(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.

 

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

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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

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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.

Im-Politic: Why Clinton’s Still Untrustworthy on Trade

Tags

2016 election, Donald Trump, free trade agreements, Hillary Clinton, Im-Politic, TPP, Trade, trade enforcement, trade law, trade policy, Trans-Pacific Partnership, World Trade Organization, WTO

For a politician widely considered such a policy wonk that she’s often stayed in the weeds at the cost of boring voters, Hillary Clinton gave an awfully sketchy picture of her views on trade and globalization in her ballyhooed economics speech in Michigan yesterday. In fact, the Democratic presidential nominee’s views so far contain fewer specifics, and her overall approach for dealing with the trade challenges that have caught fire in this campaign is much less coherent, than those of her Republican rival, Donald Trump (whose own proposals on the subject, I’ve noted, fall short in many analytical and prescriptive respects).

Let’s start with the big picture – i.e., the fundamental reasons why American trade policy has gone off the rails according to the candidates. Even if you don’t agree with it, you’ve got to agree that Trump’s critique is coherent. As he’s emphasized time and again, the United States has long run big trade deficits that have killed lots of jobs both because protectionist foreign governments are determined to grow by racking up big surpluses with America, and because multinational corporations and their Wall Street bankers have successfully pushed Washington to sign trade agreements that fuel these deficits by encouraging companies to supply the U.S. market from abroad, not domestically.

Clinton’s speech actually revealed that she agrees on these scores with Trump:

“It’s true that too often, past trade deals have been sold to the American people with rosy scenarios that did not pan out. Those promises now ring hollow in many communities across Michigan and our country that have seen factories close and jobs disappear.

“Too many companies lobbied for trade deals so they could sell products abroad but then they instead moved abroad and sold back into the United States.

“It is also true that China and other countries have gamed the system for too long.”

But (again, whether you agree with it or not) Trump’s promised policy follow-through dovetails with his analysis. He’ll negotiate better deals that prioritize boosting American growth and jobs on net, and enforce them with tariffs. Moreover, he’ll impose stiff duties on the products of those companies that move overseas and “sell back into the United States.”

Clinton’s remedies? She, too, pledges “to finally make trade work for us, not against us.” She will “stop any trade deal that kills jobs or holds down wages – including the Trans-Pacific Partnership [TPP].” But she says nothing about what concrete provisions need to be placed in new trade deals to achieve those goals. And she seems to think that existing deals can be improved sufficiently by ramping up “enforcement by appointing, for the first time, a chief trade prosecutor, I will triple the number of enforcement officers, and when countries break the rules, we won’t hesitate to impose targeted tariffs.”

As I’ve explained before, this approach faces three insurmountable obstacles to success. First, even a much greater government enforcement effort would be pathetically inadequate to monitor the factory complexes of even smallish countries like Vietnam for violations of current protections in trade deals against repressing workers and egregiously polluting the environment. How much more in the way of resources and personnel would be needed to keep track of the gargantuan Chinese manufacturing sector?

Second, she seems satisfied with the current domestic U.S. system for helping individual American companies and industries fight foreign violations of domestic and international trade rules covering practices like illegal subsidies, dumping, and intellectual property theft. Yet even taken on its own terms, the American trade law apparatus is a proven failure for reasons that have been obvious for decades. It’s reactive. It’s piecemeal. And its legalistic procedures are sadly ineffective against foreign governments that don’t share America’s rule of law tradition, and its associated transparency. Therefore, gathering evidence is all but impossible.

Third, as I’ve just written, the dispute-resolution systems created by individual U.S. trade agreements and by the World Trade Organization that was set up in 1995 serve as powerful checks on America’s ability to use its national trade law system unilaterally. The reason? In all these agreements, Washington has agreed to structures that treat it as simply one among equals even though access to its gigantic market is invariably the global economy’s paramount prize. And as a result, America is continually outvoted by export-dependent countries determined to keep its markets much more open to their products than vice versa.

Clinton also appears to labor under major illusions about the global politics of achieving even the limited trade policy tweaking she seems to favor. Like many long-time trade policy critics in the Democratic party and on the political Left, she has taken to lambasting Trump on social media for threatening to “start a trade war with China” – and presumably the other countries she agrees have “gamed the system for too long.”

But how do they think these countries will react to any serious, genuinely promising efforts to eliminate or offset their predatory trade practices? By embracing them with open arms? Does she expect no push-back at all? And when it comes, how will she deal with it?

Moreover, Clinton’s views of America’s leverage are difficult, at best, to understand. On the one hand, she charged that Trump’s trade “approach is based on fear, not strength. Fear that we can’t compete with the rest of the world even when the rules are fair. Fear that our country has no choice but to hide behind walls.” She insists that “America isn’t afraid to compete.” And yet she seems to be the candidate who’s cowed by the prospect of trade wars – which indicates that Clinton believes America lacks the leverage to prevail when push comes to shove. Why, then, does she think that her strategy will succeed? Because of the power of persuasion?

Clinton’s trade policy criticisms this year have been widely seen as campaign-driven – and therefore untrustworthy, especially among supporters of her former Democratic presidential rival Bernie Sanders and others on the Left. If they read this latest economics speech critically, they’ll find little reason to change their views of her trade policy positions as quintessentially political – and therefore all too ephemeral – constructs.

Following Up: Where Trump on Trade Falls Short

Tags

2016 election, advanced manufacturing, apparel, Donald Trump, Follwing Up, Hillary Clinton, inflation-adjusted growth, Made in Washington trade deficit, multinational corporations, NAFTA, North American Free Trade Agreement, offshoring, offshoring lobby, recovery, regulation, Rust Belt, steel, subsidies, taxes, The Race to the Bottom, Trade, Trade Deficits, trade law, World Trade Organization, WTO

Donald Trump has just given a deadly serious, detailed, and common-sensical speech about the need for overhauling American trade policy, and the establishment media has decided to respond largely by dredging up the fatuous observation that the presumptive Republican presidential nominee himself produces his name-brand apparel overseas.

Before dealing with some of the genuine – though anything but fatal – shortcomings of Trump’s trade speech, let me (again) dispose of this ignorance-based cheap shot: The very trade policies that Trump has been attacking have practically destroyed the domestic U.S. apparel industry. When Trump claims that it’s nearly impossible to make garments in this country profitably anymore, he’s absolutely right. Indeed, the Federal Reserve’s industrial production data show that, since the North American Free Trade Agreement went into effect in January, 1994, and launched the current, offshoring-focused stage of U.S. trade policy, domestic garment output is down nearly 83 percent in real terms. That’s a bloodbath.

Yes, that means that some companies still produce clothing in the United States. But it also means that the biggest money in the industry has taken the hint that opening the American market to competition from penny-wage developing countries with no meaningful environmental or worker safety regulation has been an invitation to shut down or join the party and offshore. Any journalist who fails to mention these facts is either clueless or trying to sell you a bill of goods.

At the same time, since most of the public isn’t well informed about trade and manufacturing specifics, either. And since a torrent of such slanted coverage – which has been echoed by Trump’s presumptive November rival, Hillary Clinton – can definitely affect voter judgment, Trump needs to make it as difficult as possible for opponents to portray him as a know-nothing or a hypocrite on what he clearly sees as a core issue. This is where his Tuesday speech – which overall, I liked – fell somewhat short. Here are some important examples:

>Trump deserves a lot of credit for pointing out that misguided policies have killed not only employment – especially in trade-sensitive manufacturing – but growth throughout the economy. But he left off the table eye-opening figures on just how great the trade toll has been. As I’ve documented, during this feeble economic recovery alone, the growth of that portion of the trade deficit directly influenced by trade policy (what I call the Made in Washington trade deficit) has so far slowed this already feeble expansion by some 20 percent. That’s more than $400 billion after inflation, and he should have defied anyone to insist that huge numbers of jobs haven’t been destroyed as a result.

>The likely GOP standard bearer also rightly blasted American political and business elites for pushing these damaging policies. But explaining exactly why will not only educate the public – it will further infuriate voters. As I’ve written repeatedly, and most comprehensively in my book, The Race to the Bottom, the offshoring focus that has dominated U.S. trade policy since the early 1990s resulted from American multinational corporations realizing that expanding commerce with low-income countries would enable them to improve their own (though not the nation’s) competitiveness and boost profits by supplying the high-price American economy from super-low cost and largely unregulated production sites.

In other words, for all the talk about gigantic, rapidly growing third world markets, post-NAFTA trade deals weren’t mainly about expanding American exports – and therefore growth, employment, and wages. They were mainly about expanding U.S. imports from the multinationals’ new foreign production sites. That is, big American business wanted Americans to keep playing their roles as consumers of the products they made. They just didn’t want them to keep playing their roles as producers of these products. You don’t think a critical mass of voters would be outraged to hear this?

>Trump’s vow to file suits in the World Trade Organization to open foreign markets to U.S.-origin goods and services and halt predatory foreign trade practices is completely inadequate. As I’ve also written, the WTO is far from a U.S.-like trade court where objective magistrates render impartial justice. It’s an anti-American kangaroo court numerically dominated by foreign trade powers whose overwhelming interest lies in keeping the U.S. market much more open to their goods and services than their markets are to U.S. exports. That’s largely why even when the United States does win WTO cases, the process takes so long that American interests have been dealt decisive setbacks.

In fact, that’s also why the Offshoring Lobby pushed so hard back in the 1990s for U.S. Entry into the WTO. They knew that it would give predatory foreign trade powers substantial legal immunity from American efforts to deal with illegal subsidization, dumping, currency manipulation, and the like – and that the factories they moved and built abroad would benefit from these market-distorting practices at the expense of domestic American producers and their workers.

In other words, Trump shouldn’t be arguing for working through the WTO. He should be promising to seek an American withdrawal.

>Trump’s related promise to file more suits against predatory foreign traders in the U.S. trade law system is sorely inadequate for three main reasons. First, as suggested above, the WTO nullifies most of America’s legal authority to use such unilateral mechanisms. Second, the domestic trade law system is almost as slow-moving as the WTO. And third, this legalistic set of procedures is by definition piecemeal and reactive. If Trump thinks that American trade law can help make the U.S. economy great again in his lifetime, he’s dreaming.

>I recognize that the steel industry has acquired iconic status in American culture and politics. It also remains incredibly important economically. But Trump’s exclusive reliance on steel’s recent woes to illustrate what’s wrong with American trade policy unfortunately reinforces the wrongheaded conventional wisdom that trade policy critics are naively obsessed with reviving so-called Rust Belt industries.

What Trump should have added is that manufacturing sectors running sizable trade deficits also include semiconductors, electro-medical devices, all categories of machine tools, farm machinery, construction equipment, ball bearings, telecommunications equipment (not including smartphones), and pharmaceuticals. Believe me, I could go on. And that’s not your classic Rust Belt stuff. Are all these domestic producers hopelessly uncompetitive, Trump should ask? Or are global trade markets unmistakably rigged even against American-made products falling into any knowledgeable definition of advanced manufacturing?

>Trump clearly felt the need to throw some red meat to traditional Republicans and conservatives by also promising to boost the productive sectors of the American economy by getting rid of “wasteful rules and regulations” and cutting taxes in order to “make America the best place in the world to start a business, hire workers, and open a factory.”

Of course, there’s an important, legitimate debate about the proper scope of regulations and the proper level of taxation for both corporations and individuals. Think though, of the outreach potential to independent and even many Democratic voters had Trump added something along these lines:

“But we also have to remember that many of our regulations also serve the vital purpose of protecting us from dangers like polluted air, water, and land; and unsafe food and workplaces. By freeing America’s domestic companies of the need to compete against rivals free to ignore these goals, we preserve regulations reflecting values we should be proud of, and ensure that we remain a genuine first world country.”

And let’s not forget arguments made in Trump’s tax plan (though in a form that’s surely vastly overstated) but neglected in this speech: All else equal, the faster the economy’s real (as opposed to bubble-ized) growth, the stronger its ability to generate the tax revenues that are both politically acceptable and needed to finance true national needs and popular national desires in a responsible way.

Again, I really do believe that this Trump speech was the best Americans have heard on trade in decades. But that bar has been abysmally low. If Trump wants to make America “Greater Than Ever Before” ensuring that his trade positions fit this description will help a lot.

(What’s Left of) Our Economy: Why the Latest World Trade Failure Should be Celebrated

Tags

agriculture, Alan Greenspan, bubbles, China, Congress, developed countries, developing countries, Doha Round, Federal Reserve, Financial Crisis, George W. Bush, Global Imbalances, Information Technology Agreement, ITA, Obama, offshoring, poverty, Robert Zoellick, September 11, terrorism, TPP, Trade, trade law, Trans-Pacific Partnership, World Trade Organization, WTO, {What's Left of) Our Economy

Trade policymakers have just uncharacteristically – and perhaps unwittingly – given the world economy an important holiday gift: a virtual decision to kill the so-called Doha Development Round of world trade liberalization talks.

This outcome of the latest meeting of the World Trade Organization (WTO) in Nairobi won’t make an active contribution to solving global economic problems. But it greatly reduces the odds that additional multilateral trade expansion will keep worsening the kinds of international economic imbalances that helped trigger the last financial crisis and keep threatening to set the stage for a new meltdown.

The Doha round (named after the capitol of Qatar, where it was launched) was a product of the September 11 terror attacks, but was whoppingly misconceived both strategically and economically. Though intended to spur the prosperity needed in developing countries ostensibly needed to reduce terrorism’s appeal, its founders – notably President George W. Bush’s administration trade chief Robert Zoellick – seemed unaware that dangerous extremism had never taken hold in most world regions where poverty was most desperate, e.g., rural India and rural China. Moreover, the round’s explicit aim of channeling most of its trade liberalization benefits to developing countries completely violated the core principles of genuinely free trade.

But those mistakes and their impact paled next to the damage likely from a treaty reflecting the Doha goals – ever greater global financial instability stemming from trade flows that fostered the offshoring of production, and therefore income-earning opportunities, to countries that would still long remain too poor to consume adequately, and away from the rich-country populations (especially America’s) whose purchasing power was still crucial for adequate global growth.

By the time the Doha talks were inaugurated, in 2001, years of NAFTA-style, offshoring-centric U.S. trade liberalization decisions capped by China’s admission into the WTO had already recklessly placed the U.S. and world economies on a completely unstable course. The Bush administration and the Federal Reserve under Alan Greenspan further greased the skids for crisis with two decisive moves. The former filled the resulting American income and growth shortfall with renewed, and record, federal budget deficits. The latter even more powerfully fueled consumption with prolonged (then) record low peacetime interest rates. For half a decade, the United States experienced an unprecedented burst of debt-led, bubble-ized growth. And then the entire global economy nearly collapsed.

Success at Doha was always bound to magnify world trade imbalances further and ensure even more badly lopsided growth by requiring the United States and other developed countries to open their markets much wider and faster than low-income countries. Particularly important were measures practically certain to gut the U.S. trade laws that shielded America’s domestic economy from foreign predatory trade practices like export subsidization and dumping. In fact, the inequities were so egregious that even America’s staunchly pro-trade liberalization agricultural sector, which has long wielded outsized influence in Congress, balked; its reservations began the Doha hold-up that eventually brought its demise.

Unfortunately, another recent international trade policy decision is likely to add to dangerously distorted global growth – the new Information Technology Agreement reached under WTO auspices, which eliminates tariffs on many tech products but does nothing about the non-tariff barriers and predatory commercial practices used so heavily by so many U.S. trade rivals. New financial pressures may also be fueled if Congress passes the Trans-Pacific Partnership (TPP) trade deal pursued so avidly by President Obama. As I’ve often explained, this agreement’s text does target non-tariff barriers, but creates no mechanisms even remotely capable of actually curbing their use. Therefore, it’s all but certain to create the trade deficit-boosting, finance destabilizing effects of the previous American trade agreements on which it’s modeled.

All the same, TPP ratification this year looks doubtful, given election-year opposition by major Republicans in Congress. Doha’s death would represent a second “do no harm” decision in a single year – certainly not enough progress on the trade policy front, but considerably better than nothing.