(What’s Left of) Our Economy: A New China Bill – & Trade Policy Realist? – Worth Watching

Tags

China, currency manipulation, economic nationalism, Fair Trade with China Enforcement Act, foreign direct investment, Gang of Eight, Immigration, Made in China 2025, Marco Rubio, national security, Populism, Republicans, subsidies, tech transfer, Trade, trade law, Trump, {What's Left of) Our Economy

One of the biggest questions surrounding the future of the Republican Party, and in turn of American politics, is how many leading GOP politicians learn the main lessons of the Trump victory in 2016. In my view, these include the political appeal and real-world imperative of a nationalist approach to American economic policy, especially in the realms of international trade and immigration.

President Trump’s capture of even most of his party’s establishment on the latter could not be clearer. But signs of populism’s growing appeal are also emerging in the former, and one of the biggest has just come courtesy of Marco Rubio. In fact, legislation recently introduced by the Florida Republican and Trump rival for the 2016 GOP presidential nomination strongly indicates that, when it comes to the crucial issue of China, Rubio is out-Trumping Mr. Trump.

Rubio’s journey has been a far as it has been high-speed. His voting record on trade policy overall has been awful – at least from an economic nationalist/populist standpoint. In fact, according to the libertarian Cato Institute, the only blemishes on his record so far have come from his support for federal subsidies for sugar – a crop grown in his home state. As a result, in the fall of 2015, I dismissed him as a typical Republican pseudo-hawk on China.

That is, he talked tough about the need to confront China’s expansionism in the East Asia/Pacific region. But he seemed oblivious to how decades of American trade policy had showered the People’s Republic with literally trillions of dollars worth of hard currency, along with cutting-edge technology voluntarily transferred by, and extorted with impunity from, American companies. In other words, he did and said nothing about U.S. decisions that unmistakably had helped China become a formidable military as well as economic power.

Fast forward to this year, and what a change – at least on China. In addition to criticizing President Trump for backing away from his own Commerce Department’s initial decision to all-but shut down the Chinese telecoms firm ZTE for (repeat) sanctions busting, he’s just introduced legislation that represents the most comprehensive effort I’ve yet seen to deal holistically with the intertwined Chinese threats to America’s economy and national security.

Rubio’s “Fair Trade with China Enforcement Act” contains numerous important measures to staunch the flow of money and defense-related tech to China. (Here’s a summary from his office.) Provisions that represent major and needed advancements in America’s strategy are:

> a prohibition on the the voluntary corporate transfer of technology to a wide range of explicitly named technologies subsidized by the Chinese government, including in the Made in China 2025 program aiming to achieve Chinese predominance in numerous economically and militarily critical technologies. That is, Rubio recognizes that tech extortion (conditioning access to the Chinese market on a company’s willingness to share knowhow with Chinese partners) isn’t the only way that Beijing has been closing the tech gap with the United States. American companies seeking to curry favor with China on their own, or simply recognizing the importance of locating R&D and related activities in close proximity to their manufacturing, have also fueled China’s power.

> a requirement that U.S. trade law recognize that any Chinese product headed for the American market that’s from an industry mentioned in any Chinese document even related to the Made in China 2025 plan is ipso facto receiving subsidies the kinds of subsidies that these statutes consider illegal; and that this same body of trade law just as automatically assume that such goods are actually injuring or threatening to injure U.S.-based competitors when they enter the American market. Translation into plain English: Rubio’s bill would dramatically lower the bar for imposing tariffs on imports from China deemed to be unfairly traded. Which would be one heckuva lot of imports from China.

> a ban on investors from China owning more than fifty percent of any American company producing goods targeted by Made in China 2025 – which would restrict another major channel of tech transfer to China;

> and a new tax on Chinese investments in the United States – including levies on Chinese purchases of American Treasury debt. The latter measure, in particular, would discourage China from buying excessive levels of U.S. government debt, which keeps China’s yuan weak versus the American dollar and therefore helps to put U.S.-made goods at price disadvantages versus their Chinese made counterparts wherever they compete.

Incidentally, a proposal along these lines was first made, to my knowledge, by Raymond, Howard, and Jesse Richman in their 2008 book Trading Away our Future. So they deserve a big shout-out.

Rubio’s bill isn’t perfect. For example, it should be clear by now that any Chinese entity permitted to bid for American assets is tightly controlled by the Chinese government. Therefore, I would favor banning all such takeovers. Even if existing acquisitions were permitted, Washington would at least be freezing the Chinese state’s economic footprint in the United States, and thereby preventing ever more American businesses from having to compete with rivals whose operations have nothing to do with the free market values the nation rightly values.

In addition, Rubio’s bill says nothing about American tech companies’ growing predilection for investing in Chinese tech “start-ups” and similar entities. Some of these investments are surely extorted, but others seem to be voluntary. But since all of them can help strengthen China’s tech capabilities, they should be banned as well if the recipients have any connection with Made in China 2025.

Finally, Rubio still seems pretty comfortable with the rest of America’s longstanding trade liberalization policies except for the impact of the North American Free Trade Agreement (NAFTA) on Florida produce growers. 

At the same time, China policy inevitably shapes so much of trade policy that Rubio’s single-minded focus to date can’t reasonably be criticized. Further, he seems to understand that it’s not enough simply to introduce a bill. Rubio’s been taking it the next step by lobbying for it, and for related China policy changes, actively in the media – both broadcast and print. He still needs to show a willingness to buttonhole his colleagues actively – the most important form of Capitol Hill lobbying. But (paradoxically) his leadership on 2013’s decidedly non-nationalist or populist Gang of Eight immigration bill at least indicates he recognizes the importance of this test. 

I’ve often wondered whether American politics can produce a leader with both the populist leanings of an outsider and the insider-type institutional expertise and contacts needed to turn these impulses into actual change. Rubio’s China bill and the policy migration it represents looks like major grounds for optimism.       

(What’s Left of) Our Economy: Beware the Fear-Mongering on the Trump Tariffs

Tags

Bloomberg, border adjustment tax, China, inflation, manufacturing, metals, overcapacity, productivity, real value-added, steel, tariffs, trade law, Trump, U.S. Business and Industry Council, value-added taxes, {What's Left of) Our Economy

Well, there can’t be any doubt about it now. President Trump’s trade policy course changes – and especially his determination hike U.S. tariffs – are already harming American manufacturers and the broader economy. After all, this Bloomberg News post just told us so. Except if you examine it carefully, and add a little common sense info, there’s no reason to believe any of these claims – especially for the manufacturing sector.

According to this Bloomberg report, “Confidence gauges spanning small businesses, factories and the public at large are coming off the boil as U.S. tariffs on imported metals — along with threats and counterthreats over Chinese goods — roil the stock market and cast a cloud over what was otherwise a bright economic outlook.”

Manufacturers reportedly face especially serious threats:

“The Philadelphia Fed’s index of business activity six months from now dropped 7.2 points to 40.7 in April, the lowest level since July. Earlier this week, a similar report from the New York Fed showed its future business conditions index registered the steepest one-month drop since the Sept. 11 terrorist attacks. Meantime, factories in both regions are reporting rising prices.”

And Bloomberg conveniently provided a chart displaying these reported “rising costs amid tariffs on imported metals.”

But the chart, and related macroeconomic data, actually represent compelling evidence that metals prices so far have had no discernible impact on U.S. manufacturing’s fortunes. Consider the following:

As the chart shows, the prices paid by inputs for factories in the Northeast sank significantly between 2014 and 2015. Steel prices fell especially sharply (largely because the Chinese government was fueling a massive global glut in this metal).

And according to official U.S. data, how did American domestic manufacturing fare? It grew in real value-added terms ( a measure of output preferred by many economists) by all of 0.90 percent.

The following year, according to the chart, prices these factories reported paying stayed very low, but began rising. Steel prices rebounded significantly, too. Manufacturing’s real value-added growth that year? About half the 2014-15 rate – 0.47 percent.

Those factory prices rose even faster the following year, and steel prices kept increasing. But the impact on America’s domestic manufacturing wasn’t exactly catastrophic. In fact, its annual real value-added growth nearly quadrupled – to 1.89 percent.

How on earth could this be? How about this as a starting point for an answer? Prices of steel or any other inputs aren’t the only influences on business performance. And they’re probably not the most important. For example, demand (aka “customers”) matter, too. In the United States, when those metals prices were dropping sharply between 2014 and 2015, price-adjusted economic growth turned in a solid 2.90 percent growth. The following year, when metals prices stayed unusually low, the real economic growth rate halved. And guess what also nearly halved? Manufacturing’s real value-added increase.

Even more interesting – between 2016 and 2017, when metals prices kept bouncing back, manufacturing’s real value-added jumped. Maybe in part because the economy’s overall growth rate increased by more than 50 percent, to 2.30 percent?

Looking at global growth (i.e., including foreign customers) yields similar conclusions. During that 2014-15 year of greatly reduced metals prices, pretty good U.S. growth but lousy manufacturing growth, the International Monetary Fund tells us that the global economy expanded by (a pretty poor) 3.10 percent. Chances are that feeble growth didn’t help America’s manufacturers, many of whom make much of their money by exporting.

Global growth only picked up to 3.20 percent the following year, but America’s growth tanked. The latter, then, seems to have mattered more to domestic manufacturers, as their own expansion rate fell by 50 percent. Between 2016 and 2017, however, when both the U.S. expansion and the global expansion sped up (the latter to 3.80 percent), American  manufacturing’s growth experienced that impressive takeoff. 

Now it’s true that the Trump metals tariffs could inflict greater harm on U.S. domestic manufacturers going forward, as they could impose on metals-users new costs that come on top of whatever global prices they need to pay at a given moment.  Nonetheless, it’s not like industry is exactly helpless to respond. For instance, it could start improving its productivity performance – which has been lousy on balance during this economic recovery. More productive sectors and companies of course can pass on input price increases without charging their customers more – and thereby undercutting their competitiveness.

At the same time, the metal-users’ loud complaints about the Trump tariffs point to a longstanding weakness of U.S. trade policy and especially the related body of trade law that the President has needed to rely on so far because the chief executive’s unilateral tariff-imposing authority is so limited. Because the trade law system, like U.S.-style legal systems generally, springs into action only when a specific complaint from private business is filed, its remedies are confined to that industry’s predicament. Not even the few trade cases initiated by the Obama administration or even the Trump administration have changed this pattern. (The sweeping tariffs on China sought in the President’s Section 301 intellectual property-centered action have come closest.) The tendency of such narrow-bore measures to enable foreign trade rivals to respond with divide-and-conquer tactics shows that two improvements should be made.

First, as proposed by my previous organization, the U.S. Business and Industry Council, industry-specific tariffs approved by the trade law system should be accompanied by similar protection for the “downstream” (i.e., user) industries. As a result, they would be much less likely to be victimized in the American market, anyway, by foreign competitors not saddled with higher input prices. 

Second, and even better, the administration should revive the Border Adjustment Tax that was part of the tax reform plan initially introduced by the House of Representatives’ Republican leaders. This measure, which would have worked much like the foreign Value-Added Taxes (VATs) used by most trading economies, would not only have provided the equivalent of protective tariffs for all U.S. goods and services facing import competition.  It would have boosted the competitiveness of all American exports in all foreign markets by providing the equivalent of a subsidy.   

Although President Trump initially (and weirdly) was cool to the Border Adjustment Tax, reportedly more recently he’s been changing his tune. Adopting this plan in particular could solve most of the economic as well as the political problems currently threatening his trade policies. 

 

(What’s Left of) Our Economy: The Case for Trump’s New Metals Tariffs

Tags

alliances, allies, aluminum, China, inflation, manufacturing, overcapacity, steel, subsidies, tariffs, Trade, trade law, Trump, World Steel Association, World Trade Organization, WTO, {What's Left of) Our Economy

President Trump has announced his decision to impose tariffs on U.S. imports of steel and aluminum – cue the trade war hysteria. And the national security hysteria. And the inflation hysteria. Here are some talking points I hope the administration will feel free to steal as it defends the decision in the days leading up to the release of the final tariff plan:

>Many countries have declared their intention to retaliate against the American tariffs with higher barriers to U.S. exports. Curiously, they are overlooking the Chinese government-subsidized overcapacity at the root of the long-time distortions in world steel and aluminum markets.

>Many of these countries want the problem tackled multilaterally. But the World Trade Organization (WTO) has failed to stem this overcapacity (or deal effectively with many other forms of Chinese trade and broader economic predation), and a G20 forum specifically addressing the steel issue has produced nothing since its founding in December, 2016.

>Although major steel-producing powers like the European Union have imposed their own steep tariffs on shipments from China, the global glut has continued. One reason may be that, since the global economic recovery took hold in 2010, according to World Steel Association data. the United States has been the major steel producer that has suffered by far the greatest loss of global production share by volume. (See this post of mine for the 2010 figures and the Steel Association’s latest report for the most recent – January, 2018 – figures.) And as of the most current World Steel Association data (2016), the United States is also the steel producer with the highest steel trade deficit by volume (21.7 million tons). 

>As a result, charges that American steel tariffs in particular will jeopardize the rules-based global trade system seem to be arguing that this system requires the United States to remain as the world’s dumping ground for government-subsidized steel.

>A much more constructive response from America’s trade partners would be finally getting serious about shutting down China’s overcapacity and placing market forces back in the saddle for global steel pricing. The Trump tariffs should be seen as a signal that the United States will no longer accept world steel trade patterns that treat the United States as the fall guy, and should therefore act as a spur to achieve genuinely meaningful multilateral results.

>The above gaming of global steel trade by so many American trade partners also explains the need for the kinds of sweeping measures made possible by the national security-oriented Section 232 of U.S. trade law, rather than the narrower curbs required by, say, the countervailing duty statutes.

>Fears have been expressed in the U.S. foreign policy community, and by the Trump administration’s Defense Department, that certain tariff schemes may needlessly harm America’s relationships with key security allies. Those voicing such concerns should also explain why countries that would permit these U.S. measures to undermine alliance relationships should be seen as reliable partners when overseas crises erupt.

>Tariff opponents contend that America’s use of an allegedly bogus national security rationale for the curbs will open the doors for other members of the WTO to use equally specious justifications for their own tariffs on numerous products. These opponents seem to forget that most of the world’s major economies, which rely heavily on export-led growth resulting from large trade surpluses, so far have encountered little difficulty in protecting their own domestic markets via a wide range of both tariff and non-tariff trade barriers.

>New national security rationales for new tariffs will be especially suspicious if used by the numerous American security allies that have been free-riding on U.S. defense guarantees for decades – and skimping on their own defense spending. These allies include Germany, Japan, South Korea, and Canada.

>Tariff critics also insist that the American economy will suffer major harm from foreign retaliation. They seem – oddly – convinced that U.S. trade partners that rely heavily on net exporting to the United States for their growth have nothing to fear from further the American trade restrictions that may result. Will these countries really launch trade attacks on one of their best customers?

>Tariff opponents focusing on economic impacts argue that the measures will increase the cost of a key American manufacturing input, and reduce the competitiveness of domestic steel-and aluminum-using industries. They seem to fear that these industries cannot become or remain globally competitive if such inputs are priced via free market mechanisms, rather than kept artificially cheap due to foreign government decisions.

>These economically focused tariff opponents also seem to believe that the current U.S. economy is one characterized by companies that enjoy considerable pricing power. Given inflation that has long undershot the Federal Reserve’s target, that’s a difficult argument to understand.

>In addition, those with an economic focus appear unconcerned about the prevalence and spread of government interventions in trade flows not only in steel, but in a wide variety of traded goods. If foreign governments conclude that they can subsidize and dump two key American industries out of existence, why would they stop with steel and aluminum? How can a growing presence of foreign government-subsidized goods (and services) help strengthen free markets in the United States and enable Americans to reap their maximum gains? And how can such growing foreign intervention help the global economy as a whole progress toward reaping the maximum gains of unfettered trade?

Over to you, Mr. President!

(What’s Left of) Our Economy: The World Trade Organization Unmasked

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Chad Bown, China, Foreign Affairs, Keith Bradsher, multinational companies, Peterson Institute for International Economics, Ronald Reagan, Section 301, The New York Times, Trade, trade law, Trump, World Trade Organization, WTO, {What's Left of) Our Economy

It isn’t every day that Washington’s offshoring-happy economic policy establishment reveals one of its dirtiest secrets in public (unwittingly, of course!). So anyone – and especially U.S. political leaders – with any interest at all in trade, globalization, manufacturing, employment, and related issues (e.g., the economy, getting re-elected) urgently needs to read the final paragraphs of Tuesday’s New York Times article reporting that President Trump will soon greatly ramp up trade pressure on China.

But it’s vital to read the passage intelligently, because the point is made in in the kind of Washington-speak intended to conceal its real meaning.

As Times reporter Keith Bradsher wrote, a key feature of Mr. Trump’s alleged new China strategy will be the use of a provision of America’s national trade law system called “Section 301.” It’s a provision that grants a president broad authority to respond with punitive tariffs to foreign trade practices considered to be damaging the U.S. economy in “unfair” ways, and to respond pretty quickly. (It’s still not nearly quick enough for me, but that’s a separate issue.) And as he made clear, it’s a trade law provision with a noteworthy history. In Bradsher’s words:

“The United States used Section 301 energetically against other countries during the Reagan administration and the administration of President George Bush. Mr. Lighthizer [the current chief U.S. Trade negotiator] was a deputy United States trade representative in the Reagan administration and has been an advocate of shielding the American industrial base from government-assisted foreign competitors.

“But the cases then thoroughly antagonized America’s trading partners.

“‘It was really the aggressive uses of this in the late 1980s and early 1990s that prompted the rest of the world to set up the dispute resolution system’ of the World Trade Organization [WTO], said Chad P. Bown, a senior fellow at the Peterson Institute for International Economics here.”

Bown – whose Peterson Institute home is heavily funded by the offshoring lobby – no doubt meant his statement to reinforce the standard establishment description of and rationale for the WTO-centered world trade system that’s been in existence for the last quarter century. That is, the international economy had too long operated on a law of the jungle basis that bred continual and dangerous conflict, and that in an act of enlightened self-interest, the world’s economies recognized these perils and created a global trade court that would mete out justice according to objective legal standards and thereby serve every countries’ long-term interests.

In fact, Bown wound up confirming a very different description of the WTO and the motives behind its creation that I have advanced since it was first proposed: It’s an arrangement supported by America’s trade partners in order to prevent the United States from using its matchless market power to promote and defend its legitimate international economic interests. P.S. – because U.S.-based multinational companies supply the American market from so many overseas factories, undercutting Washington’s unilateral power to restrict imports mattered crucially to them, too.

For the Reagan-era uses of Section 301 cases that Bown (and Bradsher) mention were noteworthy not mainly because they were “energetic” or “aggressive”. (Unless you view most of America’s trade partners as snowflakes or strong champions of the rule of law.) These 301 uses were noteworthy because they worked. All the evidence is contained in this article I published in Foreign Affairs in 1994. And as Bown made clear, this success was completely unacceptable to “the rest of the world” – most of which, like China, relies heavily on selling to America in order to grow and develop satisfactorily. As a result, these economies, along with the multinationals, became convinced that handcuffing the United States was essential. And official Washington dutifully went along.

Although Section 301 is still on the books, it’s been U.S. policy under Democratic and Republican presidents alike to avoid it in favor of WTO procedures (just as most foreign governments, including allies, and the multinational companies want). And legally speaking (a term I use advisedly when it comes to the WTO and international law generally), that approach seems to dovetail with WTO rules.

But the Trump administration appears to be considering the contention that the United States retains the unfettered authority to use 301 at least in certain instances. The administration further seems confident that, whether it’s right or wrong on the law, the WTO membership collectively will shrink from a frontal challenge for fear of completely destroying a dispute-resolution system that still might serve its interests well going forward – at least much of the time. 

Nevertheless, the reports of a Trump course change on China trade – which could eventually be broadened – are still just reports. All that’s certain now is that, if they’re accurate, the president will wind up showing the his own compatriots and the rest of the world what a real America-First trade policy would look like.

 

(What’s Left of) Our Economy: Trump Steel Trade Critics Offer Recipes for (Continued) Failure

Tags

Barack Obama, China, European Union, globalization, Japan, national security, Russia, steel, tariffs, The Washington Post, Trade, trade law, Trump, World Steel Organization, World Trade Organization, {What's Left of) Our Economy

The case for bold new Trump administration steps to ensure the U.S. steel industry’s continued viability is so clear that even opponents can’t help but (unwittingly) make it.

Thus this morning, The Washington Post editorial board praised – or at least seems to have praised – the Obama administration’s imposition of the tariffs on imports of Chinese steel because the world’s overwhelming source of overcapacity is China. The Post also urged the White House to remember that in order to avoid “international destabilization,” it’s critical to keep relying on “global institutions such as the World Trade Organization.”

Yet as the paper implicitly recognizes, none of these approaches has succeeded. What else can reasonably be concluded from its acknowledgment that the although the world’s “major governments, including President Barack Obama’s administration, have long recognized” the problem of Chinese fueled steel overcapacity,” the glut continues to create “unsustainable downward pressure on producers’ prices….” That’s “unsustainable” as in “can’t be sustained.” As in “if the downward pressure isn’t stopped, steel producers will start going under.”

The Post, however, has left out some crucial information. Specifically, the pressure on global steel producers has been far from uniformly felt. According to the latest (2015) figures from the World Steel Organization, which represents most of the global industry, the United States runs the world’s largest steel trade deficit by far measured in volume (which leaves out the distortions created by falling prices). At 26.5 million tons, it was nearly 80 percent greater than that of the world’s next biggest net steel importer (Vietnam, at 14.9 million tons), and nearly seven times greater than that of the European Union (3.9 million tons).

China, Japan, Russia, South Korea, and others are running surpluses, with China lapping the pack at 98.4 million tons and Japan, universally described as a staunch U.S. ally, coming in second at still-impressive 34.9 million tons.

These skewed trade patterns, moreover, are unmistakably affecting national steel output. For example, according to the World Steel Organization, in 2010, as the world’s recovery from the Great Recession was becoming established, the United States accounted for 7.46 percent of global steel output by volume. In 2016, its share had shrunk to 4.95 percent.

China clearly has been the big winner, with its share of world steel production rising from 42.62 percent to 50.16 percent during this period. Japan has boosted market share as well – albeit only from 6.49 percent to 6.60 percent. The European Union and Russia have lost ground – but the losses have been minimal. The former’s global market share has dipped from 11.54 percent to 10.43 percent. The latter’s is down from 4.48 percent to 4.45 percent.

Even weirder: America’s economic growth during this period has outstripped the recoveries of all these countries except China, and its manufacturing sector has recovered (though not completely) thanks largely to a rebound in the steel-intensive automotive industry.

In other words, according to the Post editorial board, due to global overcapacity, the U.S. steel industry is facing unsustainable (and largely artificial) pricing pressure, the worldwide statistics make clear that this pressure is in a class by itself…and the Trump administration is being advised to stick with responses that have been manifestly incapable of preventing this dangerous situation.

It’s perfectly respectable to oppose as a solution the kind of national security-focused tariffs that the Trump administration is considering – even though the advantages they offer (they need no Congressional approval and they can be implemented relatively quickly as well as flexibly) are substantial. But if critics – domestic and foreign – are genuinely interested in solving the longstanding world steel problem in a timely manner, they’ll start proposing alternatives that haven’t already failed.

(What’s Left of) Our Economy: Another U.S. Trade Deal that Puts America Last

Tags

apparel, CAFTA, Central America, Central Anerica Free Trade Agreement, dispute resolution, Dominican Republic, DR-CAFTA, free trade agreements, Guatemala, labor rights, legalism, offshoring, Trade, trade law, {What's Left of) Our Economy

To get a good idea of one of the biggest, and most neglected, failings of U.S. trade policy, look no farther than America’s near-neighbors in Central America. For earlier this month, a development on the labor rights front made clear the America Last approach Washington has taken toward the ways that disputes are handled under various trade agreements the United States has signed – in this case, the deal with six Central American countries plus the Dominican Republic (DR-CAFTA).

On June 14, an arbitration panel established by the dispute resolution chapter of the DR-CAFTA treaty ruled against the United States and for Guatemala in a long-running quarrel between the two signatories over labor rights practices in the latter. On the face of it, it’s hard to take seriously the arbiters’ conclusion that Guatemala indeed is not enforcing its own labor laws ostensibly aimed at safeguarding workers’ rights, but that this failure hasn’t affected bilateral trade flows. After all, in a world where its major industrial export industry – apparel – has to compete on price with super-low wage garment giants like China, Vietnam, and Bangladesh, keeping wages down is essential to the Guatemalan apparel sector’s very survival.

But the fundamental problem with this situation has nothing to do with the merits of the case. It has to do with the structure of the dispute-resolution process set up by the DR-CAFTA treaty, which is basically the same as that set up by all U.S. bilateral and regional free trade deals. Simply put, it bears absolutely no resemblance to economic or policy realities.

Two especially important and related points to keep in mind: First, when the DR-CAFTA deal was ratified by Congress, in 2005, the combined economies of all six Central American countries proper only equaled the output of New Haven, Connecticut. Adding the Dominican Republican barely moved this needle. Because of this gargantuan size disparity, access to the American economy was clearly the paramount prize in this arrangement, and the non-U.S. signatories needed the deal much more than did the United States.

Second, largely as a result, the DR-CAFTA deal was less an example of trade policy than of economic development policy. Yes, cheerleaders for the agreement talked of opening exciting new markets for American domestic producers – talk belied by the micro nature of Central American and Dominican markets). And yes, they spoke of enhancing the competitiveness of the American textile industry – claims belied by the impossibility that the pact could overcome the advantages of the Asian apparel giants). But at bottom, the deal was a foreign aid program for the region.

Leave aside its clear failure to achieve meaningful “democracy, economic reform, and regional integration” – at least if you believe even a fraction of countless news reports of out-of-control lawlessness and violence in Central America. Given the non-U.S. signatories’ desperate need for any American help they could get, why on earth would Washington permit the treaty to create a system for choosing arbitration panels – which have the last say in determining a dispute’s winner and loser – that treats the United States and the other DR-CAFTA countries as legal equals?

One answer is that the agreement – like many other U.S. trade deals – was actually intended to foster offshoring, not open foreign markets. So the multinational companies that have dominated the American trade policymaking process for so long made sure that dispute resolution aimed first and foremost to prevent the United States from limiting its imports from their Central American and Dominican factories for any reason. And given the absence of significant consumption markets in the region, that observation seems compelling.

But the so-far-standard U.S. approach to dispute-resolution in trade also typifies a legalistic worldview that contrasts sharply with global realities even in an economic sphere where, for numerous reasons, it’s still completely inappropriate. In fact, this legalism is likelier to undermine American interests than serve them.

Principally, the prevalence tariff and non-tariff barriers to both trade and investment, along with various other predatory practices, shows that the consensus on acceptable economic behavior needed for a genuine legal system to function adequately simply does not exist in fact. Ditto for the great majority of economies that rely heavily on amassing net exports to generate growth. As a result, international commerce is anything but the positive-sum arena portrayed by politicians and academics. So any arrangements meant to negate national power are bound to handcuff the United States. Worse, they handcuff America needlessly.

Perhaps one day, the worldwide consensus needed for a genuine, legitimate system of trade law will emerge. Until it does, however, the United States should capitalize on the leverage it enjoys as the world’s most open major trading power and market of last resort, and sign trade agreements that establish it as judge, jury, and court of appeals for whatever disputes arise. There’s no better place to start than scrapping the artificial – and indeed forced – egalitarianism of the DR-CAFTA trade agreement.

Our So-Called Foreign Policy: At the WTO, Europe Claims a Right to Free Ride

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Airbus, alliances, Boeing, Charles Dickens, Defense Department, EU, European Union, foreign policy establishment, free-riding, NATO, North Atlantic treaty Organization, Our So-Called Foreign Policy, subsidies, Trade, trade law, Trump, World Trade Organization, WTO

Charles Dickens famously observed that the law can be an idiot. Last week’s World Trade Organization (WTO) ruling on U.S. and European Union (EU) aerospace subsidies reminds that American alliance policy can be idiotic – and in a key respect has been for decades. The fault here lies not with the WTO – which is hardly beyond criticism. Instead, the problem entails an American approach to international security relationships that continues a decades-long record of enabling brazen free-riding even under the current U.S. administration – which so far has decried this practice only rhetorically.

Interestingly, the WTO decision last Friday looks like a big win for American aerospace giant Boeing and a big loss for its EU rival Airbus. The trade body ruled as still illegal only one of the original 28 subsidies provided Boeing by Washington state and the federal government that were challenged by Airbus. According to Airbus, the WTO agreed with its allegation that some of the other 27 means of Boeing support were subsidies, but Boeing says that since the ruling determined that these payments had not harmed Airbus, they can remain in place. Airbus disagrees, so expect more litigation.

But here’s what’s completely outrageous. Some of the subsidies Airbus successfully challenged – at least on paper so far – were U.S. Defense Department subsidies. It’s jaw-dropping enough to recognize that Airbus gets military support, too. What’s worse is that so much of the Pentagon money handed over to Boeing (and other defense contractors) has been spent on weapons and other military systems that the United States would not need at all or in such quantity either if Washington hadn’t taken on any role in protecting Europe for decades, or if the Europeans bore anything like an appropriate burden for the own defense.

And don’t forget: For decades, even most U.S. Presidents and other foreign policy establishmentarians who have assign supreme value to continuing current transatlantic security arrangements agree that too many European members of the North Atlantic Treaty Organization (NATO) have been shirking. Talk about biting the hand that shields you.

It’s important, however, to keep in mind who’s mainly to blame. It’s clear that the Europeans deserve no high marks for either gratitude or loyalty. But it’s also clear that their actions can be reasonably portrayed as legitimate efforts to maximize their own self interests – reflecting the equally reasonable judgment that these gambits long have been good bets to succeed.

What the American public needs to ask is (a) why their leaders have handled alliance relationships so ineptly as to have created expectations of free-riding that the WTO case shows are now seen as nothing less than a right to free-ride; and (b) whether the avowedly transactional Trump administration will view the EU defense subsidy charges as a long overdue opportunity to say enough’s enough.

(What’s Left of) Our Economy: The Alternative Facts Behind America’s China Trade Policy

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alternative facts, Bill Clinton, Charlene Barshefsky, China, exports, imports, Long Yongtu, manufacturing, offshoring, services, The Wall Street Journal, Trade, trade law, U.S. Trade Representative, USTR, World Trade Organization, WTO, {What's Left of) Our Economy

After reading her interview with The Wall Street Journal, it’s hard to tell whether Clinton-era chief U.S. negotiator Charlene Barshefsky is mainly clueless or mainly arrogant. In other words, is Barshefsky oblivious to how badly she (and colleagues) botched the challenge of admitting China into the World Trade Organization (WTO)? Or is she confident that the bipartisan American economic policy establishment remains so strongly wed to this epic failure that her reputation and current cushy job as a leading trade lawyer won’t suffer in the slightest even when it’s scope is made unmistakable?

Most disturbing, nothing could be clearer from the interview – in which she was joined by one of her former top Chinese counterparts – that her views on the WTO deal and those of Beijing are as close, as the Chinese like to say, “as lips and teeth.” The only significant difference: then Chinese vice commerce minister Long Yongtu denies that his country’s economic reform efforts have gone off the rails in recent years. Barshefsky insists that China “has stopped the process of economic reform and opening and that, instead, has put in place a spate of measures that are zero sum. They’re highly mercantilist and discriminate against U.S. and foreign companies.”

That’s nice to hear. But this claim also underscores how completely blindsided Barshefsky, the rest of the Clinton administration, and the rest of the powers-that-be in American government, business, and academe were by an about-face in a country with a recent history of political instability and course changes, and no record of viewing trade as a positive-sum game or economic openness as a crucial objective in and of itself.

Barshefsky also demonstrates her belief that the phony promises that fueled the Clinton administration’s successful drive to secure China’s WTO entry still hold water – at least with the high and mighty. For example, according to Barshefksy, “The U.S. didn’t alter its trade regime, nor did any other country alter its trade regime. As in any WTO negotiation, it is the acceding country that needs to reform its economy.” But as she surely knows, WTO membership won for China substantial immunity from the national trade law system the United States historically had used to safeguard its legitimate trade interests unilaterally. Once China entered the WTO, Washington’s internationally recognized responses to China’s predatory trade practices largely depended on the assent of the WTO membership – which has been numerically dominated by economies that were major users of Chinese style protectionism.

Barshefsky continues to claim that the safeguards she negotiated with China were adequate to protect domestic industries – at least temporarily – from surges of Chinese imports. The only problem, she contends, is that these mechanisms were “”almost never used.” What Barshefksy omitted, however, was that the big U.S.-based multinational manufacturers that lobbied so lavishly and successfully on behalf of China’s entry were also offshoring production and jobs like crazy to China largely to supply the America market much more cheaply. Limiting America’s imports from China, especially from factories with which they were linked, was the last thing they wanted.

According to Barshefsky, the post-WTO ballooning of the U.S. goods trade deficit with China can be brushed aside because “we have a substantial services surplus with China.” It’s too bad she didn’t provide any numbers, but not at all surprising – since that surplus last year was only about a tenth as big ($37.4 billion) as the merchandise shortfall ($347 billion). Moreover, the manufacturing-heavy nature of this merchandise deficit – which is increasingly comprised of advanced manufactures – should concern all Americans.

And finally, Barshefsky repeated the widely expressed canard that “the trade deficit is a function of macroeconomic factors. Principally, the difference between what Americans save, which is nada, and investment, which is plentiful.” But the relationship between national trade balances and savings rates is simply a mathematical identity – which by definition says “nada” about causation. Indeed, there are plenty of reasons to suppose that, the more the trade deficit grows, the lower the savings rate is bound to become.

Yet interviewing Barshefsky has at least performed one public service. It reminds Americans that alternative facts began shaping the nation’s politics and policy long before the last presidential election.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(What’s Left of) Our Economy: Why Tariffs Can Reverse Offshoring’s Damage

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China, emerging markets, export platforms, foreign investment, free trade agreements, GE, globalization, intermediate goods, Jeffrey Immelt, manufacturing, manufacturing jobs, manufacturing output, Mexico, multinational companies, offshoring, product life cycle theory, reshoring, Richard Baldwin, tariffs, The Great Convergence, The Race to the Bottom, Trade, trade law, World Trade Organization, {What's Left of) Our Economy

It’s definitely weird to be writing a post in response to a recent tweet-storm. But this was no ordinary tweeter. This was someone who’s getting attention from the Washington economic policy establishment as a new oracle on trade and globalization. That’s evidently because his work conveniently sums up many of the leading myths about the world economy and America’s approach to it that have been propagated by this group of interests. So his burst of social media activism provides a valuable opportunity to set the record straight.

The tweeter extraordinaire was Richard Baldwin. He’s not only an international economics professor at the University of Geneva in Switzerland, but the founder of the informative Voxeu.org economics research portal and president of the Centre for Economic Policy Research in London (not to be confused with the Center for Economic Policy and Research in Washington, D.C.). And he’s just come out with a book titled The Great Convergence: Information Technology and the New Globalization.

According to Baldwin, I have been guilty of a “Classic misthinking of globalisation” by supporting an overhauled U.S. trade policy featuring much more aggressive use of tariffs and other protectionist measures. But from the rest of his tweet-storm, a summary presentation he’s touting, and some other statements, it’s should be obvious that his own description of recent international economic trends and their main causes is way wide of the mark.

His fundamental mistake lies in neglecting the crucial role played in fostering today’s flows of goods, services, and capital by trade agreements and by the dramatically differing reductions in trade barriers from both a quantitative and, more important, a qualitative, standpoint. In particular, Baldwin ignores how various bilateral trade deals and decisions, and the multilateral pact that created the World Trade Organization gave multinational companies the essential condition they needed to justify the increasingly sophisticated production and job offshoring that has characterized globalization – guaranteed access to developed country, and especially the U.S. – market.

For the record, here’s the full string of tweets. (Some repeat previous tweets in the sequence.)

Classic misthinking of globalisation by @AlanTonelson

Recent globalisation driven by knowledge offshoring not freer trade

Tariffs don’t address the driving force

Could foster reshoring of some production but also more offshoring

The main problem is domestic: Protect workers, not jobs.

Jobs for U.S.-based robots

Trump tariffs raise cost of industrial import only in US (not Germany, Japan, China, Mexico, Canada)

Knowledge offshore drove 21^st century globalisation

Tariffs don’t address globalisation’s driving force

US tariffs foster some reshoring and some more offshoring

So what is the right way to deal with angry middle class?

Protect individual workers, not individual jobs.

So what is the right way to deal with angry middle class?

Are you familiar with the concept of factor substitutability ? Changing relative prices changes decisions.

But think of it this way. Offshoring, especially the kind focused on by Baldwin, to developing countries, can serve 3 main purposes. It can help companies better supply overseas markets. It can help them better supply their home country market. Or it can seek both objectives.

The great expansion of U.S. trade, primarily with developing countries, that Baldwin rightly notes began around 1990 (with the end of the Cold War and the great strengthening of free market reforms in gigantic developing countries), was justified with many and varied arguments. The paramount rationale, however, was serving the huge, ballooning populations of the world’s Chinas, Indias, Mexicos, and Brazils.

Yet as documented exhaustively in my 2002 book, The Race to the Bottom (and of course many other studies), incomes in these so-called Big Emerging Markets were simply too low to enable their final consumption to rise much – at least compared with their production and productive capacity. No one was more aware of this situation than the emerging market countries themselves – unless it was the global corporations considering pouring investment into them.

That’s why the smartest of these countries understood that they could not possibly grow and develop adequately by supplying their own populations alone, however rapid their income gains. Their only real hope for satisfactory progress was serving markets “where the money is.” America’s relatively open market and consumption-led national economic structure was their best bet by far.

And that’s why the multinationals as well were so determined for Washington to negotiate free trade agreements with these countries. – not to lower foreign trade barriers and permit American businesses their workers to reach the third world’s billions of new actual and potential consumers, but to lock in lower or eliminated barriers to the U.S. market. See the end notes to this recent study for references to just some of the scholarly evidence.

Accomplishing this aim would ensure that their plan to supply well heeled American customers from super low-cost and virtually unregulated third world supply bases would actually make money. Alternatively put, if Washington were legally able to curb or cut off access to the United States for Corporate America’s third world factories, these new facilities would lose much of their value.

Bringing the United States into the World Trade Organization (WTO) was also instrumental in this scheme. Its new rules and especially its unprecedented enforcement authority have greatly weakened America’s legal scope to use its trade law system to turn back goods (including those from the multinationals’ factories) that have been dumped, illegally subsidized, or benefited from other predatory trade policies – including currency undervaluation. In this vein, securing Chinese membership was vital, too. It secured near-invulnerability to U.S. trade law for the multinationals’ favorite export platform.

So the crucial importance of tariffs should be obvious to all. Yes, the technological advances cited by Baldwin (and so many others) have facilitated offshoring – and made the offshoring of even sophisticated production possible from the standpoint of logistics and administration and quality control and numerous similar considerations. But much and possibly most of it couldn’t pass the bottom-line test without the U.S. market access that can be made or broken by tariffs. That is, technology was a necessary condition of offshoring. But it was hardly sufficient.

Consistent with the product life cycle model, it’s unmistakably true that a growing share of multinational investment in developing countries is serving those markets. But compelling evidence abounds that the export platform strategy remains crucial – both to the countries and to the companies. Among the strongest, as I’ve recently written: the howls of protest from the corporate Offshoring Lobby and from export platform countries sparked by President-elect Trump’s talk of tariffs on the output they plan to sell to the United States. If America wasn’t such an important destination, and if so much of the offshored production was sold locally, why would they be so concerned?

Two other key items of evidence for the importance of tariffs:

a. The recent acknowledgment by GE CEO Jeffrey Immelt that trade barriers and other localization moves were mushrooming around the world, and that his company would have no choice but to say “How high” when ever more protectionist governments say “Jump!” Immelt’s statement makes clear that economies much smaller and weaker than America’s will be able to lure his company’s production and jobs either through relatively simple restrictions of access to their market, or through various performance standards imposed on inbound foreign investment that will be enforced through tariffs.

b. The prevalence of these practices and their success in influencing corporate location decisions. Indeed, the only major power that abjures these measures is the United States. Obviously, if smaller and weaker economies can wield tariffs and other trade restrictions successfully, America’s inaction stems from inadequate will, not inadequate wallet.

Yet as Baldwin’s tweet-storm shows, he is also offering three related objections to tariffs that have nothing intrinsically to do with the advent and growth of what he calls “knowledge offshoring.” He argues that tariffs would disastrously raise the cost to domestic U.S. manufacturers of all the imported inputs they use in their final products. As a result, he adds, these American manufacturers would lose competitiveness to any number of foreign rivals. Finally, he repeats the widespread argument that even if significant production was reshored with tariffs, the job impact would be minimal because of soaring, labor-saving productivity advances in manufacturing.

But Baldwin seems unaware that intermediate goods, including of course capital equipment, make up a huge share of domestic U.S. manufacturing. Because output data is too general (in particular lumping together such intermediates with finished goods in many super-categories), the exact figure is difficult to calculate. But other statistics leave no doubt as to the scale.

As I’ve previously shown, what the Census Bureau calls “industrial supplies” and “capital goods” have comprised fully 62.5 percent of America’s total merchandise exports for the first ten months of this year. And as with the output figures, these statistics leave out products such as auto parts (which are included, but not broken out, under a separate heading).

These industries are also gigantic employers. My own tally of Bureau of Labor Statistics data reveals that their workers number 5.764 million. That’s slightly over 47 percent of all manufacturing employees. Moreover, just over 28 percent of the workers in these sectors are white-collar workers – meaning in turn that many of them are in research, engineering, and other STEM fields. These numbers, moreover, indicate that even if I’m whoppingly wrong, we’re still talking about lots of valuable production and workers. 

So tariffs would create enormous new opportunities for this immense sector of manufacturing – and comparable new demand for the kinds of folks nearly everyone wants to become bigger and bigger percentages of the American labor market.

In addition, Baldwin’s case against tariffs seems to assume that they’ll be geographically circumscribed – hence his claim about the competitiveness-harming impact of barriers against these intermediate goods. But this assumption is puzzling, to say the least. Of course tariffs limited to, say, China or Mexico would open new opportunities in the U.S. market or third country markets for other manufacturing powers. Yet this is precisely why the trade proposals being floated by the administration-in-waiting increasingly include world-wide restrictions.

Finally, although labor-saving productivity gains are surely responsible for much manufacturing job loss in recent decades, the benefits of reshoring manufacturing output shouldn’t be underestimated. Industry’s very productivity performance is clearly one big reason – how can a national economy not profit from regaining many of its most productive sectors?

The importance of existing industry for fostering new industries and related economic benefits and opportunities is another big reason. This new paper from the National Bureau of Economic Research presents findings indicating just how much technological advance is generated by incumbent companies (and presumably industries) rather than through the “creative destruction” emphasized by much of the economics profession. So a focus on manufacturing output means a focus on much of the economy’s capacity to continue creating genuine wealth – and sustainable prosperity.

Further, for all of its competitiveness issues, manufacturing still dominates American export flows. If free-trade-oriented analysts are right, and main purpose of exporting is earning the income to buy imports, how can sufficient income keep getting created if domestic manufacturing production keeps stagnating or shrinking – which has clearly been the case in real terms since the last recession began?

As indicated by some of the preceding paragraphs, however, much uncertainty – in my view, way too much – is still left by the official data analysts are forced to use to study the vital Who, What, Where, When, Why, and How Much issues raised by globalization. Nor does the information reported sporadically in the business press or reported (often partially and self-servingly) by the companies themselves add more than fragments to the existing picture.

Many of these uncertainties could be cleared up if offshoring companies were required by Washington to disclose much more information than at present about how their domestic and foreign operations compare, and how these comparisons have changed over time. After all, knowing the crucial details is critical to their success. And if the disclosure mandate was universal, no individual firm would gain competitive advantage from this new flood of proprietary facts and figures.

So I hope Baldwin – and others sharing his views – will join me in demanding such disclosure. We have nothing to lose but our (relative) ignorance.