with Beijing’s demands that they pony up or else.

And let’s not forget: The Obama administration made only the most token efforts to combat the predatory Chinese practices that enabled Beijing to amass immense trade surpluses with the United States; therefore to further fuel the growth of its market and make it that much more difficult for American companies to resist tech extortion demands; and to finance its own multi-billion technology development efforts with these handsome trade profits. Indeed, Mr. Obama staunchly opposed Congressional efforts to punish China for its most important mercantile policy:  currency manipulation.  

So I share the authors’ view that federal research and development efforts have been crucial to establishing America’s intertwined global technology and military leadership, and their hope that President Trump will reject the conservative anti-government dogma that justifies virtually every type of budget cut outside traditional defense or law enforcement spending. But the idea that America’s approach to the Chinese tech challenged was remotely up to snuff before Mr. Trump’s election not only fails the test of historical accuracy. It has blinded them to all the other policy changes needed to ensure that the United States stays Number One.

(What’s Left of) Our Economy: New Peterson Pro-Globalization Study Only Deserves a “Nice Try”

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China, Financial Crisis, Gary C. Hufbauer, Global Imbalances, globalization, Great Recession, Larry Summers, manufacturing, Peterson Institute for International Economics, productivity, secular stagnation, technology, Trade, trade agreements, trade liberalization, trade policy, World Trade Organization, {What's Left of) Our Economy

The Peterson Institute’s new study of the benefits to Americans of globalization apparently leaves no doubt that the nation should promptly forget about any retreat from conventional trade liberalization policies and resume its aggressive pursuit of new trade agreements like the Trans-Pacific Partnership (TPP). Or does it? A close reading of the report reveals gaping holes in these claims.

According to authors Gary C. Hufbauer and Zhiyao Lu, between 1950 and 2016, “trade expansion” has enriched the overall U.S. economy by $2.1 trillion, and boosted America’s output per head and per household by just over $7,000 and $18,000, respectively. Even better, lower-income households probably gained the most (since the greatest trade liberalization progress has been made in the goods that comprise so much of their consumption).

Yet the phrase quoted in that previous paragraph points to the first big hole in the Peterson findings. “Trade expansion’s” benefits, the authors specify, entails much more than either signing new trade deals or otherwise reducing trade barriers. It also includes “technological advances in transportation and communications [that] have drastically slashed the economic distance between countries.”

Of course, there’s been a lot of the latter over the last 66 years. What share of expanded trade’s benefits has come from trade liberalization policy decisions and what share from that technological progress? Darned if the authors know.

The long time frame, in turn, reveals a second major problem with the central argument. Obviously over that last two-thirds of a century, the world economy, and America’s position in it, have changed in numerous and fundamental ways. One prominent example: For the first roughly three post-World War II decades, the United States was the only fully intact developed country. How could trade liberalization not have been a major net benefit? America produced countless products that the rest of the world desperately needed. And none of its important industries faced significant import competition until the 1970s. That doesn’t sound much like current circumstances.

And in fact, Hufbauer and Lu acknowledge this problem, noting, for example, that “compared to previous decades, increased trade since 2003 has not delivered substantial gains.” At this point, however, their analysis gets dicey. For example, they speculate that that low recent payoff resulted partly from “the lack of fresh policy liberalization on a large scale (the failure of the Doha Round)….” But that period actually saw a hugely important liberalization initiative completed – China’s accession to the World Trade Organization. And don’t forget the numerous free trade deals signed by the George W. Bush and Obama administrations, including with South Korea’s very large economy.

Moreover, although Hufbauer and Lu rightly note that the financial crisis and Great Recession also have marked the post-2003 period, they claim that “The decade that experienced the greatest gains from increased trade was 1970 to 1980.” That decade witnessed no less than two recessions (three if you count the 1980 downturn).

Undaunted, the authors contend that returning to the trade liberalization policy course will result in even more American wealth creation. But here’s where their discussion of the post-2003 period fails badly – and unmistakably. They never mention that, thanks largely to that aforementioned boost to incredibly lopsided U.S.-China the first decade of this century produced the greatest U.S. trade deficits and associated global economic imbalances in world history. They ended in the financial crisis and the nation’s worst economic downturn since the Great Recession.

Since America’s main trade partners – including China – seem either just as export-dependent, and/or just as import-and consumption-phobic as ever, it’s difficult to understand why a return to conventional trade diplomacy, combined with the cumulative and often lagged impact of past deals (as noted by Hufbauer and Zu) wouldn’t end in near-catastrophe again.

Another big problem: Former Treasury Secretary and chief Obama economic adviser Larry Summers, along with many others, worry that the United States has fallen into an economic trap they call “secular stagnation.” They speculate that the nation has become so incapable of generating healthy growth that it’s grown dependent on blowing up credit and consumption bubbles to at least produce (misleading) signs of economic life – and that these bubble’s inevitable bursting keeps creating financial crises and serious slumps. Do Hufbauer and Zu believe that the sandbagging of domestic manufacturing (which hasn’t grown in real terms since 2006) due to import competition and offshoring isn’t partly to blame? 

Finally, and similarly, American leaders have finally recognized that the economy is experiencing a major productivity growth slowdown. Can trade liberalization’s real economic impact be measured without considering the effect on productivity of allowing all that trade damage to manufacturing, which historically has led the nation in productivity growth?  

It’s definitely encouraging that a major think tank like the Peterson Institute is looking in detail at globalization’s impact on America’s economy.  Let’s hope that its next effort reflects some actual thinking.  

Im-Politic: A Surprising Source (Unwittingly) Explains Need to Keep Tight Immigration Curbs

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Im-Politic, immigrants, Immigration, labor costs, labor shortages, productivity, Ryan Avent, technology, The Economist

I’ve long argued that one of the main reasons for Americans to oppose mass immigration policies (including sweeping forms of amnesty for the current illegal population) is the devastating impact such labor inflows are likely to have on productivity growth. (Just FYI, here’s my latest take.) One of my main reasons? The relative scarcity of labor throughout American history deserves considerable credit for the nation’s emergence as a global productivity and technology leader. And since robustly improving productivity is a major key to boosting national living standards on a sustainable basis, that’s always struck me as a pretty strong argument to keep labor in short supply by limiting immigration – which of course brings in more workers. 

As a result, imagine my surprise to see that this view has just been supported by a leading writer for the British magazine The Economist – which has long loudly advocated for wider Open Borders.

The case for immigration as a productivity growth killer is solidly grounded in conventional economics. In that 2006 Congressional testimony linked above, I noted “When businesses conclude that the price of scarce labor has become excessive, powerful incentives emerge for them to substitute capital and technology for labor. And that means innovation.”

I then pointed out that “Our country owes much of its longstanding world leadership in most technology areas to this genuinely chronic scarcity and thus relatively high price of labor. Preventing shortages with immigration policy could weaken this proven spur to technological progress and all the benefits it brings.”

If you’re skeptical, here’s a link to the leading scholarly work connecting outstanding U.S. productivity performance and a chronically inadequate American labor supply. In fairness, not everyone agrees. Here’s a link to the most prominent rebuttal.

But I was understandably heartened to see the importance of scarce labor to productivity growth supported in this post by Ryan Avent, a senior editor and economics columnist for The Economist. According to Avent:

“Economic historians often explain divergences in patterns of industrialisation by pointing to differences in labour costs. British workers were expensive relative to workers on the continent and relative to British energy. British firms therefore had an incentive to develop and deploy new technologies that economised on labour and used a lot of energy: industrialisation! There’s more to the story than that, but that’s a pretty big component. Later something similar happened in America, where workers were even more expensive and resources even more abundant, and where the phenomenally productive ‘American system’ of manufacturing therefore emerged.”

Avent doesn’t explicitly make the immigration policy connection. But it’s glaringly obvious to all except the ideologically blinkered (or the hired guns of the American cheap labor lobby). Needless to say, I’ll be awaiting his next offering on the immigration policy debate with more than the usual interest. You should, too.

(What’s Left of) Our Economy: Will Tech Kill Too Many Jobs?

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Alan Turing, artificial intelligence, automation, Financial Times, Gillian Tett, Jobs, Paul Wallace, Reuters, robots, tech, technology, Turing Test, work, {What's Left of) Our Economy

One of the biggest issues facing our whole human species is one that I have (uncharacteristically!) written on little: whether or not the latest and future generations of technology will kill off way more jobs than they will create. One big reason: I’m still trying to bone up on this question, and I’m still very much in the learning phase about the future of work – and especially work that will pay a living wage..

But despite my limited knowledge, I’m pretty sure that two recent articles on the subject are especially valuable for shedding light on dimensions that demand a lot more attention.

The first is a recent column on the Reuters site presenting a case for optimism that the new robots and artificial intelligence will turn out to be big net new jobs creators. Author Paul Wallace, a former editor at The Economist magazine, definitely makes some strong points. For example, he argues that too much of the research underlying the case for pessimism wrongly assumes that all positions in sectors considered highly vulnerable are equally vulnerable.

Indeed, Wallace spotlights a study finding that a focus on tasks rather than occupations can dramatically reduce the numbers of workers at risk – at least, it seems, for the time being. One big reason? Many seemingly vulnerable positions allegedly involve “crucial social interactions” that no hardware or software or combination (on the horizon?) can replicate.

Yet those possible qualifications I just mentioned point to one major potential vulnerability in Wallace’s argument – and in the study he cites. Both seem to assume that the technologies in question won’t advance much more – and possibly that they will never, or not for decades, reach the stage where they can interface adequately with human customers or colleagues. You don’t need to be a science fiction buff to understand the implausibility of that scenario.

In fact, recall that pioneering computer scientist Alan Turing displayed unmistakable confidence that such progress was at least theoretically possible. Why else would he have developed his famous test of whether machines could be genuinely intelligent, and even, by extension, conscious?

“Turing put forward the idea of an ‘imitation game’, in which a human being and a computer would be interrogated under conditions where the interrogator would not know which was which, the communication being entirely by textual messages. Turing argued that if the interrogator could not distinguish them by questioning, then it would be unreasonable not to call the computer intelligent, because we judge other people’s intelligence from external observation in just this way.”

The article also raises big questions about the quality of the jobs that Wallace (and other optimists?) are confident won’t be robot-ized out of existence. Some definitely seem desirable – like “designing smartphone apps that have only just sprung into existence” – although I still wonder whether sooner rather than later apps won’t be designing themselves much more efficiently.

But the other examples of safe jobs sound a lot like dead-end jobs – e.g., restaurant jobs, personal trainer positions, and tour guides. And I continue to struggle understanding why they’re thought to be especially safe, either, over any meaningful stretch of time.

Gillian Tett, the managing editor for U.S. news at the Financial Times, seems fairly upbeat about employment and automation, too, and also cites research purporting to undercut techno-alarmism. Like Wallace’s examples, it’s worth considering. Her summary of the message: “[P]eople are also working with robots in new roles.” But also like Wallace’s examples, it raises the question, “For how much longer?”

Much stronger is this point made by Tett: “[T]here is a burning need for policymakers to obtain much better data on what is really happening in the American workplace. Anthropological studies are small scale, while the macro-level data are surprisingly weak, partly because the Bureau of Labor Statistics tends to collect data through traditional channels.”

My contacts with the Trump transition team convince me that upgrading American government statistics bearing on trade and offshoring are due for a big rethink. The clearly surging importance of the latest actual and potential labor-saving technologies means that their actual and likely impact on the world of work demand the same treatment.

Those Stubborn Facts: About Those Low-Tech Chinese….

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China, Digitimes, semiconductor manufacturing equipment, semiconductors, technology, Those Stubbprn Facts

Number of front-end semiconductor manufacturing facilities forecast to begin operating worldwide 2017-2020: 62

Number forecast to begin operations in China: 26 (c. 42%)

Number forecast to begin operations in “the Americas”: 10 (c. 16%)

(Source: “China to join top-3 semiconductor equipment spenders for first time, says SEMI,” by Jessie Shen, Digitimes, December 14, 2016, http://www.digitimes.com/news/a20161214PR200.html)