(What’s Left of) Our Economy: The Establishment’s Case for Free Trade Keeps Weakening

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Center for Global Development, currency manipulation, Dani Rodrik, free trade, Joseph E. Gagnon, Lawrence Summers, non-tariff barriers, Paul Krugman, Peterson Institute for International Economics, protectionism, sovereignty, Trade, trade agreements, trade barriers, transparency, {What's Left of) Our Economy

Although they’ve long enjoyed benefits ranging from lavish financial support to nearly uncritical mainstream media adulation, I felt a twinge of pity this morning for establishment backers of current trade and globalization policies.

As made clear from a new report from one of their leading think tanks and a recent speech from one of their leading individual lights, they’re doubling down on the claims that there’s nothing fundamentally wrong with the trade liberalization priorities long held by the U.S. government, and that the trade barriers supported by populists and other critics will only backfire on the American and global economies. And as also made clear by the report and speech, they keep fighting a losing intellectual battle.

The report comes from the Peterson Institute for International Economics, and addresses the question “Do Governments Drive Global Trade Imbalances?” As emphasized by author Joseph E. Gagnon, the stakes of finding the right answer are towering:

“At current levels, these imbalances will push the net debt of deficit countries gradually toward unprecedented and unsustainable levels….Moreover, the domestic political consequences of persistent trade deficits are already evident in both the United States and the United Kingdom, having contributed importantly to the election of Donald Trump and the outcome of the Brexit referendum….”

In other words, if global trade flows continue getting more lopsided, they could set the stage for a repeat of the kind of global financial crisis they helped foster during the previous decade. And failing to calm populist political waters in the west could tempt key trading powers even more strongly to dabble in economically disastrous protectionism.

So Gagnon makes the case for a feel-good story: These major trade powers, especially the United States,

“have the necessary tools to achieve their stated goal of narrowing current account imbalances. President Trump and some members of his administration have proposed using trade barriers to narrow the US current account (trade) deficit. The data show that trade barriers have very little effect on a country’s trade balance. Fiscal policy and net official flows are the policies that matter for trade balances.”

One problem right at the outset: There’s nothing in the study whatever that explicitly measures the impact of (conventional) trade barriers. But even accepting this unusual methodology, it’s surely significant that he does conclude that “foreign exchange intervention” – i.e., currency manipulation – has an “important” affect on trade balances. That sounds like a trade barrier to me, at least in many instances.

And although fiscal (and related spending) policies aren’t normally considered examples of trade policies, they’ve clearly been used by numerous countries, especially Germany and throughout East Asia, to keep savings rates high, and therefore consumption (and imports) low. Why does Gagnon leave these out?

It’s absolutely true that fiscal and budget policies reflect the choices made by national societies, and therefore economies, and that as such, the presumption should be that they’re entirely legitimate. But at the same time, the nature of such choices can reveal whether these priorities can produce reasonably balanced trade with an economy like America’s – whose priorities on these fronts are substantially different but presumably just as legitimate.

As a result, trade policies that emphasize expanding commerce with countries regardless of their domestic priorities ipso facto can’t help but boost the trade deficit of the freer spending and/or more economically open country. And that description fits decades worth of American trade policies to a tee.

Lawrence Summers, President Obama’s former top White House economic adviser (among many other major government jobs), last month advanced an argument that’s somewhat more sophisticated than Gagnon’s, but no more convincing or useful to policymakers. In a speech to the Center for Global Development, Summers made the standard nod to the “compelling and persuasive case for free trade” and to the follow on view that “erecting tariff or quota barriers to trade between countries is usually a bad idea.”

But then, Summers’ line of argument actually became interesting. He sought to draw a distinction between the (unassailable) idea of free trade on the one hand, and the focus of many recent trade agreements – which he claimed “may be good or they may be bad, but they are not self-evidently and clearly good in the way that free trade is clearly good.” These concerns centered around goals like “securing intellectual property protection for global companies in a wider range of countries” and “achieving access for service companies to a wider range of countries” and “harmonizing rules in areas like safety standards or financial reporting standards.”

Supporters of such measures, he contended, have too often been arrogating

“the prestige of free trade…in support of a rather different agenda of better, more harmonized commercial rules” and expressed support for the view that “the participants in the debate about what constitute better, more harmonized commercial rules are mostly the kinds of people who appear in Davos rather than the kinds of people who work in the companies that are run by the people who appear in Davos.”

It’s hardly new for trade advocates to note critically that recent trade deals have dealt largely with non-trade issues, and more disturbingly, issues that the theory’s originators couldn’t imagine. Many left-of-center opponents of the Trans-Pacific Partnership (TPP) agreement nixed (at least for the United States) by President Trump made this very point, and Summers peers such as Dani Rodrik of Harvard University and Nobelist Paul Krugman have echoed these views as well.

But Summers’ indictment of this shift in the trade agenda seems unusually strong, so it’s a great opportunity to pose three major questions that these critiques keep avoiding. First, with standard trade barriers like tariffs whittled down to near-insignificance in most cases, and such non-tariff barriers (NTBs) becoming more popular, how can genuinely free trade be sustained without somehow grappling with the latter?

Second, since the United States maintains relatively few NTBs, since these barriers are easy to identify because they’re typically line items in a completely transparent federal budget, or regulations in other, equally transparent federal documents, and since the world’s NTB champs are known for opaque governing systems that generally hide their barriers effectively, how can the United States adequately safeguard its legitimate interests without threatening to put up or actually erecting its own barriers?

So without the possibility or reality of unilaterally closing off its own market in response, how can the United States avoid being disadvantaged by legalistic systems of harmonization that (understandably but unrealistically) depend on producing evidence for winning redress?

Third, and similarly, there’s no global consensus on what kinds of health and safety regulations are genuine and valid measures to protect the commonweal, and what kinds are designed primarily as trade barriers. Therefore, how – unless again through using the threat or reality of unilateral tariffs – can countries that play it straight (like the United States) adequately safeguard their interests versus the clandestine protectionists?

The only plausible answers to these questions are, “It can’t.” And the sooner globalization’s cheerleaders acknowledge these hard truths and the commonsense measures that logically flow from them, the sooner they’ll start winning back the trust of a public that’s rightly ignoring them.

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

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

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

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

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

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

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

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

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

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

(What’s Left of) Our Economy: 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.  

(What’s Left of) Our Economy: Thomas Friedman’s Trump Trade Column Must be a Hack Job

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China, Donald Trump, environmental standards, labor standards, monitoring and enforcement, state-owned enterprises, The New York Times, Thomas Friedman, TPP, Trade, trade agreements, Trans-Pacific Partnership, {What's Left of) Our Economy

Thomas Friedman’s email account must have been hacked! Assuming the New York Times columnist doesn’t walk his offerings over to the paper’s editorial page office, what else could explain the appearance last night of an essay on trade under his byline so chock full of embarrassing mistakes and stale canards?

True, the column had a characteristically clever, Friedman-like premise: Republican presidential front-runner Donald Trump shouldn’t be criticizing President Obama’s Trans-Pacific Partnership (TPP) trade agreement because it contains exactly the kinds of tough-minded provisions that the champion deal-maker would insist on himself. Unfortunately, whoever really wrote the article revealed such ignorance that identity theft must have been committed.

To start, the impostor assumed that passages in a treaty’s text are remotely likely to change facts on the ground. But anyone as knowledgeable about trade policy as Friedman – who covered the beat for The Times in the 1990s – must realize that monitoring and enforcing rules on the books has never been a remotely strong suit of the U.S. government.

A big part of the reason is logistical.  As I’ve noted repeatedly, manufacturing complexes even in smallish developing countries like TPP signatory Vietnam are so vast that making provisions like new labor rights and environmental protections actually stick is impossible even for a superpower. Indeed, Washington struggles even to enforce such rules in the United States.

Another big reason has to do with the secretive nature of Asian governments like those in Vietnam and other TPP signatories such as Japan and Malaysia. Although the Pacific Rim trade pact does seek to curb the ways that these bureaucracies distort trade flows, anyone as familiar with the region as Friedman surely realizes that these regimes put few of their biggest decisions in writing, and make even fewer of them public. So as has long been the case, American officials will be hard-pressed even to identify violations of the new TPP provisions, let alone combat them effectively.

It’s also hard to imagine that the real Friedman would simply parrot the Obama administration talking point that TPP will greatly benefit Americans by eliminating tariffs in 18,000 product categories. How could he not have seen the documentation provided by Public Citizen (and refuted by exactly no one) that the United States doesn’t even sell overseas more than half of these products, and that its exports in most of the rest are miniscule?

And it’s positively inconceivable that the genuine Thomas Friedman would have claimed that “if we walk away from the TPP all our friends in the Pacific will just sign up for China’s R.C.E.P., or Regional Comprehensive Economic Partnership, which will set trade rules in Asia….” He obviously would have known that six of the ten other TPP countries are clearly hedging their bets by signing on to the Chinese initiative, too. These including the biggest by far (Japan and Australia), along with Malaysia, New Zealand, Singapore, Vietnam.

In other words, the real Thomas Friedman would never have written that a negotiator as good as Donald Trump would have okayed an agreement with this many gaping loopholes and other weaknesses. Let’s hope that the hacker(s) are caught before Friedman’s reputation takes on more water!

Im-Politic: American Elites’ America Last Leanings

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E.J. Dionne, elites, Establishment Media, globalization, Im-Politic, incomes, middle class, national interests, offshoring, Steven Weisman, The Washington Post, Trade, trade agreements, working class

Although I don’t know E.J. Dionne well, the Washington Post columnist has always been one of my favorite journalists. It’s not his politics – they’re too orthodox lefty for me. It’s been his personality – always respectful and open-minded in our limited dealings, and equally gracious, tolerant, and genuinely curious in print, despite being highly opinionated.

That’s why it pains me to write that his newest offering widely missed the mark on the first-order issue of identifying the U.S. government’s top economic priorities. It’s only saving grace is underscoring how wide the philosophical and worldview gaps have grown between the the Establishment Media (at least much of it) and the general public (at least much of it).

Summarizing a new book on the new world economy, Dionne commends the author for “painstakingly avoiding dogmatism” and taking care “in laying out the often-agonizing choices” created by globalization. For example, he continues, the rapid growth of international trade and investment,

“has ‘elevated the living standards of hundreds of millions, if not billions, of people worldwide’ but also ‘has helped suppress the incomes of low-skilled middle-class workers in rich countries.’ Where do our loyalties lie? How do we balance obligations to our fellow citizens in the communities and countries in which we live against the interests of those far away?”

Excuse me, but “Time out”! “Where do our loyalties lie”? Not only should the answer be screamingly obvious to any American citizen, but just when did this become a legitimate question? It certainly would never be asked with any sincerity anywhere else in the world, except perhaps in affluent Scandinavia and elsewhere in guilt-ridden northern Europe. That undeniable reality alone should warn Americans against such cosmopolitanism. A U.S. leadership unsure whether its first obligations are to its own citizens is a poor bet to protect their interests adequately in a world where other major-power leaders aren’t nearly so confused.

Then there’s the democracy angle (which Dionne ironically deals with – from a different angle – in his following sentence). How many American voters do you know have elected public officials to pursue foreign interests – however morally compelling – over their own? Just as important, how many of those public officials themselves put America Last? At the least, aren’t they obliged to identify themselves clearly, so their constituents can know who they’re supporting? Private citizens of course have every right to set their own international priorities (provided, of course, that they don’t clash with or undermine official American diplomacy). But elected or appointed members of the U.S. government can’t legitimately enjoy this option – unless they’ve advertised their views before entering public life.

To be clear, I’m not arguing that the United States should never subordinate its needs and wants to those of others. Often in world politics, and politics in general, long-term gain can justify short-term pain. But if the pain is likely to last longer, and keep intensifying, the American people have a right to know about such consequences before the key decisions are made. Nor do I have any intrinsic problems with using U.S. assets to create overseas benefits for their own sakes (as opposed to self-interested goals like buying and keeping allies). But again, these choices need to be approved in advance by the voters. Otherwise, politicians would have free rein to be charitable and compassionate with Other People’s Money.

And in a sense, this is what Dionne and the author he lauds (former journalist-turned Washington think-tanker Steven Weisman) arguably, if unwittingly, are engaged in. For it’s much easier to call for more altruism in American policy when high incomes make such measures affordable. Unfortunately, the kinds of Americans who Dionne and Weisman at least recognize will bear the brunt of the price aren’t in this position.

There are also major policy reasons to doubt the wisdom of globalization policies that elevate raising foreign incomes over maintaining American incomes. As I’ve written repeatedly, offshoring-friendly U.S. trade policies that have had these effects bear much responsibility for the last financial crisis, which harmed the populations of first and third world countries alike. But that’s an argument that’s reasonably debatable on the merits. Acting as if foreign populations’ interests should outweigh Americans should be completely out of bounds – again, unless the public actively approves. And the fact that thoughtful commentators like Dionne even view this option as deserving consideration, whether as an “agonizing choice” or not, tells you most of what you need to know about why so many working- and middle-class voters nowadays are so furious at their nation’s elites.

(What’s Left of) Our Economy: Data Details Suggest Obama’s Got the Wrong Trade Strategy

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Census Bureau, economic growth, exports, free trade deals, imports, Obama, recovery, Trade, trade agreements, Trade Deficits, trade surpluses, U.S. International Trade Commission, {What's Left of) Our Economy

Since it will be months at best till a new trade agreement comes before Congress, trade policy has almost disappeared as a subject for mainstream media coverage and commentary. More’s the pity, since the details of the latest set of U.S. Government trade figures strongly indicate that President Obama keeps missing a great opportunity to energize the still-phlegmatic American recovery. His key mistake: emphasizing export growth.

Thanks to the U.S. International Trade Commission’s terrific interactive trade flow database, anyone wonky enough to want to play with it can see why restricting imports is a much better bet for faster U.S. growth – and therefore job creation.

The proverbial view from 30,000 feet provides support for the export focus – and the related view that the strong U.S. dollar lately is inflicting the most damage on that side of the trade ledger. For these data, let’s use the Census figures from that bureau’s latest monthly report on American exports and imports. And let’s zero in on manufacturing, since oil trade has almost nothing to do with trade policy decisions, and since the prices of raw materials have been so depressed in recent months. Those price changes dramatically influence detailed trade data for these products, because such figures don’t factor in inflation or disinflation.

The Census statistics make clear that, from the first six months of 2014 through the first six months of 2015, U.S. manufactures imports were indeed up – by 2.85 percent. But exports of industrial goods dropped by a considerably greater 4.61 percent. In other words, score one for the export-oriented. A closer look, however, reveals the first cracks in the case for emphasizing overseas sales: Because import flows are so much greater, their increase amounted to about $26.5 billion, while the export decrease totaled only about $17 billion.

And the further down you drill, the better import curbs look. Consider this exercise. I looked at the 2014-15 trade flows and balances for the 20 categories of manufactured goods that produced the biggest export numbers during that period. Not surprisingly, they include major industries like aerospace, semiconductors, organic chemicals, plastics and resins, pharmaceutical ingredients, construction equipment, telecommunications gear, and surgical and medical equipment. Perhaps somewhat more surprisingly, this group also includes autos, auto parts, computer parts, and steel.

Over the past year, ten of these sectors saw their trade balances worsen, and ten saw them improve. Remember that when trade balances get better (whether via expanding surpluses or shrinking deficits) America’s growth speeds up. When surpluses decrease or deficits increase, growth slows down. More to that exports vs imports point, exports fell year-on-year for 12 of these 20 sectors and rose for eight, while imports rose for 15 and fell for five. That alone is a tantalizing sign that even America’s biggest export winners also face powerful foreign competition for their home market. At least as revealing, this competition has persisted even though U.S. growth has been weak, and should be at least slowing the rise of imports.

Even more interesting, of the 15 cases in which imports rose, they increased by double-digit percentages in four instances, and by near-double digits in three more. Yet of the 12 cases in which exports decreased, only three did so by double-digit percentages and only one other was near that ballpark. These results clearly point to stronger import flows.

It’s true that, as suggested above, because imports so greatly exceed exports in America’s manufacturing trade, looking at percentage moves can mislead. In fact, of these 20 leading export winners, 13 were still running trade deficits as of the mid-point of this year. (More encouragingly, nine of these gaps had narrowed.) But that statistical reality seems trumped (no pun intended) by a truth that even trade and export cheerleaders will always be hard-pressed to deny even in the best of economic times: The United States will never be able to open foreign markets nearly as easily as it can control its own.

Our So-Called Foreign Policy: Obama Ignores the Diplomacy Lesson Taught by China’s Aid Bank Gambit

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allies, Asian Development Bank, Asian Infrastructure Investment Bank, China, diplomacy, international organizations, international relations, Obama, Our So-Called Foreign Policy, power, TPP, Trade, trade agreements, Trans-Pacific Partnership, World Bank

You have to be a regular visitor to the furthest reaches of business news websites to be up to speed on the controversy over dealing with the new Asian Infrastructure Investment Bank (AIIB) China has organized. Which is a shame, because the issues involved bring up our most fundamental ideas about how international relations are actually carried out and how they should be carried out.  They show how violently many of them clash.  And they point to the dangers of learning the wrong lessons.

The bank is an institution that Beijing says will serve two main purposes. First, it will speed up lending to Asian countries for urgently needed infrastructure projects that has been slowed by concerns about adequate spending controls, environmental standards, merit-based contracting practices, and similar conditions typically attached by existing development organizations like the World Bank and the Asian Development Bank. Second, it will give Asians more control over their own destinies, because those existing aid organizations are still dominated by Western countries – and by extension the supposedly Western values epitomized by their aforementioned policies.

The United States initially opposed the AIIB’s creation. But when China pushed ahead anyway, Washington began focusing on urging its regional allies and other Asian countries, as well as prospective non-Asian donor governments, to give it the cold shoulder. Unfortunately, many of these countries have ignored U.S. wishes, too – including Britain, Germany, France, Italy, and probably Australia.

The results add up to a major setback for American diplomacy – but also a self-inflicted one. U.S. leaders have viewed the Bank’s creation as part of a Chinese master plan to ensure that the rules of commerce in the economically dynamic Asia-Pacific region are written by free market countries and therefore reflect free market norms, rather than by Beijing and other champions of more secretive, more discriminatory, and more nationalistic practices. In addition to opposing the Bank’s creation, the Obama administration also has sought to respond by concluding the Trans-Pacific Partnership (TPP) trade deal, whose provisions it believes will lock the region into a free market future, and create incentives for countries seeking to join (like China) to change their ways.

But China’s successes are just the latest reminder that Washington completely misunderstands the forces that separate the winners from the losers not only in Asian politics, but around the world. For as widely reported, even America’s closest partners are cooperating with China because the lure of Chinese economic power, and the promise of increasing access to China’s enormous actual and potential market, have proven irresistible. All maintain generally free market, and thus rule-based, economic systems at home.  But none of these governments seems concerned about entering arrangements with countries like China, which actively reject the primacy of rules and all of their corollaries, like openness, and accountability to consumers, voters, and the like.

In other words, President Obama’s focus on rule-writing is completely misplaced. Fortunately, the United States has ample power of its own. In fact, as the most important final market by far for all countries currently involved in the TPP negotiations, and for all countries hoping to join, as well as the military protector of many of these nations (and of the Europeans flocking to the AIIB), the United States should have no trouble keeping the lid on China’s influence. A simple declaration that “If you want the benefits of trade with and protection by the United States, you need to act like it,” should suffice – along of course with the determination to walk this walk.

But the most important ingredient for this strategy is a U.S. chief executive who recognizes that world affairs is still mostly jungle, not civics class. Troublingly, the record indicates that Americans won’t get one until January, 2017 at the earliest.

(What’s Left of) Our Economy: New GDP Numbers Confirm U.S. Trade Policy as a Growth and Recovery Killer

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exports, GDP, gross domestic product, growth, imports, recovery, Trade, trade agreements, Trade Deficits, trade policy, {What's Left of) Our Economy

As Congress’ debate over President Obama’s trade agenda heats up, yesterday’s revised government figures on the gross domestic product (GDP) have made the economic costs of current U.S. trade policies clearer than ever. They show that U.S. trade flows slowed growth during the last three months of last year and for the full year more than first estimated. As a result, they have undercut the current sluggish economic recovery to a greater extent than previously thought.

Here are the trade highlights from yesterday’s official figures, which update initial estimates published last month of the GDP and economic growth for the fourth quarter of 2014, and the full year.

>The revised fourth quarter GDP 2014 figures show that the growth slowdown at the end of last year was spurred mainly by a rebound in the inflation-adjusted U.S. trade deficit to its highest level ($476.4 billion on an annualized basis) since the third quarter of 2010 ($498.4 billion). Last month’s first look at fourth quarter 2014 GDP pegged the annualized trade deficit at $471.5 billion

>Whereas trade flows added 0.78 percentage points to the third quarter’s strong 5.00 percent annualized real growth, they subtracted 1.15 percentage points from the fourth quarter’s much lower 2.17 percent real GDP advance. The advance figures from last month showed that the trade deficit’s after-inflation increase cut only 1.02 percentage points from the fourth quarter’s 2.62 percent annualized growth estimate.

>On a full-year basis, whereas a narrowing of the U.S. trade deficit added 0.22 percentage points to real GDP growth’s 2.20 percent real growth in 2013, the gap’s widening subtracted 0.23 percentage points from last year’s 2.39 percent growth in real terms. That’s a bigger bite than the 0.22 percentage points subtracted from the 2.42 percent 2014 growth figure released last month.

>2014 remains the first year during which the trade deficit worsened, and therefore slowed growth, since 2011.

>Since the current economic recovery began in the middle of 2009, the trade deficit’s increase has cut cumulative real GDP growth by 5.68 percent – a price that was almost entirely paid by the U.S. private sector and its workers. According to last month’s preliminary forth quarter and full-year 2014 figures, the trade hit to the inflation-adjusted recovery was 5.38 percent.

>Moreover, this trade deficit worsening has taken place despite the remarkable recent improvement in the nation’s energy trade.

>Indeed, the U.S. non-oil goods trade deficit’s increase in real terms, according to the latest (December and full-year 2014) trade figures has cut the cumulative growth of the current weak American recovery by 15.87 percent. Worse, virtually all of this lost growth has come in the private sector.

>The non-oil goods trade data is especially important because these are the trade flows that are most strongly influenced by trade agreements and related policy decisions. The dramatic trade deficit worsening and resulting GDP hit strongly indicate that the new trade agreements being pushed by President Obama – which are modeled on current trade deals – will further undercut growth, and by extension, job-creation.

>The revised GDP figures pushed the increase in U.S. real exports since the first quarter of 2009 to 38.12 percent from 37.98 percent. Nonetheless, they still fall way short of President Obama’s commitment to double them by the end of 2014. Future revisions cannot possibly upgrade this dismal performance significantly.

(What’s Left of) Our Economy: New GDP Data Show that Trade is a U.S. Growth Killer

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energy trade, export doubling, growth GDP, Jobs, Obama, oil, recovery, Trade, trade agreements, trade deficit, {What's Left of) Our Economy

The fourth quarter 2014 GDP figures released this morning show that U.S. trade flows have slowed the nation’s economic recovery during the final three months of last year, for all of 2014, and since the current economic recovery began in mid-2009. Worse, these costs have been exacted despite major improvement in U.S. energy trade, meaning that the trade deficit strongly shaped by Obama-style trade agreements is the culprit. Although U.S. exports set new quarterly and annual records, so did America’s much greater import flows. The President’s export-doubling goal, meanwhile, has fallen more than 60 percent short of its target, with upcoming GDP revisions leaving no hope of significantly greater success. 

Here are the trade highlights from this morning’s GDP report:

>The initial fourth GDP 2014 figures show that the growth slowdown at the end of last year was spurred mainly by a rebound in the U.S. trade deficit to its highest level ($471.5 billion on an annualized basis) since the third quarter of 2010 ($498.4 billion).

>Whereas trade flows added 0.78 percentage points to the third quarter’s strong 5.00 percent annualized growth, they subtracted 1.02 percentage points from the fourth quarter’s 2.60 percent annualized figures.

>On a full-year basis, whereas a narrowing of the U.S. trade deficit added 0.22 percentage points to real GDP growth’s 2.20 percent growth in 2013, the gap’s widening subtracted 0.22 percentage points from last year’s 2.40 percent growth.

>2014 was the first year during which the trade deficit worsened, and therefore slowed growth, since 2011.

>Since the current economic recovery began in the middle of 2009, the trade deficit’s increase has cut cumulative real GDP growth by 5.38 percent – a price that was almost entirely paid by the U.S. private sector and its workers.

>Moreover, this trade deficit worsening has taken place despite the remarkable recent improvement in the nation’s energy trade. Data showing the full-year 2014 non-oil goods trade flows will be released next week.

>The non-oil goods trade data is especially important because these are the trade flows that are most strongly influenced by trade agreements and related policy decisions. The dramatic trade deficit worsening – and even greater GDP hit – sure to be revealed by the upcoming data strongly indicates that the new trade agreements being pushed by President Obama will further undercut growth, and by extension, job-creation.

>U.S. real exports are now up , moreover, are up only 37.98 percent since the first quarter of 2009. As a result, they have fallen way short of President Obama’s commitment to double them by the end of 2014. Future revisions cannot possibly upgrade this dismal performance significantly.

 

(What’s Left of) Our Economy: All the TPP Talking Points Fit to Print

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currency manipulation, Japan, labor standards, multinational companies, Singapore, TPP, Trade, trade agreements, trade enforcement, Vietnam, {What's Left of) Our Economy

Maybe I should always be grateful when a Mainstream Media figure deals with U.S. trade policy. Heck anything’s better than the neglect typically shown for this topic. I’d be even more grateful if the detailed look occasionally taken at this subject reflected some actual thought, rather than the repetition of talking points and slogans. That’s why Lydia DePillis’ long piece yesterday in the Washington Post on the Trans-Pacific Partnership (TPP) left me so dissatisfied.

Actually, DePillis deserves credit on several counts. Unlike, say, Washington Post editorial board members, she treated TPP critics’ calls for including provisions against currency manipulation and for stronger labor standards as something other than nefarious protectionist ploys. She also recognized that fixing America’s schools isn’t a remotely promising idea for offsetting the damage inflicted by trade deals on much of the workforce.

But given that the nation – and the Mainstream Media – now has nearly a quarter-century’s worth of experience with the current, post-Cold War phase of U.S. trade policy, what’s most striking is how many immensely important points DePillis, and so many of her colleagues, still routinely miss. For now, let’s just focus on currency and labor standards.

First, the author writes that currency manipulation by China, and by prospective first-round TPP signatories Japan and Singapore, has played a role in widening U.S. trade deficits, and that the new agreement should do something about this exchange-rate protectionism. She absolves trade liberalization as such for the problem. Yet when the U.S. government repeatedly signs liberalization deals with manipulating countries (not just the still-unfinished TPP, but numerous agreements with China over the years), then this strategy deserves blame for worsening the trade gap.  The same goes for continuing to sign trade deals with countries that engage in any of the other predatory trade practices so common in the global economy. 

Another currency manipulation fundamental overlooked by DePillis: It’s not just manipulating countries that want the practice kept out of the TPP. It’s also offshoring U.S. multinational companies. When foreign governments keep exchange rates artificially low, the products these firms make in those countries for export to the United States are kept artificially less expensive and thus more competitive versus American-made products. In other words, currency manipulation is a foreign subsidy from which the multinationals benefit.  That’s why they’re fighting tooth and nail to preserve the do-nothing currency status quo.  And that’s why no TPP currency manipulation language that’s ultimately acceptable either to manipulating countries or to the offshoring lobby could possibly shield domestic companies from its effects.  

Similarly, it’s good that DePillis recognizes that Washington’s record in enforcing labor provisions in trade deals has been “abysmal.” Step Two is to learn that even American governments that wanted to right by U.S. and foreign workers would face obstacles that look insurmountable. Chiefly, even in relatively small TPP countries, like Vietnam, national manufacturing complexes are enormous.

According to a 2013 World Bank report, the country boasted about 50,000 manufacturing companies in 2011. The number had roughly quintupled since 2000, and has doubtless grown since. How many American or other inspectors will be needed to inspect their factories on an ongoing basis to ensure that whatever labor standards become part of TPP are met? And what happens when the agreement admits Bangladesh? Or Indonesia? Or China?

But maybe I shouldn’t be so hard on DePillis. After all, many of these points in her article clearly reflect what she’s been told by the “progressive” TPP critics she’s interviewed. If most of the deal’s opponents in and out of Congress keep trafficking in the myth that the TPP would be fine if it simply included language that ostensibly addresses certain outstanding issues, and even sets up means of enforcing new rules, why shouldn’t reporters buy in as well?