(What’s Left of) Our Economy: The New York Fed Whiffs on Tariffs and Trade Policy

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China, currency manipulation, imports, intermediate goods, New York Fed, non-tariff barriers, subsidies, tariffs, Trade, Trade Deficits, Trump, Trump tariffs, value-added tax, VAT, {What's Left of) Our Economy

Do you want to know how slipshod a new post from the New York branch of the Federal Reserve on tariffs and trade deficits is? I’m not a Ph.D. economist, and it took me about thirty seconds to spot no less than four fatal flaws.

The post, written by a senior Fed economist and three academic colleagues (including one from a Chinese university), argues that President Trump’s tariff-heavy trade policies are likeliest to backfire on the administration and the entire U.S. economy by widening, not narrowing, the country’s trade deficit. Their main evidence? The experience of China after it entered the World Trade Organization (WTO) at the end of 2001.

According to the authors:

“While more costly imports are likely to reduce the quantity and value of imports into the United States, the story does not stop there, because we cannot presume that the value of exports will remain unchanged. In this post, we argue that U.S. exports will also fall, not only because of other countries’ retaliatory tariffs on U.S. exports, but also because the costs for U.S. firms producing goods for export will rise and make U.S. exports less competitive on the world market. The end result is likely to be lower imports and lower exports, with little or no improvement in the trade deficit.”

The Chinese example, they claim, supports this hypothesis because China significantly reduced its tariffs following WTO entry (i.e., pursued a policy exactly the opposite of that sought by Mr. Trump), and both its exports as well as its imports soared. Moreover, the authors found that

“Focusing on China’s exports to the United States…shows that by lowering its own tariffs on imported inputs, China reduced its production costs and increased productivity, enabling Chinese firms to enter the U.S. export market and compete with other firms. With a fall in production costs, Chinese firms charged lower prices on goods exported to the United States and increased their U.S. market shares.”

But the weaknesses in this analysis are positively jaw-dropping. First, the data supporting that latter key finding is no less than a dozen years out of date.

Second, the post completely fails to take into account the possible effects over time of a U.S. failure to provide trade protection for sectors, like steel, that represent key inputs for manufacturing. Although obviously the cheaper they are, the more competitive the industries that utilize them will be, intermediate goods sectors (including not only materials like metals but machinery and equipment of all kinds) could represent as much as nearly half of America’s entire manufacturing complex. Should the United States just sit back and watch those sectors trashed by foreign competition?

Third, and even more important, should the United States accept this result if much of the foreign competition faced by its manufacturers is predatory? In this vein, the Fed post contains not a single word about China’s currency manipulation – which kept the value of the yuan significantly and artificially suppressed throughout the early post-WTO admission years (and arguably still does) for reasons completely unrelated to trade liberalization, and which gave Chinese products a major and wholly artificial advantage in China’s own market, the U.S. market, and markets around the world.

Fourth, the authors similarly ignore the impact of China’s value-added tax (VAT) system, which not only surrounds the entire Chinese economy with high, tariff-like walls that nonetheless aren’t technically considered tariffs, but which provides comparably impressive subsidies for China’s exports.  Not to mention the other massive supports Beijing offers to manufacturing, or its still (and perhaps increasingly) formidable array of non-tariff trade barriers.

Indeed, all these non-market practices no doubt largely explain why China has both supercharged its exports since it entered the WTO and impressively raised the levels of Chinese inputs they contain. 

In baseball, three strikes means “you’re out.” At the New York Fed, by contrast, four strikes apparently earns a “well done.”

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(What’s Left of) Our Economy: The Real Trade Messages of the New GDP Report

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exports, GDP, Great Recession, gross domestic product, imports, inflation-adjusted growth, Made in Washington trade deficit, real exports, real imports, real trade deficit, recovery, tariffs, Trade, Trade Deficits, Trump, {What's Left of) Our Economy

Friday’s government report on U.S. economic growth in the second quarter of this year was a treasure trove of newsworthy information. It not only provided the first peak at how President Trump’s imposed and threatened tariffs have affected the nation’s economic performance. It also incorporated literally decades’ worth of revisions that contained some important surprises about the economy’s strengths and weaknesses – in particular over the last five years. These new findings entail considerably more than trade, but let’s focus on that subject for today, since it’s been making so many headlines.

As widely expected, these new figures on the gross domestic product (GDP) and how it changed in inflation-adjusted terms showed that the threatened tariffs and retaliatory levies boosted American exports significantly. The reason? Many foreign customers for U.S. goods decided to “front-load” their purchases to avoid the paying the new charges for as long as possible.

On a sequential basis, this first of this year’s three estimates for the second quarter judged that U.S. merchandise exports jumped by 8.96 percent on an annualized basis. That’s the biggest such increase since the 11.72 percent surge in the fourth quarter of 2013. At the same time, the contribution to total quarterly growth made by goods exports was nothing special. In fact, at 1.12 percentage points out of the quarter’s 4.10 percent annualized rate of inflation-adjusted expansion, they fueled less real growth relatively speaking than they did in the fourth quarter of last year, when they were responsible for 0.79 percentage points of that period’s 2.30 percent annualized constant dollar growth.

Interestingly, the tariffs didn’t result in U.S. customers of overseas producers displaying the same interest in maximizing their imports to the greatest possible extent. Indeed, these purchases inched up sequentially by only 0.12 percent at an annual rate after inflation. Yet at $3.4241 trillion after inflation and annualized, they set a new record, nosing out the previous quarter’s $3.4201 trillion.

Thanks to exports’ performance, which brought their quarterly total to a new record ($2.5742 trillion annualized in real terms) as well, the inflation-adjusted trade deficit plummeted by 23.27 percent annualized to $849.9 billion. (The absolute numbers are different from those reported in previous RealityChek posts because the new GDP report is presenting the inflation-adjusted figures using 2012 dollars, not 2009 dollars.) That quarterly trade shortfall was the nation’s smallest since the $845.9 billion annualized recorded in the third quarter of last year. And the sequential decrease was the biggest since the 36.96 percent nosedive in the fourth quarter of 2013.

In addition, according to the revisions, America’s trade performance between the fourth quarter of 2012 and the second quarter of this year was considerably worse than previously estimated. Combined goods and services exports rose a bit faster (at a 2.6 percent rather than a 2.5 percent average annual pace in real terms). But total import growth was much stronger during this period – a 4.2 percent average annual increase in constant dollars rather than 3.7 percent growth.

Trade deficits have therefore been higher than previously judged. Again, the changeover from reporting the figures in 2009 dollars to using 2012 dollars makes comparing the old and new levels pointless. But the difference can become clear by examining these deficits as a share of the total economy. Here are the previously reported percentages:

2013: 2.59 percent

2014: 2.67 percent

2015: 3.31 percent

2016: 3.51 percent

2017: 3.64 percent

And here are the revised data:

2013: 3.23 percent

2014: 3.42 percent

2015: 4.17 percent

2016: 4.45 percent

2017: 4.76 percent

Last year’s level was the highest for any year since 2007’s 5.27 percent – just before the Great Recession struck. It’s still a far cry from the historic quarterly high of 6.10 percent, set in the fourth quarter of 2005. But the trend shows that the real trade deficit has been climbing steadily toward these heights.

In fact, during the first quarter of this year, the overall real trade deficit hit 4.92 percent of GDP, before falling back to 4.59 percent in the second.

The revised GDP figures also shed new light on trade’s drag on economic growth during this sluggish recovery. Before this revision, the increase in the constant dollar trade deficit since the expansion began, in the middle of 2009, had sliced $302.1 billion off of the economy’s cumulative inflation-adjusted growth through the second read on first quarter GDP. That amounted to a trade drag of 9.99 percent.

With the revision in place, the trade drag as of the first quarter’s final read was $457.2 billion – or 14.33 percent. The decline in the price-adjusted trade gap as of Friday’s first read on second quarter GDP pushed the drag down to twelve percent. But that figure still represented $404.7 billion in lost real growth.

The growth drag created by the increase in the Made in Washington trade deficit has been much bigger. Before the new GDP revision, the growth of this trade shortfall (which is comprised of constant-dollar trade flows heavily affected by trade policy and trade agreement, and therefore leaves out trade in oil and services) had cut cumulative recovery era growth by 17.37 percent in real terms, or $523.88 billion, as of the final first quarter figures.

It won’t be possible to calculate revised figures for the first quarter and new figures for the second quarter until this Friday, when we’ll get the next monthly trade report (for June).

(What’s Left of) Our Economy: The IMF (Unwittingly) Explains Why Trade Deficits Really Do Matter

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China, current account, current account surplus, current deficit, Germany, Global Imbalances, globalization, IMF, International Monetary Fund, Japan, tariffs, The Netherlands, Trade, Trade Deficits, Trump, {What's Left of) Our Economy

One of my greatest professional disappointments has been my failure to help make many converts to the idea that one of the biggest – and possibly the biggest – reason that trade deficits matter a lot (contrary to the insistence of most economists) is that they can lead to global financial crises like the one that struck in 2007 and 2008. The idea is that these deficits lay at the heart of the broader economic imbalances run up during the previous decade – which flooded borrowing- and spending-happy economies (especially America’s) with oceans of cheap credit, and inevitably produced the reckless use of such credit and the inevitable – and terrifying – bursting of the resulting bubbles.

You see? It’s a thesis that’s tough to summarize briefly – even though it’s widely accepted by some of the world’s leading economists, who nonetheless remain reluctant to acknowledge any connection to trade flows.

So I’m gratified that the International Monetary Fund has just lent additional support to this thesis, but I’m under no illusions that the determinedly oblivious conventional wisdom is going to budge – especially since the Fund goes out of its way absolve lopsided trade flows of any blame.

According to the Fund’s new External Sector Report (click here for a link to the PDF), these imbalances (measured in their broadest form, the current account) stayed at about the same share of the world economy last year as they did in 2016 (some 3.25 percent). Yet in the IMF’s view, between 40 and 50 percent of these imbalances were “excessive (that is, not explained by countries’ fundamentals and desirable polices).”

Why should anyone care? Because, as the Fund explains, “Large and sustained excess external imbalances in the world’s key economies—amid policy actions detrimental to external balances—pose risks to global stability.” Specifically, “Over the medium term, sustained deficits, leading to widening debtor positions in key economies, could constrain global growth and possibly result in sharp and disruptive currency and asset price adjustments.”

That last reference to “sharp and disruptive currency and asset price adjustments” is a fancy, and deliberately understated, way of saying “financial crisis.”

The danger is underscored by Figure 1 from the Report (on page five) – which shows how the world’s current account situation has changed over time. Optimists might take comfort from the fact that the overall global imbalance today (showed by the thick, solid line), is considerably smaller as a share of global output than it was at the peak of the last decade’s bubble. Also of interest: China’s current account surplus has shrunk in relative terms, while those of Japan, Germany, and the Netherlands have remained about the same. (For evidence that the better Chinese numbers are largely smoke and mirrors, see this analysis from the Council on Foreign Relations – not exactly a hotbed of protectionist thought.)

But here’s what the pessimists would note – and what should worry everyone: Although the total worldwide current account imbalances is down, so is global growth. During the peak bubble years, it was about 4.30 percent annually after inflation. During the current recovery, it’s been much lower, and last year, it was 3.15 percent. Worse, a new slowdown may well be in the cards.

That is, the world economy seems to be facing all the dangers of a new financial crisis without having received many of the (dubious) benefits of a preceding bubble.

The IMF has a solution: The persistent surplus countries should spend more (which will presumably pull in more imports from the deficit countries) and the deficit countries should take “actions to strengthen public and private sector balance sheets” (that is, in large measure, spend less).

And it sends a warning: “[P]rotectionist policies should be avoided as they are likely to have significant deleterious effects on domestic and global growth, while limited impact on external imbalances.”

These are pretty standard prescriptions. The trouble is, as usual, neither the surplus nor the deficit countries are showing any interest in following them. Moreover, the IMF’s views on the relationship between trade flows on the one hand, and national borrowing and spending and savings rates on the other, seems to repeat the canard that net savings levels determine trade flows. Nowhere do its economists acknowledge that the fundamental mathematical relationship is that of an identity – which says nothing about causation at all. As a result, they also ignore all the ways in which trade flows can determine savings rates.

It’s anything but realistic to expect the Fund to endorse President Trump’s tariffs or any of the rest of his trade policies. But it also seems to remain anything but realistic to expect the Fund to identify any plausible alternative ways to prevent today’s global imbalances from turning into Financial Crisis 2.0.

(What’s Left of) Our Economy: The Chamber’s “Trade Works” Campaign is Clearly Hoping that Trade Fakery Works

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exports, imports, recovery, states, tariffs, Trade, Trade Deficits, trade surpluses, Trump, U.S. Chamber of Commerce, {What's Left of) Our Economy

The U.S. Chamber of Commerce is at it again: It’s launched a public relations campaign to strengthen American support for conventional trade liberalization policies (or at least to weaken support for President Trump’s increasing resort to tariffs to overhaul these policies). Its campaign focuses on how the old trade status quo was benefiting the U.S. economy. It’s using “state-by-state analysis to argue that Trump is risking a global trade war.” And as usual, it’s pretending that national and state trade flows (and their employment effects) consist of and stem only from exports.

Also as usual – there’s an excellent reason for the Chamber to resort once again to such intellectual dishonesty. Since the nation as a whole is running a huge and rising trade deficit that has cut into the subpar economic growth generated by the current expansion, it’s practically inevitable that the great majority of the fifty states have seen worsening trade balances significantly slow their recoveries as well.

And thanks to the Commerce Department, which tracks individual states’ merchandise exports and imports, it’s easy to see just how greatly the trade losers outnumber the trade winners. (State-level data on much smaller flows of services exports and imports are not available.) 

Specifically, from the year the current recovery began (2009) through last year, 26 states have seen their merchandise trade deficits increase, two have seen such trade surpluses fall, and in five, goods surpluses have turned into deficits. So in all, trade has dragged on growth during the recovery for 33 of the 50 states.

Of the 17 states that have improved their trade performances during this period, five have seen their deficits shrink, six have generated higher surpluses, and six have turned deficits into surpluses.

These data thoroughly debunk the claim made by the Chamber’s campaign that “Trade Works. Tariffs Don’t.” So it’s clear that what this pillar of the Offshoring Lobby is actually counting on is that trade fakery works.

(What’s Left of) Our Economy: A U.S. Trade Figures Update with a Special Focus on China & Trump “Foe” EU

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Canada, China, EU, European Union, exports, goods trade, high tech goods trade, imports, manufacturing, merchandise trade, services trade, tariffs, Trade, Trade Deficits, trade surpluses, Trump, {What's Left of) Our Economy

The May U.S. trade figures are no longer exactly new, having been released July 6. But with a big round of U.S. tariffs just imposed on China, and many more possibly on the way (along with automotive trade curbs that would affect most major U.S. economic competitors), they’re still incredibly newsy. So here’s a quick rundown of some highlights closely related to recent headlines, starting with the China figures.

>The enormous American goods trade deficit with China shot up by 18.68 percent sequentially, from $27.96 billion to $33.19 billion. The May shortfall was the biggest since January ($35.95 billion) and the increase was the greatest since May, 2016 (19.49 percent).

>The widening of the trade gap was largely driven by a 14.56 percent monthly jump in U.S. merchandise imports from China, to $43.80 billion.

>That level was also the highest since January ($45.79 billion) and the increase was the biggest since March, 2015 (30.33 percent).

>U.S. goods exports to China rose on month by only 1.69 percent, to $10.61 billion.

>Year-to-date, the merchandise deficit is running 9.92 percent higher than last year’s rate – which resulted in a record $375.58 billion bilateral shortfall.

>Also, year-to-date, U.S. goods exports to China have increased by 7.79 percent, while the far larger amount of imports is up by 9.36 percent.

>The trade figures for another competitor in President Trump’s cross-hairs, the European Union (EU) tell a different story. In May, the goods trade deficit with this grouping – labeled a trade “foe” by Mr. Trump – declined by 8.57 percent, from $14.64 billion to $13.39 billion.

>U.S. merchandise exports to the EU advanced by 4.34 percent sequentially in May, to $27.97 billion, and American sales to the group have been improving steadily since November. Indeed, on a year-to-date basis, they’ve improved by a healthy 14.02 percent.

>The merchandise deficit, however, has risen by 14.77 percent year-to-date as of May, with the larger amount of imports up nearly as fast: 14.27 percent.

>The U.S. goods deficit with Canada, another country that has drawn Mr. Trump’s ire, nearly doubled on month in May, from $806 million to $1.50 billion. But because this shortfall has fallen to such low levels in recent years, largely because of reduced American energy imports, these figures now tend to be volatile.

>U.S. merchandise exports to Canada – still America’s largest single country trade partner – increased 4.42 percent on month in May, to $26.81 billion, while goods imports rose by 8.53 percent, to $28.31 billion

>But although that import figure was the highest such monthly total since December, 2014’s $28.83 billion, the year-to-date American bilateral merchandise deficit has plummeted by 40.78 percent, from $9.78 billion to $6.08 billion.

>U.S. goods exports to Canada year-to-date are up by 4.98 percent, as of May, and goods imports have risen by 6.02 percent.

>U.S. global trade flows set a series of multi-month bests and all-time records in May.

>The combined May goods and services deficit fell by 6.57 percent sequentially to $43.05 billion – the lowest such total since October, 2016’s $42.64 billion.

>The goods deficit declined by 3.77 percent on month to $65.79 billion – the lowest since last August’s $65.49 billion.

>On the services side, the May surplus of $22.74 billion bested the April result by 2.04 percent, and fell just short of the record $22.77 billion recorded in February, 2015.

>Total exports, which rose sequentially by 1.94 percent, to $215.33 billion, hit their fourth straight monthly record.

>U.S. goods exports, which increased on month by 2.62 percent, to $144.89 billion, set their third straight such record.

>U.S. services exports, which advanced by 0.56 percent, to $70.44 billion, set their 13^th straight monthly record.

>U.S. non-oil goods exports (pre-inflation) in May climbed by 2.75 percent on month, to $129.98 billion, and set their third straight monthly record.

>U.S. current dollar oil exports inched up by 0.77 percent sequentially in May, to $14.18 billion – the second best performance on record after December, 2013’s $14.27 billion.

>The immense American manufacturing trade deficit in May continued its march toward the $1 trillion-dollar annual mark, and a new yearly record.

>The May manufacturing trade deficit totaled $85.05 billion – its fourth all-time highest, and an increase of 8.95 percent sequentially.

>Manufactures exports improved on month by 4.89 percent, from $96.72 billion to $101.45 billion. But the much greater amount of manufactures imports increased even more – by 6.71 percent, from $174.79 billion to $186.50 billion.

>Year-to-date, the manufacturing trade shortfall reached $397.48 billion in May – 11.89 percent higher than the comparable level in 2017, when the gap finished the year at $929.14 billion.

>Year-to-date manufacturing exports have increased by 7.38 percent, but imports are 9.27 percent higher.

>America’s trade deficit in advanced technology products also keeps heading to a new annual record.

>On month, the chronic shortfall in this category rose by 8.44 percent, to $10.32 billion.

>That increase brought the year-to-date deficit to $45.37 billion –32.62 percent higher than the comparable total last year, when this full-year trade gap reached $110.93 billion.

(What’s Left of) Our Economy: CNBC Interview Now On-Line, Plus Background Info & Context

Tags

China, CNBC, Made in China 2025, North Korea, tariffs, Trade, Trade Deficits, Trump, {What's Left of) Our Economy

I’m pleased to announce that the video is now on-line of my interview yesterday on CNBC on President Trump’s new announced tariffs on imports from China. Click here to see it.

As is usually the case, though, the segment was way too short to deal with all the aspects and angles of this decision that deserve attention. So here’s some material I prepared for the segment producer at her request the night before the broadcast. Sharp-eyed RealityChek regulars will find some of these points familiar, but to me, that just goes to show that many of the questions that have surrounded Mr. Trump’s trade policies since his inauguration remain either completely unanswered, or largely unanswered – as do many of the potential pluses and minuses. These talking points are as follows: 

“1. Although the White House may announce the tariff list tomorrow, it remains far from certain that all, or any, of them will actually be imposed. The Section 301 law providing their statutory basis permits the U.S. Trade Rep’s office 30 days to put them in place after the order formally appears in the Federal Register. In addition, the President could delay the duties up to 180 more days (i.e., after the midterm elections) if he determines that significant progress is being made in trade talks with China, or that the delay would encourage such progress.

“2. Less formally, these windows could enable the President to delay the tariffs’ imposition in order to encourage China to remain cooperative on the North Korea crisis. Mr. Trump has most recently declared his determination to go ahead with the tariffs despite acknowledging China’s help vis-a-vis Kim Jong Un, but at times in the past, he’s linked decisions to ease up or postpone such tariff decisions because of China’s purportedly cooperative attitude. And on a related issue, just before his summit with Kim, he explicitly called his decision to lift the “death penalty” on China telecoms firm ZTE a favor to Chinese leader Xi Jinping.

“3. I personally believe that any linkage between China trade policy and North Korea policy would be a serious mistake, as it assumes that Beijing is helping the United States defuse tensions on the peninsula as an act of charity, rather than a course of action that is squarely in China’s interest. As a result, linkage could reward China for taking steps it would have taken anyway.

“4. The President deserves major credit for recognizing that diplomacy and engagement alone have not sufficed to stem the economic and national security threats presented by China’s wide array of predatory trade and investment policies, exemplified most recently by its Made in China 2025 programs.

“5. In particular, Mr. Trump has recognized that U.S. allies are simply not serious about making significant contributions to a multilateral effort to combat China’s trade and broader economic predation. Similarly, he understands that the WTO is completely inadequate to this task, and that unilateral American action has long been essential.

“6. But his policies can be faulted in several respects.

“a. Some of his China-related goals seem flatly contradictory. Chiefly, the President says he wants to reduce the massive bilateral trade deficit America runs with China. But he also wants China to reduce its recent harassment of U.S. and other foreign companies and make it easier for them to do business in China. If the Chinese agree on the latter, much of the increased American (and other) corporate investment in China will wind up producing goods for export to the United States, thereby increasing the deficit.

“b. Tariffs on imports from China, all else equal, could well reduce the bilateral trade imbalance – especially if China opens its markets wider to U.S. exports, too. But the impact could be limited because shipments from other countries are likely to fill the gap to some extent.

“c. In addition, Mr. Trump should be paying more attention to the makeup of the trade deficit. In this regard, he has (erroneously) indicated that he would satisfied to see stepped up American exports of farm and energy products to accomplish much and even most of the deficit-reduction goal. But it’s much more important to narrow the gap in high value manufacturing industries, which make a much greater contribution to the American economy.

“d. The President is going to remain under attack on the tariff front from industries and sectors of the economy that might suffer losses, and these criticisms could well undercut GOP candidates in the upcoming midterm elections. He will also be criticized for taking measures the increase consumer prices. He could have preempted many of these criticisms in two main ways:

“First, earlier in his term, he should have strongly backed the border adjustment tax contained in the original Republican tax bill. This measure would have in effect both imposed a 20 percent tariff on imports and given a 20 percent subsidy to American exports. And since it would have been across-the-board, it would have provided protection and subsidies for both producers of finished goods (e.g., steel- and aluminum-using industries), and of the inputs for these finished goods.

“Second, he should be doing a much better job of persuading the American people that any change as disruptive as the new trade policies he’s begun to put into effect are bound to entail some short-term costs and sacrifices, but that the long-term benefits are well worth the candle. Tweets are not nearly enough. He needs a full-court PR press – Oval Office speeches, rallies, town hall meetings, the works.”

Another important point I wasn’t able to make: It’s true that, as the anchors and the other guest maintained, most economists think that trade deficits don’t matter to the health of a national economy. But as explained in the post linked here, this claim dangerously overlooks how trade deficits, and especially their increase, inevitably worsen the quality of the economy’s growth and makeup, and weaken the foundations of sustainable prosperity.    

 

(What’s Left of) Our Economy: The Rules-Based Global Order – & Other Fairy Tales

Tags

alliances, America First, burden sharing, China, currency, Federal Reserve, Financial Crisis, globalists, Great Recession, hegemony, NAFTA, North American Free Trade Agreement, offshoring, public goods, recovery, Robert Triffin, tariffs, Trade, Trade Deficits, Triffin dilemma, Trump, World Trade Organization, WTO, {What's Left of) Our Economy

Can the foreign and domestic critics of President Trump’s latest trade policy moves finally get real – and start talking and acting like adults? I’m not referring to politicians and analysts who have pointed out problems with individual aspects of the President’s recent announcements of tariffs on various trade competitors. I’ve been one of these myself.

Instead, I’m talking about those who keep whining that Mr. Trump’s tariffs and his overall – inconsistently to be sure – emerging “transactional” approach to alliances and other international arrangements are endangering a rules- and institutions-based global order that has served both America and the rest of the world unmistakably well. No description of the post-World War II world could be less accurate and indeed more childish – not to mention more self-serving for the supposed U.S. allies and multinational business interests (and their Washington, D.C. hired guns) that have pushed this canards so insistently.

For the institutions and rules so touted by President Trump’s globalist critics were simply window-dressing created to obscure a much less aesthetically pleasing reality: The postwar (non-communist) world’s success has been based fundamentally on America’s power and wealth, and the  consequent U.S. ability to provide what political scientists call “public goods” for those aligned with it. Specifically, it almost single-handedly created the conditions on which success decisively depended: the military protection that countries recovering from war-time devastation could not provide for themselves, and the credit and export markets that were similarly beyond the capacities of their crippled economies. Just as important, during the early post-war decades, the United States could play this role for the most part without excessive security risks and economic costs.

Unfortunately, even the biggest, best-run public goods-providing country will find these arrangements unsustainable, especially on the economic front, and especially if its government is substantially accountable to its people. The essential dilemma was first identified by the Yale University economist Robert Triffin back in 1960, when American power was at or near its zenith.

Triffin’s warning was narrowly economic. He argued that the very free lending and especially spending by which such a country (which political scientists call a “hegemon”) fueled growth around the world would eventually massive international deficits and a global glut of its currency – which was serving as the world’s money – and erode global confidence that currency’s value. Either the hegemon could tighten up – and likely throw the entire world economy into a major downturn. Or it could keep over-lending and especially spending. In this case, its currency would lose enough of its perceived value to end its world-money role, and the world economy would degenerate into chaos. Or the rest of the world could keep stockpiling these excess dollars – which as the French in particular noted would result in the inflation caused by the greenback’s declining value being exported around the world.

Yet in America’s case, the ultimate engines of the paradox – at least in post-World War II America’s case – were foreign policy and domestic politics-related. The over-spending, and consequent deficits stemmed from the United States’ determination simultaneously to incur the expenses of maintaining huge military forces at home and abroad (along with dispensing considerable foreign aid), and of satisfying the American public’s growing demand for social services, without increasing taxes enough to finance these programs responsibly. At the same time, the dilemma was greatly intensified by the refusal of the foreign beneficiaries of these U.S.-provided public goods to pay many more of the costs of their own defense, or to open their markets wider to American exports.

The breakdown of these arrangements in 1971 bore out Triffin’s warnings, but although major adjustments were made globally, the rest of the world continued relying heavily on American security guarantees and markets. And in fairness, a bipartisan American foreign policy establishment addicted to intangibles like “global leadership” and genuinely worried that its European and East Asian allies could not manage their own security affairs in particular responsibly, staunchly resisted any fundamental changes to the status quo.

Fast forward to the mid-2000s, and the exact same fundamental problem reemerged. Further, a Triffin-like situation was greatly worsened by two new developments. First, the Federal Reserve decided to enable reckless over-spending by American consumers by keeping interest rates at peacetime lows not seen for many decades.

Second, American trade policy swelled the international deficits by taking a new, offshoring-focused turn starting with the North American Free Trade Agreement (NAFTA) in the early 1990s, and culminating with multinational companies’ decisions to focus tightly on supplying more and more American business and consumer demand from China, not from the United States.

Not so coincidentally, this trade policy shift was accompanied by the creation of an international organization – the World Trade Organization (WTO) – that was the first such body ever authorized to create both binding rules for any international policy sphere, and to utilize enforcement mechanisms in which the United States enjoys no special standing (as opposed, for example, to the United Nations Security Council, where the United States and other permanent members possess an individual veto over decisions).

A better recipe could not be created for empowering China (and the rest of the world’s major export-dependent economies) to view the United States as an even more attractive dumping ground for surplus production; for undermining America’s internationally recognized right to respond unilaterally; and for consequently enabling footloose multinational companies to supercharge the trade deficits by sending an astonishing amount of the nation’s production capacity to China and other super-low cost countries that could not or would not import remotely as much as they could or would export.

The end result: Rather than the United States winding up exporting inflation and (along with free-riding allies and trade competitors) bringing down a global monetary order, America exported financial instability, triggering the worst worldwide financial crisis, the deepest international economic downturn since the Great Recession, and the weakest U.S. economic recovery on record. And revealingly, to the cheers of the bipartisan American foreign policy and economic policy establishments, the first post-financial crisis president, Barack Obama, kept America’s grand strategy firmly on course.

Although it’s still unclear whether Mr. Trump is choosing an effective combination of trade and alliance policy tactics, his initiatives so far raise even more important questions. Chiefly, is he simply trying to achieve greater security and economic burden-sharing? And even if his aims at present are restricted to securing better deals, is he prepared to scrap American participation in current alliances and other international institutions altogether if U.S. tariffs and other America First-type threats don’t seem to be working?

Nonetheless, the President has opened the door to elevating America’s thinking about its global environment toward the adult levels that ultimately will be needed to prevent today’s lopsided unsustainable international arrangements from disastrous crackups. If his critics want to increase the odds that the best choices will be made, they’ll need to grow up, too.

(What’s Left of) Our Economy: Some Surprising New Data on Manufacturing and Trade

Tags

China, IMF, International Monetary Fund, manufacturing, manufacturing jobs, Nicholas Lardy, Peterson Institute for International Economics, Trade, Trade Deficits, trade surpluses, World Bank, World Economic Outlook, {What's Left of) Our Economy

That was some chart in this week’s newest International Monetary Fund (IMF) update on the world economy on how different countries (including the United States) have fared when it comes to increasing or maintaining their manufacturing employment and their manufacturing output. (The detail in the below reproduction is tough to see, but for the original, see p. 5 in the third chapter of the Fund’s April World Economic Outlook.) 

 

Looking at performance for 20 high-income countries and 20 low-income countries, it makes clear that, contrary to the conventional wisdom, there’s nothing unusual about national economies boosting manufacturing jobs as a share of total jobs, and manufacturing output as a share of total output, at the same time. So it’s a powerful retort to claims from American globalization cheerleaders that all over the world, in rich and poor countries alike, both manufacturing indicators are bound to fall in relative terms as economies inevitably evolve in more services-oriented directions.

And at the very least, it calls into question the notion that trade balances in manufacturing have little or nothing to do job loss in the sector in particular. For example, according to the chart, 22 of the 40 countries examined have boosted manufacturing as a share of their employment and their real value-added (a measure of output) from 1960 through 2015. And 11 of these were high-income countries, where the conventional wisdom says manufacturing’s economic importance is likeliest to shrink over any significant time frame.

Of these 22 countries, 17 ran surpluses in their combined goods and services trade in 2015. And nine were high-income countries.

Not that trade surpluses are automatic indicators of economic success: This group does include economically stagnant Italy as well as economically collapsing Venezuela. Spain, which experienced a terrible stretch during the last recession, is on this list, too – although it’s been a strong grower more recently. And there’s one country whose failure to qualify sure surprised me: Germany. Nonetheless, the countries that have excelled at manufacturing during this period also include major success stories like Chile, the Netherlands, Sweden, Ireland, Singapore, South Korea, Malaysia, and of course China (along with Japan, which is currently in the midst of its best growth stretch in nearly three decades).

Of course, the 1960-2015 time frame is still problematic at best, especially for China – since in 1960 it was still being run by leaders enamored with ideas like making steel in peasants’ backyard furnaces. But more recent comparisons between China and the United States look much more instructive – and supportive of the idea that a strong manufacturing trade performance is a great way to maintain robust manufacturing employment and production – and of its converse.

Let’s examine the post-2002 period – with the baseline chosen because that’s the year China actually joined the World Trade Organization, and began receiving WTO-style protection for its predatory, surplus-building trade practices. And for manufacturing output, let’s use pre-inflation value-added, since I wasn’t able to find inflation-adjusted data for China.

According to World Bank figures, manufacturing by this measure dipped from 31.06 percent of China’s economy in 2002 to 29.38 percent – a 5.72 percent decline. For the United States, between 2002 and 2015 manufacturing value-added as a share of gross domestic product (GDP) fell from 13.74 percent to 12.27 percent. That 10.70 drop-off was nearly twice that of China.

As for employment, Sinologist Nicholas Lardy of the Peterson Institute for International Economics (and no hardliner on China) has compiled Chinese statistics dating from 2003, and covering employment in the country’s cities. They show that manufacturing jobs as a share of this China total rose from 15 percent that year to 20 percent in 2014. In the United States during those years, manufacturing employment as a share of total non-farm jobs (the U.S. Bureau of Labor Statistics’ American jobs universe), dropped from 11.91 percent to 8.76 percent.

And nowhere have the manufacturing differences between the two economies been greater than in trade flows. For the first year of its WTO membership, China’s goods and services trade surplus (which was mainly in manufacturing) was $30.35 billion. By 2014, it was ballooned to $382 billion. During this period, the American manufacturing trade deficit shot up by just under 74 percent – from $362.64 billion to $629.53 billion.

So the new IMF chart (and related data) by no means ends the debate over whether trade balances impact national manufacturing employment and output. But if I was a globalization cheerleader, I’d sure hope they didn’t attract too much attention.

(What’s Left of) Our Economy: Trump Tariffs Evoke Summers Snake Oil

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Al Gore, China, Clinton administration, current account surplus, Emergency Committee for American Trade, exports, FDI, Financial Times, forced technology transfer, foreign direct investment, General Motors, intellectual property theft, Larry Summers, Obama administration, offshoring lobby, tariffs, Trade Deficits, Trump, {What's Left of) Our Economy

Larry Summers doesn’t like President Trump’s China trade policies – that’s not news. After all, he served in senior economic policy posts both in the Clinton administration, which proudly championed expanded trade with China and laid the groundwork for the PRC’s entry into the World Trade Organization, and in the Obama administration, which less proudly but nonetheless effectively coddled much of the Chinese trade predation (including intellectual property theft) that even most globalization cheerleaders now admit is a major problem.

Newsier are two arguments Summers made yesterday in the Financial Times that indicate how dishonest years of justification of the China trade policies by globalist U.S. administrations have been, and how clueless they remain.

The dishonesty entails Summers’ dismissive treatment of China’s intellectual property “extraction” (as he calls what is usually and rightly recognized as “extortion”) from U.S. and other foreign companies that are forced by Chinese policy into joint venture partnerships with Chinese entities. According to Summers, this form of theft is no big deal for Americans because these episodes

“typically involve cases where the company in question produces for China in China and so have little impact on US employment. In many cases a substantial number of the company’s shareholders are foreign and it pays taxes to many governments. It is more than a little ironic that an administration that condemns outsourcing should make standing up for those who move production to China so central a priority.”

As should be clear to anyone who has followed U.S. trade policy toward China and other offshoring-friendly countries, that’s a heckuva way to describe the outbound American investment that’s been encouraged by the trade deals and related policy decisions enthusiastically supported by Summers and his White House bosses.

For especially during the Clinton years, when so many of these policies were put in place, the construction of American-owned factories, labs, and similar facilities in China was depicted not as activity that would substitute for American exports, or for U.S.-based production (in the form of goods shipped from these factories to the U.S. market), but as activity that would benefit the domestic American economy and its workers by supercharging U.S. exports – which would comprise much of the content of these foreign-made products.

Here’s a typical example from a 1998 report by the (Offshoring Lobby-funded) Emergency Committee for American Trade:

“American companies with global operations ship the large majority — between 60 percent and 75 percent — of total U.S. exports. Their foreign affiliates are important recipients of these exports; their share has increased to over 40 percent today.”

And let’s not forget one of the showcase examples of such Clinton-era investments – General Motors’ 1997 agreement with a Shanghai-run entity to produce autos in China. GM gushed that the joint venture would generate billions in American auto parts exports to China, and the importance attached by the Clinton administration to such deals was made clear by the decision to send Vice President Gore to the PRC to attend the signing ceremony. (Neither GM Chairman John Smith nor Gore mentioned that the agreement’s provisions mandated that the factory achieve 80 percent Chinese content levels within five years.)

Now, according to Summers, these joint ventures don’t significantly benefit the American domestic economy at all. Of course, there’s still the matter of how this Chinese tech theft – including from world-leading U.S. companies in cutting edge industries – will affect America’s innovation and technology futures. But these critical issues don’t seem to be on Summers’ screen.

The author’s cluelessness is evident from his insistence that

“it is wrong to say nothing has been achieved through negotiation with China. Only a few years ago, China’s current account surplus was the largest relative to GDP among significant countries….Today China’s global surpluses are far below past US negotiating targets of a few years ago….”

Here’s the (glaringly obvious) problem. During the current economic recovery, China’s total trade surplus with the United States (including its services deficit) jumped by 75 percent – from $219.47 billion in 2009 to $385 billion in 2016 (the last year for which such figures are available). Can a piece from Summers expressing his astonishment that so many U.S. voters opted in 2016 for a candidate promising to look after “America First” be far behind?

(What’s Left of) Our Economy: February’s Big New U.S. Trade Deficit Driven by Lots of Volatile Internals

Tags

Canada, China, exports, Financial Crisis, Great Recession, high tech goods, imports, manufacturing, Mexico, NAFTA, North American Free Trade Agreement, services, South Korea, Trade, Trade Deficits, Trump administration, {What's Left of) Our Economy

The U.S. monthly trade deficit rose for the sixth straight month in February, to its highest level ($57.79 billion) since some of the darkest days of the last financial crisis (October, 2008’s $60.19 billion). Combined U.S. goods and services exports set their third monthly record ($204.45 billion) in the last four months, but total imports (at $262.04 billion) hit their fifth straight monthly all-time high. New monthly records were also set for goods imports ($214.49 billion), services exports (for the tenth straight month, with a total of $67.27 billion) and services imports ($47.85 billion).

With U.S.-China trade tensions rising, the huge and chronic American trade shortfall with the PRC sank by 18.61 percent on month in February, but the drop was from an unusually high January figure ,and the new total ranked as the biggest February number ever ($29.26 billion). Similar volatility was on display with the U.S. deficits with other trade partners in the Trump administration’s crosshairs, including South Korea, Canada, and Mexico, as well as in manufacturing and high tech goods.

Here are selected highlights of the latest monthly (February) trade balance figures released Thursday morning by the Census Bureau:

>In the process of revealing several new all-time records and multi-year highs and lows, this morning’s U.S. trade balance report also made clear how volatile the nation’s monthly trade figures can be – including those describing the nation’s commerce with major foreign economies whose trade policies have evoked first criticism and now tariffs and threatened levees from the Trump administration.

>The combined U.S. goods and services trade deficit rose in February sequentially for the sixth straight month. The $57.59 billion total, a 1.63 percent increase from January’s upwardly adjusted $56.67 billion figure, was the biggest monthly trade shortfall since October, 2008’s $60.19 billion – when the Lehman Brothers bankruptcy pushed the global financial crisis into a dangerous new phase and ultimately helped usher in America’s worst downturn since the Great Depression of the 1930s.

> U.S. total exports in February set their third new record in the last four months. At $204.45 billion, they were 1.74 percent greater than January’s upwardly adjusted $200.95 billion and 0.41 percent higher than the previous best of $203.61 billion, set last December.

>But U.S. total imports in February set their fifth straight monthly record. The $262.04 billion total was 1.72 percent higher than the upwardly adjusted January level of $257.61 billion – the previous record.

>The $77.01 billion February U.S. trade deficit in goods was also the biggest such total since the last recession – specifically, the $77.63 billion figure for July, 2008. Sequentially, it grew 0.39 percent from January’s upwardly adjusted $76.71 billion.

>America’s services trade remained healthily in surplus in February. But the $19.42 billion excess of exports over imports was the smallest such total since December, 2012’s $18.63 billion. Month-on-month, the services surplus sank by 3.12 percent in February from January’s upwardly adjusted $20.04 billion – the biggest such drop since last April’s 4.88 percent plunge.

>U.S. goods imports set their third record in the last four months in February. At $214.19 billion, they exceeded the January total (the previous record, which has been upwardly adjusted) of $210.86 billion by 1.58 percent.

>Services exports in February set their tenth straight monthly record, rising sequentially by 0.70 percent from an upwardly adjusted $66.80 billion to $67.27 billion.

>Services imports in February set their fourth straight monthly record, rising sequentially by 2.34 percent from a downwardly adjusted $46.76 billion to $47.85 billion. The monthly increase, moreover, was the biggest since August 2016’s 3.67 percent.

>At the same time, reportedly, the February services imports total was fueled in part by payments made by American broadcasters for the rights to televise the Seoul Winter Olympics.

>With U.S.-China trade tensions escalating, the February figures showed that the massive, chronic goods trade surplus run by China with the United States plunged by 18.61 percent sequentially, from $35.95 billion (the second highest monthly total ever) to $29.26 billion.

>The February figure was the lowest since April, 2017’s $27.63 billion, and the monthly decrease was the biggest since last February’s 26.64 percent. Yet the February figure was an all-time February high.

>U.S. goods exports in February declined by 0.30 percent, from $9.84 billion to $9.81 billion – the lowest such total since last April’s $9.84 billion.

>The much larger amount of U.S. goods imports from China sank sequentially by 14.68 percent in February, from $45.79 billion to $39.07 billion.

>The goods import decline was the biggest since last February’s 20.82 percent, and the monthly total was the lowest since April’s $37.47 billion. Yet as with the goods deficit, the new February goods import total was a new monthly record for February.

>A similar story is told by the new statistics for U.S. merchandise trade with South Korea, whose bilateral trade deal with the United States was recently renegotiated.

>America’s goods trade deficit with South Korea also shrank dramatically on month in February – by 65.28 percent, from $1.97 billion to $0.68 billion.

>The February total was the lowest since the 0.56 billion figure recorded for March, 2012 – as the trade agreement went into effect. The month-on-month plummet, moreover, was the biggest since the 70.50 percent drop in February, 2012.

>Yet the January U.S.-South Korea merchandise trade deficit was the biggest since October’s $2.51 billion.

>Still, the composition of the monthly U.S.-South Korea goods trade deficit change differed dramatically from that of the U.S.-China deficit.

>Not only did U.S. merchandise imports from South Korea fall sequentially by 12.05 percent – to $4.97 billion, the lowest such total since last February’s $4.87 billion, and the greatest monthly percentage drop since that month. U.S. merchandise exports to South Korea also jumped on month by 16.36 percent, to $4.92 billion.

>That increase was the biggest percentage-wise since last March’s 22.04 percent.

>The U.S.’ merchandise shortfall with Canada nosedived in February, too – by 89.59 percent on month, from January’s $3.70 billion to $0.38 billion.

>The total was the lowest since last September’s $0.25 billion, and the sequential drop was the steepest since May, 2016’s 95.84 percent.

>But the January deficit was the biggest since December, 2014’s $4.07 billion.

>Most of the U.S.-Canada merchandise deficit’s February monthly decrease came on the American imports side, as these purchases declined by 8.95 percent to $23.92 billion – the largest such decrease since last July’s 11.49 percent, and the lowest such total since that month’s $22.89 billion.

>But U.S. goods exports to Canada also rose on month in February – by 4.28 percent, to $23.53 billion.

>A different kind of volatility was exhibited by U.S. merchandise trade with its other North American Free Trade Agreement (NAFTA) partner, Mexico.

>The American goods trade shortfall with Mexico soared by 46.62 percent sequentially in February, to $6.06 billion. That’s the biggest such increase since the 81.73 percent of March, 2001 – nearly 17 years ago.

>Yet the $4.14 billion January U.S. merchandise deficit with Mexico was the smallest since last January’s $3.95 billion.

>U.S. goods exports to Mexico sank by 7.24 percent on month in February, to a five-month low of $20.22 billion, while goods imports from Mexico climbed by 1.35 percent, to $26.29 billion.

>Volatility in these bilateral deficits was mirrored in February by volatility in the manufacturing trade deficit. This chronic and enormous shortfall plunged sequentially by 15.48 percent, to $73.21 billion. But the January total of $86.62 billion was the second highest of all time.

>Manufacturing exports improved by 2.89 percent sequentially in February, to $88.86 billion, while imports skidded by 6.31 percent, to $162.07 billion.

>High tech goods trade displayed major ups and downs, too. In February, the shortfall cratered 30.96 percent, to $7.93 billion. That was the smallest total since last April’s $6.04 billion.

>But the $11.49 billion January gap was 14.25 percent bigger than the December figure.